Internal Revenue Bulletin 2001-2 (PDF rendition): IRS Revenue Procedures

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

INCOME TAX
Rev. Rul. 2001–2, page 255.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period October through
December 2000. This ruling announces the monthly bond
factor amounts to be used by taxpayers who dispose of qual-
ified low-income buildings or interests therein during the peri-
od October through December 2000. This ruling also
announces errors in bond factor amounts for dispositions of
1987 properties in 1998 and of all properties in 1999 and
January through June 2000, and sets forth summaries for
1998, 1999, and 2000 that contain the corrected bond fac-
tor amounts.
Notice 2001–2, page 265.
Research credit suspension periods. This notice pro-
vides guidance to help taxpayers compute and report their
credit for increasing research activities (research credit)
under section 41 of the Code for taxable years that include
the research credit suspension periods described in section
502(d)(2) of the Tax Relief Extension Act of 1999, Pub. L.
No. 106-170 (Dec. 17, 1999). This notice also explains how
to take into account any research credits attributable to a
research credit suspension period.
Notice 2001–4, page 267.
This notice provides additional guidance to qualified inter-
mediaries and U.S. withholding agents relating to the with-
holding of income tax under section 1441 of the Code on
certain U.S. source income paid to foreign persons.
Rev. Proc. 2001–10, page 272.
Methods of accounting; inventories; small taxpayers.
This procedure provides that the Commissioner will exercise
his discretion to except a qualifying taxpayer with average
annual gross receipts of $1,000,000 or less from the
requirements to use an accrual method of accounting and to
account for inventories. Rev. Proc. 2000–22 modified and
superseded. Rev. Proc. 99–49 modified and amplified.
Rev. Proc. 2001–11, page 275.
Penalties; substantial understatement. Guidance is pro-
vided concerning when information shown on a return will be
adequate disclosure for purposes of reducing an under-
statement of income tax under section 6662(d) of the Code
and for purposes of avoiding the preparer penalty under sec-
tion 6694(a) of the Code.
EMPLOYEE PLANS
Notice 2001–3, page 267.
Weighted average interest rate update. The weighted
average interest rate for December 2000 and the resulting
permissible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412 (c)(7) of the Code are set forth.
EMPLOYMENT TAX
T.D. 8910, page 258.
Final regulations under section 6053 of the Code set forth
rules for employers that wish to establish electronic systems
for use by their tipped employees in reporting tips to the
employer. The regulations also provide rules relating to sub-
stantiation requirements for tipped employees using the
electronic system.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–2
January 8, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
(Continued on the next page)

January 8, 20012001–2 I.R.B.
Notice 2001–1, page 261.
This notice sets forth the requirements employers must
meet and the procedures for obtaining approval of employ-
er-designed tip reporting alternative commitment (EmTRAC)
programs for the food and beverage industry. Notice
2000–21 superseded.
Page 258.
Railroad retirement; rate determination; quarterly. The
Railroad Retirement Board has determined that the rate of
tax imposed by section 3221 of the Code shall be 26 cents
for the quarter beginning January 1, 2001.
Announcement 2001–1, page 277.
The Service announces the availability of two new pro forma
voluntary tip reporting agreements for employers of tipped
employees and revisions of three existing pro formavolun-
tary tip reporting agreements. These documents were pub-
lished in proposed form as announcements in I.R.B.
2000–19.
ADMINISTRATIVE
Announcement 2001–2, page 277.
An updated edition of Publication 551, Basis of Assets
(revised December 2000), will be available soon.
Announcement 2001–3, page 278.
This announcement updates Publication 1187 (Rev. 8-98),
which provides specifications for the magnetic or electronic fil-
ing of Form 1042-S, Foreign Person’s U.S. Source Income
Subject to Withholding. Announcement 99–79 superseded.
Announcement 2001–4, page 286.
This document contains corrections to T.D. 8889, 2000–30
I.R.B. 124, final regulations regarding claims for certain
income tax convention benefits.
Announcement 2001–5, page 286.
This document contains corrections to the Numerical Finding
List, the Finding List of Current Actions on Previously
Published Items, and the Index for Cumulative Bulletin
1998–2. These pages are reprinted here.

2001–2 I.R.B.January 8, 2001
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless oth-
erwise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Ser-
vice personnel in the disposition of other cases. In applying
published rulings and procedures, the effect of subsequent
legislation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same
conclusions in other cases unless the facts and circum-
stances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Ad-
ministrative Rulings. Bank Secrecy Act Administrative Rul-
ings are issued by the Department of the Treasury’s Office
of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual
basis, and are published in the first Bulletin of the succeed-
ing semiannual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 41.—Credit for
Increasing Research Activities
Notice 2001–2 provides guidance to help taxpay-
ers compute and report their credit for increasing re-
search activities (research credit) under section 41 of
the Code for taxable years that include the research
credit suspension periods described in section
502(d)(2) of the Tax Relief Extension Act of 1999,
Pub. L. No. 106-170 (Dec. 17, 1999) (the Act). Fur-
ther, this notice explains how to take into account
any research credits attributable to a research credit
suspension period. See Notice 2001–2, page 265.
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period October through December
2000. This ruling announces the monthly
bond factor amounts to be use by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the
period October through December 2000.
This ruling also announces errors in bond
factor amounts for dispositions of 1987
properties in 1998 and of all properties in
1999 and January through June 2000, and
sets forth summaries for 1998, 1999, and
2000 that contain the corrected bond fac-
tor amounts.
Rev. Rul. 2001–2
In Rev. Rul. 90–60, 1990–2 C.B. 4, the
Internal Revenue Service provided guid-
ance to taxpayers concerning the general
methodology used by the Treasury De-
partment in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Sec-
retary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Inter-
nal Revenue Bulletin a table of “bond fac-
tor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfac-
tory under § 42(j)(6) for dispositions of
qualified low-income buildings or inter-
ests therein during the period October
through December 2000. Table 1 also
provides a summary of the bond factor
amounts for dispositions occurring during
the period January through September
2000. Table 2 provides a summary of
bond factor amounts for dispositions oc-
curring during the period January through
December 1999. Table 3 provides a sum-
mary of the bond factor amounts for dis-
positions occurring during the period Jan-
uary through December 1998.
Due to a miscalculation, Rev. Rul.
98–13, 1998–1 C.B. 686; Rev. Rul.
98–31, 1998–1 C.B. 1269; Rev. Rul.
98–45, 1998–2 C.B. 364; and Rev. Rul.
99–1, 1999–1 C.B. 265, are in error re-
garding the specific bond factor amounts
for buildings placed in service in calendar
year 1987 and disposed of in calendar
year 1998. Further, Rev. Rul. 99–18,
1999–1 C.B. 868; Rev. Rul. 99–24,
1999–1 C.B. 1096; Rev. Rul. 99–38,
1999–2 C.B. 335; Rev. Rul. 99–54,
1999–2 C.B. 675; Rev. Rul. 2000–22,
2000–16 I.R.B. 880; and Rev. Rul.
2000–31, 2000–26 I.R.B. 1269, are in
error regarding the bond factor amounts
for buildings placed in service in calendar
years 1987 through 2000 and disposed of
in calendar year 1999 and January 2000
through June 2000. The present revenue
ruling provides a complete list of the cor-
rected bond factor amounts.
Under the authority of § 7805(b), tax-
payers that posted bonds and taxpayers
that established Treasury Direct Accounts
with the Service pursuant to Rev. Proc.
99–11, 1999–1 C.B. 275, based upon the
above mentioned bond factor amounts
may continue to rely on those figures.
Taxpayers that choose to amend their pre-
viously posted bonds by using the cor-
rected bond factor amounts listed in this
revenue ruling may do so by submitting
an amended Form 8693,Low-Income
Housing Tax Credit Disposition Bond,to
the Internal Revenue Service Center,
Philadelphia, PA 19255. The amended
form may be submitted by either the tax-
payer or the surety. Taxpayers that choose
to amend the amount of securities pledged
in their previously established Treasury
Direct Accounts with the Service by using
the corrected bond factor amounts listed
in this revenue ruling should contact the
Bureau of the Public Debt, Division of
Customer Service, IRS Collateral Desk at
(304) 480-6158 for further information.
2001–2 I.R.B.255January 8, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Table 1
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 19871988198919901991199219931994199519961997199819992000
Jan’0037.5951.8163.6473.62 75.5277.9280.3682.7085.05 87.6390.3893.5296.69 97.21
Feb’0037.5951.8163.6473.62 75.3177.6980.1282.4484.78 87.3590.0893.1796.26 97.21
Mar ’0037.5951.8163.6473.62 75.0977.4779.8882.2084.53 87.0789.7992.8595.88 97.21
Apr ’0039.7554.7867.3077.84 79.9683.3186.7690.1693.64 97.41 101.43105.89 110.31 112.52
May ’0039.7554.7867.3077.84 79.7483.0786.5189.9093.36 97.12 101.11105.54 109.93 112.52
Jun’0039.7554.7867.3077.84 79.5282.8486.2689.6493.09 96.83 100.81105.22 109.59 112.52
Jul’0039.7554.7867.3077.84 79.3182.6186.0289.3892.82 96.56 100.53104.92 109.29 112.52

January 8, 20012562001–2 I.R.B.
Table 1 (cont’d)
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 19871988198919901991199219931994199519961997199819992000
Aug ’0039.7554.7867.3077.84 79.0982.3985.7889.1492.57 96.29 100.25 104.64 109.02 112.52
Sep’0039.7554.7867.3077.84 78.8982.1785.5588.8992.32 96.0499.99 104.37 108.77 112.52
Oct’00 39.7554.7867.3077.84 78.6881.9585.3288.6692.08 95.7999.74 104.12 108.55 112.52
Nov ’0039.7554.7867.3077.84 78.4881.7485.1088.4391.84 95.5599.50 103.89 108.35 112.52
Dec ’0039.7554.7867.3077.84 78.2881.5484.8888.2191.61 95.3299.28 103.66 108.16 112.52
Table 2
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 1987198819891990199119921993199419951996199719981999
Jan’9949.7260.9170.1570.99 72.3473.9475.5476.9878.38 79.9481.5983.6083.98
Feb’9949.7260.9170.1570.79 72.1373.7275.3176.7578.13 79.6881.3283.2883.98
Mar ’9949.7260.9170.1570.60 71.9373.5175.0976.5277.90 79.4481.0783.0083.98
Apr ’9952.5764.4174.1775.18 77.3679.8582.3784.7787.15 89.7592.4895.5397.21
May ’9952.5764.4174.1774.97 77.1479.6282.1384.5286.90 89.4992.2095.2597.21
Jun’9952.5764.4174.1774.77 76.9379.3981.8984.2886.65 89.2391.9594.9997.21
Jul’9952.5764.4174.1774.57 76.7279.1881.6784.0486.41 88.9991.7194.7697.21
Aug ’9952.5764.4174.1774.37 76.5278.9681.4483.8186.18 88.7691.4894.5597.21
Sep’9952.5764.4174.1774.18 76.3278.7581.2383.5985.95 88.5491.2794.3797.21
Oct’99 52.5764.4174.1773.99 76.1278.5581.0283.3785.74 88.3291.0794.2097.21
Nov ’9952.5764.4174.1773.80 75.9378.3580.8183.1785.53 88.1290.8894.0497.21
Dec ’9952.5764.4174.1773.62 75.7478.1580.6182.9685.33 87.9390.7193.9097.21
Table 3
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 198719881989199019911992199319941995199619971998
Jan’9869.2879.5781.8484.75 88.1491.9795.9299.75 103.57 107.70 111.85112.52
Feb’9869.2879.5781.5984.49 87.8691.6795.5999.39 103.18 107.25 111.28112.52
Mar ’9869.2879.5781.3584.24 87.5991.3795.2799.04 102.80 106.83 110.79112.52
Apr ’9865.5275.2575.9677.87 80.1682.7985.4687.9790.41 93.0395.6097.21
May ’9865.5275.2575.7577.65 79.9382.5585.2087.6990.12 92.7495.3197.21

For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see Rev. Rul. 98–3,
1998–1 C.B. 248.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 98–13, 1998–1 C.B. 686; Rev.
Rul. 98–31, 1998–1 C.B. 1269; Rev. Rul.
98–45, 1998–2 C.B. 364; Rev. Rul. 99–1,
1999–1 C.B. 265; Rev. Rul. 99–18, 1999–1
C.B. 868; Rev. Rul. 99–24, 1999–1 C.B.
1096; Rev. Rul. 99–38, 1999–36 I.R.B.
335; Rev. Rul. 99–54, 1999–51 I.R.B. 675;
Rev. Rul. 2000–22, 2000–16 I.R.B. 880;
Rev. Rul. 2000–31, 2000–26 I.R.B. 1269;
and Rev. Rul. 2000–48, 2000–42 I.R.B.
349, are revoked.
DRAFTING INFORMATION
The principal author of this revenue ruling
is Gregory N. Doran of the Office of Associ-
ate Chief Counsel (Passthroughs and Special
Industries). For further information regard-
ing this revenue ruling, contact Mr. Doran at
(202) 622-3040 (not a toll-free call).
Section 162.—Trade or Business
Expenses
26 CFR 1.162–3: Cost of materials.
Qualifying taxpayers with average annual gross
receipts of $1,000,000 or less are excepted from the
requirement under § 471 of the Code to account for
inventories, and instead may account for inventori-
able items as materials and supplies that are not inci-
dental under §1.162–3 of the regulations. See Rev.
Proc. 2001–10, page 272.
Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
26 CFR 1.263A–1: Uniform capitalization of costs.
Section 263A does not apply to inventoriable
items of qualifying taxpayers with average annual
gross receipts of $1,000,000 or less that are treated
as materials and supplies that are not incidental
under §1.162–3 of the regulations. See Rev. Proc.
2001–10, page 272.
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
Qualifying taxpayers with average annual gross
receipts of $1,000,000 or less are excepted from the
requirement to use an accrual method of accounting
under § 446 of the Code and to account for invento-
ries under § 471. See Rev. Proc. 2001–10, page 272.
Section 471.—General Rule for
Inventories
26 CFR 1.471–1: Need for inventories.
Qualifying taxpayers with average annual
gross receipts of $1,000,000 or less are expected
from the requirement to use an accrual method of
accounting under § 446 of the Code and to ac-
count for inventories under § 471, and may in-
stead treat inventoriable items as materials and
supplies that are not incidental under § 1.162–3 of
the regulations. See Rev. Proc. 2001–10, page
272.
Section 481.—Adjustments
Required for Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
26 CFR 1.481–4: Adjustments taken into account
with consent.
Procedures are provided for qualifying taxpay-
ers with average annual gross receipts of
$1,000,000 or less to obtain automatic consent to
change to the cash receipts and disbursements
method of accounting and to a method of account-
ing for inventory as materials and supplies that are
not incidental under § 1.162–3 of the regulations.
See Rev. Proc. 2001–10, page 272.
Section 1001.—Determination
of Amount of and Recognition
of Gain or Loss
26 CFR 1.1001–1: Computation of gain or loss.
Notwithstanding § 1001 and the regulations
thereunder, qualifying taxpayers that use the cash
receipts and disbursements method of accounting
include amounts in income attributable to open
accounts receivable (i.e., receivables due in 120
days or less) as amounts are actually or construc-
tively received. See Rev. Proc. 2001–10, page
272.
2001–2 I.R.B.257January 8, 2001
Table 3 (cont’d)
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 198719881989199019911992199319941995199619971998
Jun’9865.5275.2575.5477.44 79.7182.3184.9587.4389.85 92.4695.0597.21
Jul’9865.5275.2575.3377.22 79.4982.0884.7087.1889.60 92.2194.8197.21
Aug ’9865.5275.2575.1377.01 79.2781.8584.4786.9389.35 91.9794.6197.21
Sep’9865.5275.2574.9376.81 79.0681.6384.2386.7089.12 91.7494.4297.21
Oct’98 65.5275.2574.7376.61 78.8581.4184.0186.4788.89 91.5394.2597.21
Nov ’9865.5275.2574.5476.41 78.6581.2083.7986.2588.68 91.3394.0997.21
Dec ’9865.5275.2574.3576.22 78.4580.9983.5886.0488.47 91.1493.9497.21

Section 3221.—Rate of Tax
Determination of Quarterly Rate
of Excise Tax for Railroad
Retirement Supplemental
Annuity Program
In accordance with directions in section
3221(c) of the Railroad Retirement Tax Act
(26 U.S.C., 3221(c)), the Railroad Retire-
ment Board has determined that the excise
tax imposed by such section 3221(c) on
every employer, with respect to having in-
dividuals in his employ, for each work-hour
for which compensation is paid by such
employer for services rendered to him dur-
ing the quarter beginning January 1, 2001,
shall be at the rate of 26 cents.
In accordance with directions in section
15(a) of the Railroad Retirement Act of
1974, the Railroad Retirement Board has de-
termined that for the quarter beginning Janu-
ary 1, 2001, 39.7 percent of the taxes col-
lected under sections 3221(b) and 3221(c) of
the Railroad Retirement Tax Act shall be
credited to the Railroad Retirement Account
and 60.3 percent of the taxes collected under
such sections 3211(b) and 3221(c) plus 100
percent of the taxes collected under section
3221(d) of the Railroad Retirement Tax Act
shall be credited to the Railroad Retirement
Supplemental Account.
Dated December 1, 2000.
By Authority of the Board.
Beatrice Ezerski,
Secretary to the Board.
(Filed by the Office of the Federal Register on De-
cember 12, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 13, 2000,
65 F.R. 77938)
Section 6053.—Reporting of
Tips
26 CFR 31.6053–1: Report of tips by employee to
employer.
T.D. 8910
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 602
Electronic Tip Reports
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document amends the
regulations dealing with the requirement that
tipped employees report their tips to their
employer. These final regulations permit
employers to establish electronic systems for
use by their tipped employees in reporting
tips to the employer. These final regulations
also address substantiation requirements for
employees using the electronic system.
DATES:Effective Date: These regula-
tions are effective December 13, 2000.
Applicability Dates: For dates of ap-
plicability, see §31.6053–1(d)(6) of these
regulations.
FOR FURTHER INFORMATION CON-
TACT: Karin Loverud at 202-622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1603. Responses to this collection of in-
formation are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
The estimated annual burden per re-
spondent varies from 1 hour to 3 hours,
depending on individual circumstances,
with an estimated average of 2 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 Re-
ports Clearance Officer, W:CAR:MP:FP,
Washington, DC 20224, and to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On January 26, 1998, the IRS pub-
lished in the Federal Register(63 F.R.
3681) a notice of proposed rulemaking
(REG–104691–97, 1998–1 C.B. 695)
under section 6053 of the Internal Rev-
enue Code relating to electronic tip re-
ports. The notice proposed to amend
§31.6053–1 and §31.6053–4 of the em-
ployment tax regulations.
No written comments responding to the
notice of proposed rulemaking were re-
ceived. No public hearing was requested
or held. Accordingly, the proposed regu-
lations are adopted as final regulations.
The final regulations are consistent
with the provisions of the Electronic Sig-
natures in Global and National Com-
merce Act.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Further, it is hereby certified, pur-
suant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6), that the collection of informa-
tion contained in these regulations will
not have a significant economic impact on
a substantial number of small entities.
The collection of information in
§31.6053–1 is imposed solely on individ-
uals, not on any small entities, and the
regulations provide flexibility to employ-
ees who must provide the information re-
quired by statute, thereby reducing bur-
den. With respect to the collection of
information in §31.6053–4, the certifica-
tion is based on the expectation of the IRS
that most businesses that choose to imple-
ment the electronic tip reporting provi-
sions will be larger businesses with many
employees and sophisticated computer
systems. Moreover, because the provi-
sion is wholly elective, any small business
that would be adversely impacted may
choose not to use electronic tip reporting.
Finally, the Service expects that for those
small entities that choose to implement
the provision, the use of electronic tip re-
porting will reduce overall burden by re-
January 8, 20012582001–2 I.R.B.

ducing paper collections. Therefore, a
regulatory flexibility analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Karin Loverud, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). How-
ever, other personnel from the IRS and
the Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 602
are amended as follows:
PART 31–EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 31.6053–1 is amended
as follows:
1. Paragraph (a) is revised.
2. The introductory text of paragraph
(b)(1) is revised.
3. The last sentence of paragraph
(b)(1)(iii) is revised.
4. Paragraph (b)(2) is revised.
5. Paragraph (c) is revised.
6. Paragraph (d) is added.
The revisions and additions read as fol-
lows:
§31.6053–1 Report of tips by employee
to employer.
(a) Requirement that tips be reported—
(1) In general. An employee who
receives, in the course of employment by an
employer, tips that constitute wages as
defined in section 3121(a) or section 3401,
or compensation as defined in section
3231(e), must furnish to the employer a
statement, or statements, disclosing the
total amount of the tips received by the
employee in the course of employment by
the employer. Tips received by an employ-
ee in a calendar month in the course of
employment by an employer that are
required to be reported to the employer
must be reported on or before the 10th day
of the following month. For example, tips
received by an employee in January 2000
are required to be reported by the employee
to the employer on or before February 10,
2000.
(2) Cross references. For provisions
relating to the treatment of tips as wages
for purposes of the Federal Insurance
Contributions Act (FICA) tax under sec-
tions 3101 and 3111, see sections
3102(c), 3121(a)(12), and 3121(q) and
§§31.3102–3 and 31.3121(a)(12)–1. For
provisions relating to the treatment of tips
as wages for purposes of the tax under
section 3402 (income tax withholding),
see sections 3401(a)(16), 3401(f), and
3402(k) and §§31.3401(a)(16)–1,
31.3401(f)–1, and 31.3402(k)–1. For pro-
visions relating to the treatment of tips as
compensation for purposes of the
Railroad Retirement Tax Act (RRTA) tax
under sections 3201 and 3221, see section
3231(e) and §31.3231(e)–1(a).
(b) * * * (1) In general. The state-
ment described in paragraph (a) of this
section can be provided on paper or trans-
mitted electronically. The statement must
be signed by the employee and must dis-
close:
* * * * *
(iii) * * * If the statement is for a peri-
od of less than 1 calendar month, the
beginning and ending dates of the period
must be included (for example, January 1
through January 8, 1998).
* * * * *
(2) Form of statement—(i) In general.
No particular form is prescribed for use in
furnishing the statement required by this
section. The statement may be furnished
on paper or transmitted electronically. An
electronic system and all tip statements
generated by that system must meet the
requirements of paragraph (d) of this sec-
tion. If the employer does not provide any
other means for the employee to report
tips, the employee may use Form 4070,
“Employee’s Report of Tips to
Employer.”
(ii) Single-purpose forms. A statement
may be furnished on an employer-provid-
ed form. The form may be on paper or in
electronic form. An employer that pro-
vides a paper form must make blank
copies of the form readily available to all
tipped employees. Any form, whether
paper or electronic, provided by an
employer for use by its tipped employees
solely to report tips must meet all the
requirements of paragraph (b)(1) of this
section.
(iii) Regularly used forms.Instead of
requiring that tips be reported as
described in paragraph (b)(2)(ii) of this
section on a special form used solely for
tip reporting, an employer may prescribe
regularly used forms for use by employ-
ees in reporting tips. A regularly used
form may be on paper or in electronic
form (such as a time card or report), must
meet the requirements of paragraph
(b)(1)(iii) and (iv) of this section, must
contain identifying information that will
ensure accurate identification of the
employee by the employer, and is permit-
ted to be used only if the employer fur-
nishes the employee a statement suitable
for retention showing the amount of tips
reported by the employee for the period.
The employer statement may be furnished
when the employee reports the tips, when
wages are first paid following the report-
ing of tips by the employee, or within a
short time after the wages are paid. The
employer may meet this requirement, for
example, through the use of a payroll
check stub or other payroll document reg-
ularly furnished (if not less frequent than
monthly) by the employer to the employ-
ee showing gross pay and deductions.
(c) Period covered by, and due date of,
tip statement—(1) In general. A tip state-
ment furnished by an employee to an
employer may not cover a period greater
than 1 calendar month. An employer may,
however, require the submission of a state-
ment in respect of a specified period of
time, for example, on a weekly or biweekly
basis, regular payroll period, etc. An
employer may specify, subject to the limita-
tion in paragraph (a) of this section, the
time within which, or the date on which, the
statement for a specified period of time
should be submitted by the employee. For
example, a statement covering a payroll
period may be required to be submitted on
2001–2 I.R.B.259January 8, 2001

the first (or second) day following the close
of the payroll period. A statement submit-
ted by an employee after the date specified
by the employer for its submission never-
theless is a statement furnished pursuant to
section 6053(a) and this section if it is sub-
mitted to the employer on or before the 10th
day following the month in which the tips
were received.
(2) Termination of employment. If an
employee’s employment terminates, the
employee must furnish a tip statement to
the employer when the employee ceases
to perform services for the employer. A
statement submitted by an employee after
the date on which the employee ceases to
perform services for the employer is a
statement furnished pursuant to section
6053(a) and this section if the statement is
submitted to the employer on or before
the earlier of the day on which the final
wage payment is made by the employer to
the employee or the 10th day following
the month in which the tips were received.
(d) Requirements for electronic sys-
tems—(1) In general. The electronic sys-
tem must ensure that the information
received is the information transmitted by
the employee and must document all
occasions of access that result in the trans-
mission of a tip statement. In addition,
the design and operation of the electronic
system, including access procedures, must
make it reasonably certain that the person
accessing the system and transmitting the
statement is the employee identified in the
statement transmitted.
(2) Same information as on paper
statement. The electronic tip statement
must provide the employer with all the
information required by paragraph (b)(1)
of this section.
(3) Signature. The electronic tip state-
ment must be signed by the employee.
The electronic signature must identify the
employee transmitting the electronic tip
statement and must authenticate and veri-
fy the transmission. For this purpose, the
terms authenticateand verifyhave the
same meanings as they do when applied
to a written signature on a paper tip state-
ment. Any form of electronic signature
that satisfies the foregoing requirements is
permissible.
(4) Copies of electronic tip statements.
Upon request by the Internal Revenue
Service (IRS), the employer must supply
the IRS with a hard copy of the electronic
tip statement and a statement that, to the
best of the employer’s knowledge, the
electronic tip statement was filed by the
named employee. The hard copy of the
electronic tip statement must provide the
information required by paragraph (b)(1)
of this section, but need not be a facsimi-
le of Form 4070 or any employer-
designed form.
(5) Record retention. The record reten-
tion requirements applicable to automatic
data processing systems also apply to
electronic tip reporting systems.
(6) Effective date. The provisions per-
taining to electronic systems and electronic
tip reports are applicable as of December
13, 2000. However, employers may apply
these provisions to earlier periods.
Par. 3. Section 31.6053–4 is amended
as follows:
1. A sentence is added to paragraph
(a)(1) after the third sentence.
2. A sentence is added to paragraph
(a)(2) after the fourth sentence.
The additions read as follows:
§31.6053–4 Substantiation requirements
for tipped employees.
(a)(1) * * * The Commissioner may by
revenue ruling, procedure or other guid-
ance of general applicability provide for
other methods of demonstrating evidence
of tip income. * * *
(2) * * * In addition, an electronic sys-
tem maintained by the employer that col-
lects substantially similar information as
Form 4070A may be used to maintain
such daily record, provided the employee
receives and maintains a paper copy of the
daily record. * * *
* * * * *
PART 602–OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is
amended by revising the entries for
31.6053–1 and 31.6053–4 to read as fol-
lows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved August 25, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 12, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 13, 2000,
65 F.R. 77818)
January 8, 20012602001–2 I.R.B.
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
31.6053–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0029
1545–0062
1545–0064
1545–0065
1545–1603
* * * * *
31.6053–4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0065
1545–1603
* * * * *

Employer-Designed Tip
Reporting Program for the Food
and Beverage Industry
Notice 2001–1
I. BACKGROUND
In 1993, the Internal Revenue Service
introduced its Tip Rate Determination/Ed-
ucation Program (TRD/EP), which is de-
signed to enhance tax compliance among
tipped employees through taxpayer edu-
cation and voluntary advance agreements
instead of traditional audit techniques.
The TRD/EP was developed as a means
of enhancing tax compliance while reduc-
ing taxpayer burden. In essence, the
TRD/EP envisions that the Service and
taxpayers in industries in which tipping is
common will work together to improve
tax compliance.
The TRD/EP currently offers employ-
ers the opportunity of entering into one of
two types of agreements. The Tip Rate
Determination Agreement (TRDA) re-
quires the determination of tip rates; the
Tip Reporting Alternative Commitment
(TRAC) agreement emphasizes education
and tip reporting procedures. The agree-
ments also set forth an understanding that
both the employer and employees who
comply with the terms of the agreement
will not be subject to challenge by the
Service. The decision to enter into either
a TRDA or a TRAC agreement is entirely
voluntary on the part of the employer.
TRDAs are currently in use in the food
and beverage industry and the gaming in-
dustry. TRAC agreements are currently
in use in the food and beverage industry
and the cosmetology and barber industry.
The Service expects to begin making
these agreements available to other indus-
tries during 2000.
Taxpayers in the food and beverage in-
dustry have expressed interest in design-
ing their own TRAC programs. Notice
2000–21, 2000–19 I.R.B. 967, set forth
proposed requirements and procedures for
obtaining approval of an employer-de-
signed EmTRAC program. Notice
2000–21 also offered interested persons
the opportunity to comment on the pro-
posed program. The Service received no
comments. Even so, several nonsubstan-
tive clarifying changes have been made.
They appear in this document.
II. EmTRAC PROGRAM
The EmTRAC program is available
only to employers in the food and bever-
age industry that have employees who re-
ceive both cash and charged tips. The
employer may have one place of business
or many places of business. For purposes
of the program, each place of business is
called an establishment. If an employer
has more than one establishment, it can
choose which establishments to include in
its EmTRAC program.
The EmTRAC program retains many of
the provisions in the TRAC agreement.
The employer must establish an educa-
tional program that trains employees that
the law requires them to report all their
cash and charged tips to their employer.
Education must be furnished for newly
hired employees and quarterly for exist-
ing employees.
The employer must establish tip report-
ing procedures, under which a written or
electronic statement is prepared and
processed on a regular basis (no less fre-
quently than monthly), reflecting all tips
for services attributable to each employee.
The EmTRAC program provides an
employer with considerable latitude in de-
signing its educational program and tip
reporting procedures, which the employer
may combine. For example, a point-of-
sale tip reporting system could meet both
of these requirements, because the em-
ployee is prompted of the tip reporting re-
quirement at the end of each sale and be-
cause the reporting occurs at the end of
each sale.
The employer must agree–
1. to comply with the requirements
for filing all required federal tax returns
and paying and depositing all federal
taxes;
2. to maintain the following records
for at least 4 years after the April 15 fol-
lowing the calendar year to which the
records relate:
a. gross receipts subject to tip-
ping, and
b. charge receipts showing
charged tips; and
3. upon the request of the Service, to
make the following quarterly totals avail-
able, by establishment, for statistical sam-
plings of its establishments:
a. Gross receipts subject to tip-
ping,
b. Charge receipts showing
charged tips,
c. Total charged tips, and
d. Total tips reported.
The Service agrees–
1. not to initiate any tip examina-
tions of the employer or an establishment
included in the EmTRAC for any period
for which the EmTRAC program is in ef-
fect; except in relation to a tip examina-
tion of one or more employees or former
employees of the employer or an estab-
lishment.
2. to base any section 3121(q) notice
and demand issued to the employer or an
establishment included in the EmTRAC
and relating to any period during which
the EmTRAC program is in effect solely
on amounts reflected on–
a. Form 4137,Social Security and
Medicare Tax on Unreported Tip Income,
filed by an Employee with his or her
Form 1040, or
b. Form 885-T,Adjustment of So-
cial Security Tax on Tip Income Not Re-
ported to Employer, prepared at the con-
clusion of an employee tip examination;
and
3. not to evaluate the employer for
compliance with the provisions of its Em-
TRAC program for the first two calendar
quarters for which the EmTRAC program
is effective.
Both parties agree that, for purposes of
the EmTRAC program, a compliance re-
view is not treated as an examination or
an inspection of books of account or
records, and an inspection of books of ac-
count or records pursuant to a tip exami-
nation is not an inspection of books or
records for purposes of section 7605(b) of
the Code, and is not a prior audit for pur-
poses of section 530 of the Revenue Act
of 1978.
The effective date of an EmTRAC pro-
gram is the first day of the quarter begin-
ning on or after the date the Service signs
an approval letter.
An employer may at any time terminate
its EmTRAC program either completely
2001–2 I.R.B.261January 8, 2001
Part III. Administrative, Procedural, and Miscellaneous

or with respect to one or more establish-
ments. The Service may terminate its ap-
proval with respect to the EmTRAC pro-
gram or a specific establishment or
establishments, only if–
1. the Service determines that the
employer or establishment(s) has failed to
comply with the required provisions; or
2. the Service pursues an adminis-
trative or judicial action relating to the
employer, an establishment included in
the EmTRAC, or any other related party
to the employer’s EmTRAC program.
Generally, any termination is effective the
first day of the first calendar quarter after
the terminating party notifies the other
party in writing.
If the employer has an existing TRAC
agreement or TRDA covering one or
more establishments included in the em-
ployer’s EmTRAC program, the existing
TRAC agreement or TRDA will terminate
with respect to that establishment or those
establishments upon the approval of the
employer’s EmTRAC program.
III. PROCEDURES FOR
REQUESTING APPROVAL
The employer must request approval of
its EmTRAC program. For this purpose,
the Service has developed a pro formalet-
ter that an employer must use to request
approval of its EmTRAC program. The
letter requests approval of the employer’s
EmTRAC program and states that the em-
ployer will comply with the provisions set
forth in the letter (and also set forth in
section II above).
A copy of the approval request letter is
attached to this notice. It can be obtained
by mail by contacting the tip coordinator
in any local IRS office or by calling (202)
622-5532 (not a toll-free call).
The completed approval request letter
and a copy of the employer’s EmTRAC
program should be sent to:
Internal Revenue Service
S:C:CP:ET Room 2404
Attn: EmTRAC Coordinator
1111 Constitution Avenue, N.W.
Washington, DC 20224
IV. PROCEDURES FOR APPROVING
REQUESTS
After it receives the approval request
letter, the Service will review the em-
ployer’s program. If the program meets
the necessary requirements, the Service
will send the employer an approval letter,
a copy of which is attached to this notice.
The approval letter will specify the effec-
tive date of the employer’s EmTRAC pro-
gram.
If the IRS determines that the em-
ployer’s EmTRAC program fails to meet
all the requirements, the IRS will contact
the employer and offer assistance in
working out a program that will meet both
the employer’s needs and the IRS’s re-
quirements.
V. MISCELLANEOUS
Upon request to the local tip coordina-
tor or the EmTRAC Coordinator, the Ser-
vice will assist any employer in establish-
ing, maintaining, or improving its
educational program or tip reporting pro-
cedures.
The Commissioner of Internal Revenue
may terminate all EmTRAC programs at
any time following a significant statutory
change in the FICA taxation of tips. After
December 31, 2005, the Commissioner
may terminate prospectively the Tip Rate
Determination/Education Program and all
EmTRAC programs.
VI. PAPERWORK REDUCTION ACT
The collections of information con-
tained in this notice have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1716.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number. The collections of infor-
mation in this document are in sections II
and III. This information is required to
comply with sections 6053(a) and 6001 of
the Internal Revenue Code and to assist
the Internal Revenue Service in its com-
pliance efforts. This information will be
used to monitor the Employer’s perfor-
mance under its EmTRAC program. The
collections of information are required to
obtain the benefits available under the
EmTRAC program. The likely respon-
dents are business or other for-profit insti-
tutions.
The estimated total annual reporting
and/or recordkeeping burden is 870 hours.
The estimated annual burden per re-
spondent/recordkeeper varies from 8
hours to 44 hours, depending on individ-
ual circumstances, with an estimated av-
erage of 13 hours. The estimated number
of respondents and/or recordkeepers is
20.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Code.
VII. AFFECT ON OTHER
DOCUMENTS
Notice 2000–21 is superseded.
DRAFTING INFORMATION
The principal author of this notice is
Karin Loverud of the Office of the Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this an-
nouncement, contact Ida Volz of the Of-
fice of Compliance Policy at (202) 622-
5532 (not a toll-free call).
January 8, 20012622001–2 I.R.B.

Letter — Request for EmTRAC approval
Tip Coordinator
Internal Revenue Service
Re: Request for EmTRAC Approval
Dear Internal Revenue Service:
Pursuant to the Employer Tip Reporting Alternative Commitment Program (EmTRAC), I request your approval of the enclosed pro-
gram for
(name of business), EIN
.
In accordance with Notice 2001–1, 2001–2 I.R.B. 261, if you approve this program_______________________________________
(name of business) agrees to:
(1) comply with the requirements for filing all required federal tax returns and paying and depositing all federal taxes;
(2) maintain the following records for at least 4 years after the April 15 following the calendar year to which the records relate:
a. gross receipts subject to tipping, and
b. charge receipts showing charged tips;
(3) upon your request, make the following quarterly totals available, by establishment, for statistical samplings:
a. gross receipts subject to tipping,
b. charge receipts showing charged tips,
c. total charged tips, and
d. total tips reported;
(4) operate its EmTRAC program as indicated in the program documents attached to this letter; and
(5) comply with the terms of your approval described in Notice 2001–1.
Also in accordance with Notice 2001–1,
(name of business)
agrees that a compliance review will not be treated as an examination or an inspection of its books of account or records and that
your inspection of books of account or records pursuant to a tip examination will not be treated as an inspection of books or records
for purposes of section 7605(b) of the Internal Revenue Code, and will not be treated as a prior audit for purposes of section 530 of
the Revenue Act of 1978.
All correspondence pertaining to this EmTRAC program (including a notice of termination) should be sent to the address indicated below,
unless we notify you in writing of a change of address.
(name
of business) will send correspondence to you in the manner indicated in your approval letter. All correspondence is effective on the date
of the postmark stamped on the envelope or, in the case of a notice sent by certified mail, on the sender’s receipt.
I represent that I have the authority to agree to these terms on behalf of
(name
of business).
If you have any questions, please contact
at (telephone number)
or (e-mail address).
Name of Business
\s\
By:
Title:
Date:
Enclosures:
EmTRAC program documents
List of establishments (name, address, and EIN) participating in the program
2001–2 I.R.B.263January 8, 2001

Letter – EmTRAC approval
Internal Revenue ServiceDepartment of the Treasury
Service Representative
Person to Contact:
Identification Number:
Contact Telephone Number:
Re: EmTRAC Approval
Dear
(Taxpayer):
Thank you for your letter of requesting our approval of your EmTRAC program and contain-
ing your agreements with respect to that program. We are pleased to inform you that your EmTRAC Program meets the require-
ments of Notice 2001–1.
Accordingly, we agree as follows:
Your EmTRAC program will be effective on
[insert the first day of the quarter beginning on or after
the date the Service signs the letter]. The Service agrees not to initiate any new tip examinations of you or any of the establishments
included in your letter for any period during which your EmTRAC program is in effect, except in relation to a tip examination of
one or more employees or former employees of you or an establishment.
Any section 3121(q) notice and demand that we issue to you (or an establishment) relating to any period during which your
EmTRAC program is in effect will be based solely on amounts reflected on Form 4137,Social Security and Medicare Tax on
Unreported Tip Income, filed by an employee with his or her Form 1040, or Form 885-T,Adjustment of Social Security Tax on Tip
Income Not Reported to Employer, prepared at the conclusion of an employee tip examination.
The Service will not evaluate your EmTRAC program for compliance until
[insert the first day of
the second calendar quarter following the date on which the EmTRAC program becomes effective]. The Service may, however,
review your progress in implementing your EmTRAC program before then.
Your EmTRAC program will remain in effect until you terminate it or the Service terminates its approval. If you no longer wish
your EmTRAC program to apply to one or more of your establishments, you may terminate the program with respect to any estab-
lishment(s) by identifying the establishment(s) in writing to the Service Representative described below. If you want to completely
terminate your EmTRAC program, please say that in your letter to the Service Representative.
The Service may terminate its approval only (1) if you fail to comply with your agreements described in your letter, (2) if the Service
pursues an administrative or judicial action relating to you, an establishment, or any other related party to your EmTRAC program,
(3) following a significant statutory change in the FICA taxation of tips, or (4) after December 31, 2005. If one or more establish-
ments fail to comply with any of your agreements, the Service may choose to terminate its approval with respect to that establish-
ment(s).
Any termination will be effective the first day of the first calendar quarter after the terminating party notifies the other party in writ-
ing, unless you (or an establishment) fail to comply with your agreements. In that case, the Service may terminate your EmTRAC
program effective as of the first day of the quarter in which you ceased to comply.
Please send all correspondence relating to your EmTRAC program to
(name
and address), unless we notify you in writing otherwise.
If you have any questions regarding this agreement, please contact (ID ) at
(telephone number) or (e-mail address).
Thank you for your participation in the program.
INTERNAL REVENUE SERVICE
By:
ID:
Date:
January 8, 20012642001–2 I.R.B.

Research Credit-Suspension
Period
Notice 2001–2
PURPOSE
This notice provides guidance to help
taxpayers compute and report their credit
for increasing research activities (research
credit) under § 41 of the Internal Revenue
Code for taxable years that include the re-
search credit suspension periods de-
scribed in § 502 (d)(2) of the Tax Relief
Extension Act of 1999, Pub. L. No. 106-
170 (Dec. 17, 1999) (the Act). Further,
this notice explains how to take into ac-
count any research credits attributable to a
research credit suspension period.
SPECIAL RULES RELATING TO THE
RESEARCH CREDIT SUSPENSION
PERIODS
Section 502(d) of the Act provides that,
for purposes of the Code, any research
credit attributable to the period beginning
on July 1, 1999, and ending on September
30, 2000, that is otherwise allowable under
the Code, may not be taken into account
prior to October 1, 2000. Further, any re-
search credit attributable to the period be-
ginning on October 1, 2000, and ending on
September 30, 2001, that is otherwise al-
lowable under the Code, may not be taken
into account prior to October 1, 2001.
On or after the earliest date that an
amount of research credit attributable to a
research credit suspension period may be
taken into account, the amount may be
taken into account through the filing of an
amended return, an application for expe-
dited refund, or an adjustment of esti-
mated taxes.
Because the research credit suspension
periods merely delay the use of research
credits attributable to a research credit
suspension period, the limitations con-
tained in § 38(c), § 39, and § 41(g) on the
amount of research credit allowable to
any person as a credit against tax for any
taxable year remain applicable. Further,
taxpayers not electing to take a reduced
credit under § 280C(c)(3) must continue
to reduce applicable deductions, amounts
chargeable to capital account, and credits
for the taxable year by the full amount of
the research credit as required by
§ 280C(c)(1) and (2).
COMPUTATION OF THE RESEARCH
CREDIT FOR TAXABLE YEARS
INCLUDING SUSPENSION PERIODS
Section 502(d)(4) of the Act provides
the rule for determining the amount of re-
search credit suspended for taxable years
including research credit suspension peri-
ods. To determine the amount of research
credit that is suspended, taxpayers first
must calculate the research credit for the
taxable year. The amount of research
credit that is attributable to a research
credit suspension period under § 502(d)
of the Act is the amount that bears the
same ratio to the amount of research
credit for the taxable year as the number
of months in the research credit suspen-
sion period that are during the taxable
year bears to the total number of months
in the taxable year.
Form 6765,Credit for Increasing Re-
search Activities, reflects the required
computation of the research credit and the
determination of the research credit al-
lowed on a current year return and the
suspended research credit attributable to
the current year.
APPLICATION
ORIGINAL RETURNS
Research credits attributable to a re-
search credit suspension period may not
be used as a credit against tax on a timely
filed or late filed original return for a tax-
able year that includes any part of such
suspension period even if that original re-
turn is filed after the expiration of such
suspension period. This rule is necessary
for the Internal Revenue Service to prop-
erly administer § 502(d) of the Act.
CARRYBACK AND CARRYFOR-
WARD OF SUSPENDED CREDITS
Any research credit that is not allowed
for the taxable year that is attributable to a
research credit suspension period may not
be claimed as a carryback or carryforward
until the day after the end of the applica-
ble research credit suspension period.
After the end of the applicable research
credit suspension period, however, re-
search credits attributable to a research
credit suspension period that are not used
currently as a credit against tax may be
carried to other taxable years under the
rules of § 39.
OVERPAYMENT OF TAX AND IN-
TEREST ON OVERPAYMENTS
Because research credits attributable to
a research credit suspension period may
not be taken into account in determining
any amount required to be paid for any
purpose under the Code until the expira-
tion of the applicable research credit sus-
pension period, research credits attribut-
able to a research credit suspension period
are not available as a credit against tax
until the expiration of the applicable re-
search credit suspension period and may
not be considered in determining any
overpayment of tax until the expiration of
the applicable research credit suspension
period.
In computing interest on any overpay-
ment attributable to any suspended re-
search credit under the rules of § 6611,
the date of the overpayment for purposes
of computing the interest is the later of the
date of the overpayment without regard to
the research credit suspension period
(even though the credit may not be
claimed on an original return that includes
any part of the suspension period) or the
day after the close of the suspension pe-
riod.
REFUND OF TAX AND EXPEDITED
REFUNDS
If an overpayment of tax for a taxable
year arises as of the expiration of a re-
search credit suspension period, a claim
for refund of the overpayment of tax may
be taken into account by filing an
amended return, an application for tenta-
tive refund, or an application for expe-
dited refund on or after the earliest date
that an amount of credit may be taken into
account. A separate claim should be
made for each taxable period.
An application for expedited refund of
suspended research credits is made by fil-
ing a Form 1045,Application for Tentative
Refund, or a Form 1139,Corporation Ap-
plication for Tentative Refund, or by filing
an amended income tax return (Form
1040X , Form 1120X, or other amended re-
turn) before the date that is the later of one
year after the close of the research credit
suspension period to which the application
relates or one year after the close of the tax-
able year to which the suspended research
credit relates. The application for expe-
dited refund shall be filed with the Service
2001–2 I.R.B.265January 8, 2001

Center receiving the original return. The
application for expedited refund shall indi-
cate at the top “Application for Expedited
Refund-Suspended Research Credit”
and include a copy of the Form 6765 filed
with the original return.
If an application for an expedited re-
fund is filed before the date that is the
later of one year after the close of the re-
search credit suspension period to which
the application relates or one year after
the close of the taxable year to which the
suspended research credit relates, the In-
ternal Revenue Service will review the
application, determine the amount of the
overpayment, and apply, credit, or refund
the overpayment, in a manner similar to
the manner provided in § 6411(b), no
later than 90 days after the date on which
an application is filed.
Further, a claim for refund of the over-
payment of tax attributable to suspended
research credits may be taken into ac-
count by filing an amended income tax re-
turn (Form 1040X, Form 1120X, or other
amended return) on or after the date that
is the later of one year after the close of
the research credit suspension period to
which the claim relates or one year after
the close of the taxable year to which the
suspended research credit relates but be-
fore the expiration of the period of limita-
tion on filing a claim for credit or refund
under § 6511. An amended income tax
return, filed on or after the date that is the
later of one year after the close of the re-
search credit suspension period to which
the claim relates or one year after the
close of the taxable year to which the sus-
pended research credit relates, claiming a
refund of the overpayment of tax attribut-
able to suspended research credits shall
indicate at the top “Refund-Suspended
Research Credit”and include a copy of
the Form 6765 filed with the original re-
turn. Further, an amended income tax re-
turn filed on or after the date that is the
later of one year after the close of the re-
search credit suspension period to which
the claim relates or one year after the
close of the taxable year to which the sus-
pended research credit relates and before
the expiration of the period of limitation
on filing a claim for credit or refund under
§ 6511 will be processed under the gen-
eral rules for processing refund claims in
lieu of the expedited refund procedures
described above.
Finally, any claim for refund of an
overpayment of tax attributable to a re-
search credit suspension period should
not be filed before the expiration of the
applicable suspension period or before the
date the original return for the applicable
taxable year is filed.
ESTIMATED TAXES
The prohibition on taking into account
research credits attributable to a research
credit suspension period extends to the
determination of any estimated tax pay-
ment. Thus, for example, the research
credit attributable to the period beginning
on July 1, 1999, and ending on September
30, 2000, cannot be used to reduce any es-
timated tax payments due before October
1, 2000. The research credit attributable
to the period beginning on July 1, 1999,
and ending on September 30, 2000, can
be used to reduce an estimated tax pay-
ment due on or after October 1, 2000.
ESTIMATED TAX PENALTIES
In general, additions to tax for failure
to pay estimated tax are made under
§ 6654 or § 6655 for any underpayment of
income tax imposed by the Code even if
the underpayment was created or in-
creased by reason of the suspension of the
research credit under § 502 of the Act.
No additions to tax for failure to pay esti-
mated tax, however, will be made for any
period before July 1, 1999, for any under-
payment of income tax imposed by the
Code to the extent the underpayment was
created or increased by reason of the sus-
pension of the research credit under § 502
of the Act.
EXAMPLE
Assume that taxpayer, a calendar-year
corporation, had 800x
dollars of research
credit for 1999 and 800xdollars of re-
search credit for 2000. The amount of re-
search credit attributable to the period
July 1 through December 31, 1999, is
400xdollars (6/12 x 800xdollars), and
the amount of research credit attributable
to the period from January 1 through Sep-
tember 30, 2000 would be 600xdollars
(9/12 x 800xdollars).
On taxpayer’s original return for 1999,
taxpayer may not reduce its 1999 tax lia-
bility by the research credit of 400xdol-
lars attributable to the period July 1
through December 31, 1999. On or after
October 1, 2000, taxpayer may file an
amended return to claim the benefit of the
400xdollars of research credit attributable
to the period July 1 through December 31,
1999. In lieu of filing an amended return,
on or after October 1, 2000, taxpayer may
file an application for tentative refund of
the 400xdollars of research credit attrib-
utable to the period July 1 through
December 31, 1999. An application for
tentative refund of the 400x
dollars of
research credit attributable to the period
July 1 through December 31, 1999, must
be filed before October 1, 2001. An
amended return or application for tenta-
tive refund filed before October 1, 2001,
claiming the 400x
dollars of research
credit attributable to the period July 1
through December 31, 1999, with the des-
ignation “Application for Expedited
Refund-Suspended Research Credit”
will be treated as an application for expe-
dited refund.
Taxpayer’s 400x
dollars of research
credit attributable to the period July 1
through December 31, 1999, and 600x
dollars of research credit attributable to
the period January 1 through September
30, 2000, may not be taken into account in
determining any of the estimated tax pay-
ments that are due before October 1,
2000. If taxpayer makes an estimated tax
payment for its 2000 taxes based on its
prior year tax liability, that liability must
be determined without regard to the 400x
dollars of research credit attributable to
the period July 1 through December 31,
1999. If taxpayer makes an estimated tax
payment for its 2000 taxes based on its
current year tax liability, whether or not
that liability is annualized, that liability
must be determined without regard to the
600x
dollars of research credit attributable
to the period January 1 through
September 30, 2000, or any research cred-
it attributable to the second research cred-
it suspension period.
Because taxpayer’s first estimated tax
payment due on or after October 1, 2000,
is the payment due on December 15,
2000, taxpayer may use its 600xdollars of
research credit attributable to the period
January 1 through September 30, 2000,
and available on October 1, 2000,to
reduce the amount of estimated tax pay-
ments otherwise required to be paid on
December 15, 2000. In addition, if tax-
January 8, 20012662001–2 I.R.B.

payer indicates on its amended return
filed on or after October 1, 2000, that all
or part of the 400xdollars of research
credit attributable to the period July 1
through December 31, 1999, and available
on October 1, 2000, is to be applied to its
estimated tax for the succeeding taxable
year (in lieu of a refund), then the amount
requested will be applied to the taxpayer’s
estimated tax payment due on December
15, 2000.
Alternatively, assume taxpayer files an
amended return on December 1, 2000 to
claim a refund of the 400x
dollar overpay-
ment of tax attributable to the period July
1 through December 31, 1999. Taxpayer
is entitled to interest under § 6611 on the
overpayment from October 1, 2000 (the
end of the applicable suspension period)
to December 1, 2000 (the date the amend-
ed return was filed). Assuming that the
overpayment is refunded within 45 days
after the amended return is filed, no addi-
tional interest is allowed on the refund.
DRAFTING INFORMATION
The principal author of this notice is
Lisa J. Shuman of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Ms. Shuman
at (202) 622-3120 (not a toll-free call).
Weighted Average Interest Rate
Update
Notice 2001–3
Notice 88–73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Om-
nibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103-465
(GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for November
2000 is 5.78 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
2001–2 I.R.B.267January 8, 2001
90% to 105%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
December20005.935.34 to 6.235.34 to 6.52
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this notice, please call Mr. Newman at
(202) 283-9702 (not a toll-free number).
Clarifications of Qualified
Intermediary Agreement
Provisions and Procedures
Notice 2001–4
I. Purpose
Certain issues have arisen regarding
the implementation of the new withhold-
ing and reporting regulations (T.D. 8734,
1997–2 C.B.109, and T.D. 8881,
2000–23 I.R.B. 1158) and the qualified
intermediary agreement contained in
Rev. Proc. 2000–12 (2000–4 I.R.B.
387). This notice provides guidance re-
garding certain transitional and other is-
sues for qualified intermediaries (QIs)
and U.S. withholding agents. In addi-
tion, this notice provides a clarification
regarding the use of the term “know your
customer” in the context of the new
withholding and reporting regulations.
The Department of the Treasury (Trea-
sury) and the Internal Revenue Service
(IRS) will continue to monitor the imple-
mentation of the new regulations and the
qualified intermediary agreement and
will provide, as appropriate, other guid-
ance designed to ensure that the imple-
mentation process occurs as smoothly as
possible.
II. Background
In T.D. 8734, as modified by T.D.
8881, (the “new withholding regula-
tions”), Treasury and the IRS issued com-
prehensive regulations under chapter 3
(sections 1441-1464) and subpart G of
subchapter A of chapter 61 (sections
6041-6050S) of the Internal Revenue
Code (the “Code”). The regulations are a
significant revision of the procedural rules
regarding the withholding, documenta-
tion, and information reporting require-
ments that apply to payments of income
to foreign persons, particularly as they re-
late to payments handled by financial in-
termediaries. The regulations generally
become effective January 1, 2001.
The provisions relating to QIs are a key
component of the new regulations. Those
provisions are intended to reduce the ad-
ministrative burdens of both foreign fi-
nancial institution intermediaries (as well
as foreign branches of U.S. intermedi-
aries) and the U.S. withholding agents
from whom the foreign intermediaries
and foreign branches receive income. To
become a QI, an entity must submit an ap-
plication and enter into a qualified inter-
mediary withholding agreement (QI
agreement) with the IRS. The application
procedures and terms of the QI agreement
are set forth in Rev. Proc. 2000–12 . Ad-
ditional guidance has been provided to
qualified intermediaries in Announcement
2000–48 (2000–23 I.R.B. 1243).
III. Transitional Guidance for QIs.
A. Acting as a QI Prior to Execution
of the QI Agreement
1. Provisions Applicable to QIs.
Some potential QIs have expressed
concerns about their ability to act as QIs
on January 1, 2001, if they file an applica-
tion for a QI agreement before January 1,

2001, but do not receive a fully executed
QI agreement by that date. Other poten-
tial QIs have expressed concerns about
their treatment if they submit applications
after January 1, 2001. To address these
concerns, the IRS will apply the following
rules to potential QIs.
An applicant for a QI agreement may
represent on a Form W-8IMY that it is a
QI for a limited period after it submits a
complete application for a QI agreement
and before it receives a fully executed
agreement. An application is complete if
it contains all of the information required
by section 3 (Application for QI Status) of
Rev. Proc. 2000–12, including a com-
pleted Appendix A (countries in which the
applicant will operate as a QI) and Appen-
dix B (list of auditors that may be used by
the QI and any private arrangement inter-
mediary of the QI to perform external au-
dits). It is not necessary, however, for an
applicant to attach the know-your-cus-
tomer documentary evidence attachment
for particular countries because the IRS
has standardized those attachments.
An applicant that has submitted a QI
application before January 1, 2001, may
represent on Form W-8IMY that it is a QI
without being in possession of a fully exe-
cuted QI agreement until June 30, 2001.
An applicant that has submitted a QI ap-
plication after December 31, 2000, may
represent on Form W-8IMY that it is a QI
until the end of the sixth full month after
the month in which it submits its QI appli-
cation. An application is submitted on the
date it is post marked. Because of limited
resources, the IRS will not date stamp re-
turn copies of applications.
An applicant may not represent that it
is a QI if it receives a notice from the IRS
stating that it may not make the represen-
tation unless it receives a fully executed
QI agreement. The IRS will only issue
such notices in cases where an application
is not substantially complete or the IRS
has determined on a preliminary basis that
it will not enter into a QI agreement with
the applicant.
The IRS has instituted procedures to
issue applicants a QI employer identifica-
tion number (QI-EIN) upon receiving an
application. An applicant should include
the QI-EIN on any Form W-8IMY it pro-
vides as a QI after it receives the number.
If an applicant has provided a Form
W-8IMY before it has received a number,
it should write “awaiting QI-EIN” on line
6 of Part I of the form. If an applicant
provides an “awaiting QI-EIN” statement
on a Form W-8IMY, or an applicant has
provided a Form W-8IMY before the date
of this notice in anticipation of becoming
a QI, the applicant should provide the QI-
EIN to its withholding agent as soon as
practicable after it is received. It is not
necessary, however, for the applicant to
provide a newly executed Form W-8IMY
with the QI-EIN after it receives the QI-
EIN or after it receives a fully executed
QI agreement provided all of the informa-
tion on the original form remains valid.
The applicant may furnish its QI-EIN to
its withholding agent in any manner
agreed to by the applicant and its with-
holding agent.
Provided that it submits its application
before July 1, 2001, a potential QI may
apply all of the provisions of the QI
agreement beginning January 1, 2001.
An applicant that submits its application
after June 30, 2001, may represent to a
withholding agent that it is a QI effective
on the date it submits a complete applica-
tion. Such a QI, however, will not be per-
mitted to apply the reporting provisions of
section 8 of the QI agreement or the col-
lective credit or refund procedures of sec-
tion 9.04 of the QI agreement to any pay-
ments received prior to the effective date
contained in its QI agreement. Thus, a QI
that submits its application after June 30,
2001, must report all payments that it
makes prior to the effective date of its QI
agreement as a nonqualified intermediary.
See e.g., §1.1461–1(c)(4).
The IRS will not assess any penalties
for failure to make a deposit of withheld
amounts prior to the date the QI receives
its QI-EIN provided the QI makes a de-
posit of any amounts otherwise required
to be made within 3 days of receiving its
QI-EIN. In addition, if a QI applies to en-
roll in the Electronic Federal Tax Payment
System (EFTPS) within 30 days of re-
ceiving a QI-EIN, no penalty will be as-
sessed for failure to deposit withheld
amounts if any deposit otherwise required
to be made before the date that the QI is
enrolled in EFTPS is made within 3 days
of being enrolled in EFTPS.
2. Rules Applicable to Withholding
Agents
A withholding agent that receives a
Form W-8IMY with an “awaiting QI-
EIN” statement may treat the person that
provides the form as a QI unless it knows,
or has reason to know, that the provider of
the form cannot validly represent that it is
a QI. A withholding agent that receives a
Form W-8IMY with an EIN, or that re-
ceives an EIN with respect to an other-
wise valid Form W-8IMY without an
EIN, may treat the provider of the form as
a QI unless it knows, or has reason to
know, that the provider of the Form is not
a QI. A withholding agent is not required
to determine when a QI applied for an
agreement or if it is actually in possession
of a fully executed agreement. A with-
holding agent is also not required to ver-
ify whether the EIN is a QI-EIN.
A withholding agent should report any
payments made prior to receiving a Form
W-8IMY on which a person represents
that it is acting as a QI in accordance with
any other valid documentation that the
withholding agent has for such person or,
in the absence of such documentation, in
accordance with the presumption rules
provided in the withholding agent’s QI
agreement (if the withholding agent is a
QI) or the presumption rules contained in
the new withholding regulations (if the
withholding agent is not a QI).
B. Documentation Transition Rules for
QIs.
Under section 5.01 of the QI agree-
ment, a QI is required to apply the pre-
sumption rules of section 5.13(C) to any
payment made to an account holder un-
less the QI can reliably associate the pay-
ment with valid documentation from the
account holder. The presumption rules
may result in withholding at a 30-percent
or 31-percent rate. Under section
11.03(F), failure to obtain documentation
from a significant number of direct ac-
count holders constitutes an event of de-
fault for which the IRS may terminate a
QI agreement.
Some potential QIs have indicated that
they will be unable to obtain the account
holder documentation required under sec-
tion 5 of the QI agreement by January 1,
2001, because they have a substantial num-
ber of existing accounts for which docu-
mentation must be sought. These institu-
tions have requested clarification regarding
the operation of the documentation require-
ments and, in particular, the audit provi-
sions of the QI agreement. Specifically,
they have asked whether the audit provi-
January 8, 20012682001–2 I.R.B.

sions of the QI agreement afford them a
documentation transition period.
Section 10.03 of the QI agreement pro-
vides that the QI shall have its external
auditor conduct an audit of the second and
fifth full calendar years that the agree-
ment is in effect. Section 10.06 provides
that, upon review of the external auditor’s
report, the IRS may request, and the QI
must permit, the external auditor to per-
form additional audit procedures or to ex-
pand the external audit to cover some or
all of the calendar years for which the pe-
riod of limitations for assessment of taxes
has not expired.
The IRS intends to implement the audit
provisions in a manner that will permit a
QI to have a transition period for obtaining
account holder documentation. To effect a
documentation transition period, the IRS
will not request an external auditor to ex-
amine the first year of the QI agreement
provided that the IRS determines, based on
the external auditor’s report, that the QI is
in substantial compliance with all of the
provisions of the QI agreement, including
the documentation requirements, by the
end of the second full year of its agree-
ment. In addition, the IRS will not impose
failure to deposit penalties to the extent
that the under-deposit is attributable solely
to the failure to apply the presumption
rules in the second full year of the agree-
ment. The IRS will, however, require a QI
to pay the tax due from the second full year
of the agreement if the amount actually
withheld from an account holder is less
than the amount supported by valid docu-
mentation on file by the end of the second
full year of the agreement or, if there is no
documentation on file, the amount with-
held was less than required under the pre-
sumption rules. No penalties will be as-
sessed on underpaid tax; however, interest
will be charged on any tax due that is paid
after the due date of the Form 1042 for the
second full calendar year of the agreement.
The following example illustrates the
documentation transition rule. Assume
that after the audit of the second year of
its QI agreement, a QI is found to be in
substantial compliance with the QI agree-
ment and all but an insignificant number
of its accounts have valid documentation.
The external auditor determines that pay-
ments of dividends were received by a
particular individual account holder, B,
prior to B furnishing the QI with any doc-
umentation. The QI applied withholding
on dividends received by B in year 2 at
the rate of 15 percent. By the end of year
2, B does provide the QI with documenta-
tion that supports the 15 percent rate. No
penalties will be asserted against the QI
even though 30 percent was not withheld
from the dividends as required under the
presumption rules. If, however, B did not
provide valid documentation supporting
the 15-percent treaty rate by the end of the
second full calendar year of the agree-
ment, the QI would be liable for the tax
equal to the difference between the 15-
percent rate of withholding actually ap-
plied and the 30-percent rate that should
have applied under the presumption rules.
Because the QI is in substantial compli-
ance with the QI agreement and has valid
documentation for all but an insignificant
number of its accounts, however, the un-
derpayment will be computed only with
respect to dividends paid in the second
year of the agreement.
The IRS will not apply the transition
approach to any QI that is found not to be
in substantial compliance with the QI
agreement by the end of the second full
year of the agreement. In that case, the
IRS may, in accordance with the terms of
the QI agreement, request the external au-
ditor to audit the first year of the QI
agreement, and the IRS may assess the
appropriate penalties for both the first and
second years of the agreement. The pro-
visions of this section III. B. shall not
apply for years after 2002.
C. Documentation and Reporting Re-
lief for Simple and Grantor Trusts.
Under section 5.07 of the QI agree-
ment, a QI is generally required to obtain
a Form W-8IMY from a flow-through en-
tity, which includes a foreign simple or
foreign grantor trust, together with appro-
priate documentation from the interest
holders in the flow through entity. Sec-
tion 8.02(B) of the QI agreement provides
that a QI must file separate Forms 1042-S
for each interest holder in a flow-through
entity that is not itself a nonqualified in-
termediary or flow-through entity. Thus,
the pool basis reporting provisions of sec-
tion 8.03 of the QI agreement do not
apply to payments made to beneficiaries
or owners of foreign simple trusts and for-
eign grantor trusts.
Commentators have requested that the
IRS consider treating beneficiaries of for-
eign simple trusts and owners of foreign
grantor trusts as direct account holders of
a QI in appropriate circumstances. They
argue that where local “know-your-cus-
tomer” rules (i.e., the rules that require a
person to obtain documentation confirm-
ing the identity of a customer or account
holder) require a QI to identify the benefi-
ciaries or owners of such trusts, plus cer-
tain additional precautions are taken, it is
appropriate to treat the beneficiaries or
owners as direct account holders. In addi-
tion, they argue that a company providing
fiduciary services as a trustee should be
able to become a QI if it is subject to
know-your-customer rules, even though it
is not a financial institution or a clearing
organization described in §1.1441–
1(e)(5)(ii)(A) and (B).
The IRS will permit a QI to treat the
beneficiaries of a foreign simple trust or
the owners of a foreign grantor trust as di-
rect account holders for purposes of the
QI agreement if the following criteria are
met. First, the QI must be required, pur-
suant to the applicable know-your-cus-
tomer rules, to determine the identity of
the beneficiaries or owners of foreign
simple or foreign grantor trusts. Second,
the QI must obtain the type of know-your-
customer documentation set forth in para-
graph 4 of the appropriate know-your-
customer attachment to the QI agreement.
This second requirement cannot be satis-
fied by obtaining a Form W-8. Third, the
QI must obtain a valid Form W-8 from the
beneficiary or owner of the trust. The IRS
will apply the documentation transition
approach described in section III. B. of
this notice to these documentation re-
quirements. The documentation may be
provided to the QI directly rather than
being attached to a Form W-8IMY, or it
may be attached to a Form W-8IMY on
which the trust represents that it is a for-
eign simple or foreign grantor trust. If a
Form W-8IMY is provided, it is not nec-
essary for the trust to provide a withhold-
ing statement. In addition, if a Form
W-8IMY is provided and the trust has 5 or
fewer owners, the IRS will not require the
trust to provide the QI with a taxpayer
identification number despite
§1.1441–1(e)(4)(vii)(G).
The IRS will also permit a company
that is in the business of providing fidu-
ciary services as a trustee (i.e., a trust
company) and that is subject to know-
2001–2 I.R.B.269January 8, 2001

your-customer rules that have been ap-
proved by the IRS for purposes of the QI
agreement to become a QI provided that
the trust company agrees to the provisions
of the QI agreement as set forth in Rev.
Proc. 2000–12. Such a QI must treat the
trusts and trust beneficiaries or owners as
account holders for purposes of applying
the QI agreement. Such a QI may also
treat beneficiaries and owners of foreign
simple trusts and foreign grantor trusts as
direct account holders provided they meet
the conditions of this section III. C.
Treasury and the IRS will monitor
whether the rules of this notice applicable
to grantor and simple trusts are appropri-
ate and may provide further guidance as
necessary.
D. Proprietary Accounts of Qualified
Intermediaries
Section 1.01 of the QI agreement pro-
vides that a QI must act as a qualified inter-
mediary for those accounts which it desig-
nates as QI accounts with a withholding
agent. Clearing organizations have argued
that the language that requires a QI to act as
a QI with respect to an account prohibits
the QI from including assets for which the
QI is the beneficial owner in the same ac-
count as one containing assets for which
the QI acts as a QI. Separating proprietary
and intermediary assets into separate ac-
counts would, they argue, erode the effi-
ciencies that clearing organizations provide
their financial institution members and
shareholders.
Notwithstanding Section 1.01, the IRS
will permit a QI that maintains an account
with a clearing organization in which it is a
member or shareholder to include the assets
for which the QI is the beneficial owner in
the same account with those assets for
which it acts as a qualified intermediary if
the QI timely and accurately reports the in-
come for which it is the beneficial owner by
filing the appropriate Forms 1042-S for
each year showing itself as the recipient of
the income for which it is the beneficial
owner. For purposes of this exception to
section 1.01 of the QI agreement, a clearing
organization is an entity which is in the
business of holding obligations for member
organizations or shareholders and transfer-
ring those obligations among the members
or shareholders by credit or debit to the ac-
count of the member or shareholder with-
out the necessity of physical delivery of the
obligation. Under no circumstances, how-
ever, may a QI maintain assets for which it
acts as a QI in the same account as assets
for which it acts as a nonqualified interme-
diary.
E. Assumption of Primary Form 1099
Reporting and Backup Withholding Re-
sponsibility
Section 3.07 of the QI agreement con-
tains the terms for those QIs assuming
primary Form 1099 reporting and backup
withholding responsibilities. The intro-
ductory language to that section provides
that QIs that are not U.S. payors must ob-
tain IRS approval to assume primary
Form 1099 reporting and backup with-
holding responsibility. The IRS evi-
dences its approval by inserting the Com-
missioner’s, or his delegate’s, signature in
the margin of section 3.07 of the QI
agreement.
The IRS will no longer require QIs that
are not U.S. payors to obtain IRS ap-
proval before assuming primary Form
1099 reporting and backup withholding
responsibility. A non-U.S. payor QI may,
therefore, assume such responsibilities by
making the appropriate representations on
Form W-8IMY, or the associated with-
holding statement, provided to a with-
holding agent.
IV. Transition Relief for Foreign Part-
nerships
Under the regulations as well as the QI
agreement, foreign partnerships are gen-
erally treated as flow-through entities. As
such, they should provide withholding
agents, including QIs, with a Form
W-8IMY together with documentation
from each partner and a withholding
statement that, among other things, allo-
cates the payment made to each of the
partners in the partnership.
To achieve a smoother transition period
for foreign partnerships and their with-
holding agents, the IRS will permit for
calendar year 2001 a foreign partnership
to provide a withholding agent, including
a QI, with a Form W-8IMY together with
a withholding statement that provides the
withholding agent with information re-
garding withholding rate pools. The for-
eign partnership must associate the docu-
mentation from each of its partners with
the Form W-8IMY. However, if a partner
is a foreign person or a U.S. exempt recip-
ient (e.g., a corporation), that documenta-
tion may be provided to the withholding
agent at any time during calendar year
2001. A Form W-9 must be provided,
however, with respect to any U.S. non-
exempt recipient before a payment is
made to a partnership.
A withholding rate pool is a payment of
a single type of income, determined in ac-
cordance with the categories of income
reported on Form 1042-S or Form 1099,
as applicable, that is subject to a single
rate of withholding. The foreign partner-
ship, must provide a separate withholding
rate pool for each U.S. non-exempt recipi-
ent partner (e.g., a U.S. individual, U.S.
partnership, U.S. trust, or U.S. estate).
A withholding agent, including a QI,
may withhold in accordance with the
withholding rate pool information pro-
vided by the foreign partnership. In addi-
tion, a withholding agent that is not a QI
should report payments allocated to with-
holding rate pools, other than a withhold-
ing rate pool attributable to a U.S. non-ex-
empt recipient, on Form 1042-S as if the
payment were made to the foreign part-
nership as a recipient. A QI should report
such payments as if it were made to its
general withholding rate pool. A with-
holding agent that is not a QI must report
payments to U.S. non-exempt recipients
in accordance with the regulations under
chapter 61 of the Code. A withholding
agent that is a QI must treat U.S. non-ex-
empt recipients in accordance with the
provisions of the QI agreement. With-
holding agents that cannot allocate a pay-
ment to a withholding rate pool must
apply the appropriate presumption rules.
V. Transition Relief for U.S. Withhold-
ing Agents
A. Documentation Transition Rules.
Some U.S. withholding agents that are fi-
nancial institutions have stated that despite
the extensive period they have been given to
obtain Forms W-8BEN, W-8ECI, W-8EXP,
and W-8IMY, they have nevertheless had
difficulties re-documenting the large num-
ber of accounts they must handle. In addi-
tion, they have stated that the rule in
§1.1441–1(e)(2)(ii), which prohibits the use
of a P.O. box as a permanent residence ad-
dress on a Form W-8, presents an insur-
mountable difficulty for Forms W-8 pro-
vided by residents of foreign countries that
do not have street addresses and instead use
P.O. boxes as permanent residence ad-
dresses. Finally, some commentators have
January 8, 20012702001–2 I.R.B.

noted that T.D. 8881, issued on May 15,
2000, made certain changes to the rules re-
garding when a withholding certificate may
be treated as reliable that are more restric-
tive than the rules promulgated under T.D.
8734. In particular, they note that under
T.D. 8881, a withholding agent cannot rely
on a Form W-8 if the form has a U.S. mail-
ing address or the withholding agent has a
U.S. mailing address as part of its account
information, unless the withholding agent
obtains both documentary evidence that is
less than three years old and a written expla-
nation from the account holder that substan-
tiates the account holder’s foreign status.
To address these concerns, the IRS will
permit a U.S. withholding agent during
calendar year 2001 to rely on old Form
W-8 (i.e., Form W-8 as revised November
1992), Form 1001, Form 1078, Form
4224, and Form 8709 obtained under the
regulations in effect prior to January 1,
2001 (see 26 CFR parts 1 and 35a, revised
April 1, 1992), even if the validity period
of those forms has expired, provided that
the U.S. withholding agent can demon-
strate on audit that it has made good faith
efforts to obtain Forms W-8BEN,
W-8ECI, W-8EXP, W-8IMY, and W-9
from account holders required to provide
those forms. In addition, and until fur-
ther notice, the IRS will permit Forms
W-8 that contain a P.O. box as a perma-
nent residence address to be relied upon
provided that the withholding agent does
not know, or have reason to know, that the
person providing the form is a U.S. per-
son and provided that the withholding
agent does not know, or have reason to
know, that a street address is available.
Finally, the IRS will permit a withholding
agent to rely on Forms W-8 for which
there is a U.S. mailing address provided
the Form was received prior to December
31, 2001, without applying the provisions
of 1.1441–7(b) regarding the presence of
a U.S. mailing address on the Form W-8
or as part of the withholding agent’s ac-
count information.
Under no circumstances, however, may
a U.S. withholding agent apply the so-
called address rule contained in
§§1.1441–3(b)(3) and 35a.9999–3 Q&A
36 for dividends paid after December 31,
2000. Thus, a withholding agent may not
treat dividends as paid to a foreign person,
or as subject to a reduced rate of with-
holding under an income tax treaty, based
solely on the address of the person to
whom the dividends are paid. The with-
holding agent may treat the payee of divi-
dends as a foreign person, and as a resi-
dent of a treaty country, if applicable, in
the absence of a Form W-8BEN if it is in
possession of a Form W-8 (revised No-
vember 1992) or a Form 1001 for the
same payee and it does not know, nor
have reason to know, that the payee is not
entitled to treaty benefits.
Notwithstanding the provisions of this
section V. A., a withholding agent may
not rely on an old Form W-8 (revised No-
vember 1992) to treat a foreign financial
institution as the beneficial owner of in-
come if the withholding agent knows, or
has reason to know, that the foreign finan-
cial institution is acting as an intermedi-
ary on behalf of others.
B. Year 2001 as Transition Year for
U.S. Withholding Agents
In Notice 98–16 (1998–1 C.B. 847) and
Notice 99–25 (1999–1 C.B. 979), the IRS
stated that it would regard the calendar
years 1999 and 2000 as transition years.
Calendar year 2001 will similarly be re-
garded as a transition year for U.S. with-
holding agents by the IRS in enforcing
compliance for the administration of the
withholding tax system. Accordingly, the
IRS will take into account in performing
audits of the year 2001, the extent to which
a U.S. withholding agent has made good
faith efforts in 1999, 2000, and 2001 to
transform its business practices and infor-
mation systems to comply with the new
withholding regulations. Thus, the IRS will
take into account whether a U.S. withhold-
ing agent has made reasonable efforts dur-
ing 1999, 2000, and 2001 to modify its ac-
count opening practices to conform to the
new documentation requirements, obtain
new withholding certificates on existing ac-
counts, and make appropriate systems
changes to comply with the new withhold-
ing regulations. The IRS will also take into
account whether or not a U.S. withholding
agent has effectively implemented the new
withholding regulations by January 1,
2002.
C. Reporting Relief for U.S. Payors in
U.S. Possessions.
Under the new withholding regulations,
U.S. payors that pay foreign source in-
come outside the United States to U.S.
non-exempt recipients must generally re-
port such payments on Form 1099 and, if
appropriate, apply backup withholding. A
commentator has noted that the new with-
holding regulations will require reporting
of income from sources within a posses-
sion of the United States, including
Puerto Rico, on Form 1099 if that income
is paid to persons that are U.S. citizens,
even though that income may be exempt
from Federal income taxation under sec-
tion 931 section 932, section 933, or sec-
tion 935.
The IRS intends to revise the new with-
holding regulations so that income from
sources within a possession of the United
States that is exempt from taxation under
section 931, section 932, section 933, or
section 935 and that a payor reasonably
believes to be paid to a resident of a pos-
session of the United States is not re-
quired to be reported on Form 1099. U.S.
payors will not be required to report such
income pursuant to the authority of this
notice until the regulations are amended.
D. Use of the Documentary Evidence
Rule in U.S. Possessions
Section 1.6049–5(c)(1), effective Janu-
ary 1, 2001, states that a payor may rely
on documentary evidence instead of a
beneficial owner withholding certificate
(i.e., a Form W-8) for a payment made to
an offshore account, or, in the case of bro-
ker proceeds, for the sales effected out-
side the United States. For this purpose,
the term offshore account means an ac-
count maintained at an office or branch of
a U.S. or foreign bank or other financial
institution at any location outside the
United States and outside of U.S. posses-
sions. The IRS intends to amend section
1.6049–5(c)(1) so as to permit the use of
documentary evidence in lieu of a Form
W-8 in the U.S. possessions. U.S. payors
will be permitted to rely on documentary
evidence in lieu of a Form W-8 in a U.S.
possession pursuant to the authority of
this notice until the regulations are
amended.
E. Foreign Source Services Income
Under section 6041, a U.S. payor must
report payments of foreign source income
paid for services performed outside the
United States unless the U.S. payor has a
Form W-8 from the payee stating that the
payee is not a U.S. person. Under the pre-
sumption rules of §§1.6049–5(d)(2) and
1.14441–1(b)(3)(iii), a U.S. payor must
presume that the payee of income for ser-
vices is a U.S. payee and subject to Form
2001–2 I.R.B.271January 8, 2001

1099 reporting, and potentially backup
withholding, if the payee is an individual.
U.S. payors, which include controlled for-
eign corporations, contend that the rule
contained in the regulations is overly bur-
densome in that it requires them to ask all
persons to whom they make payments for
services performed outside the United
States to represent that they are not U.S.
persons.
Until further notice, the IRS will not re-
quire a U.S. payor to report, under section
6041, income paid for services if (1) the
payee of the income is an individual, (2)
the U.S. payor does not know that the
payee is a U.S. citizen or resident, (3) the
payor does not know, and has no reason to
know, that the income is (or may be) ef-
fectively connected with the conduct of a
U.S. trade or business, and (4) all of the
services for which payment is made were
performed by the payee outside the
United States.
VI. Issuance of New Forms W-8.
The IRS has released new versions of
Forms W-8BEN, W-8ECI, W-8EXP, and
W-8IMY, all of which were revised in De-
cember 2000. Withholding agents have
asked for clarification regarding whether
the prior versions of those forms (Forms
W-8 as revised October 1998) may be re-
lied upon now that new versions of those
forms have been released.
Withholding agents, including QIs,
may rely on the October 1998 versions of
Forms W-8BEN, W-8ECI, W-8EXP,
W-8IMY that they receive prior to Janu-
ary 1, 2002, for the normal validity period
applicable to those forms. Withholding
agents are advised, however, to use the
newer versions of the forms in all mail-
ings they make after December 2000.
VII. Clarification Regarding Use of the
Term “Know Your Customer”
Treasury and the IRS have recently be-
come aware that some confusion may
have arisen concerning the use of the term
“know your customer” in relation to the
QI agreement. Accordingly, Treasury
and the IRS wish to clarify the meaning of
“know your customer” in that context, to
avoid any misunderstanding by foreign fi-
nancial institutions or officials in other
countries.
Use of the term “know your customer”
in the QI context should not be confused
with the use of that term in other contexts,
specifically including the use of the term
in the area of international standards relat-
ing to money laundering control. As used
in the QI context, the term “know your
customer” generally relates to the capac-
ity of financial institutions to determine
whether their customers are U.S. persons
and, if their customers are non-U.S. per-
sons claiming the benefits of an income
tax treaty, whether these customers are
residents of the applicable treaty country.
The term “know your customer” in the
context of international money laundering
control efforts, for example in recommen-
dations of the Financial Action Task Force
(FATF), refer to a broad range of rules and
practices designed to ensure that financial
institutions properly identify their cus-
tomers and understand enough about their
customers’ customary banking activities
to be able to comply with applicable sus-
picious activity reporting rules and other
obligations that may apply under anti-
money laundering regimes. Although the
meaning of the term “know your cus-
tomer” in the QI context is often closely
related to the meaning of the term in the
broader context of money laundering con-
trol, the concepts are nevertheless distinct
and should not be regarded as having the
same meaning or scope.
Contact Information
The principal author of this Notice is
Laurie Hatten-Boyd of the Office of the
Associate Chief Counsel (International),
Internal Revenue Service, 1111 Constitu-
tion Avenue, N.W., Washington, D.C.
20224. For further information regarding
this Notice contact Ms. Hatten-Boyd at
202-622-3840 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part 1 , §§ 162, 263A, 446, 471, 481, 1001;
1.162–3, 1.263A–1, 1.446–1, 1.471–1, 1.481–1,
1.481–4, 1.1001–1.)
Rev. Proc. 2001–10
SECTION 1. PURPOSE
This revenue procedure modifies and
supersedes Rev. Proc. 2000–22, 2000–20
I.R.B. 1008, and provides that the Com-
missioner of Internal Revenue will exer-
cise his discretion to except a qualifying
taxpayer with average annual gross re-
ceipts of $1,000,000 or less from the re-
quirements to use an accrual method of
accounting under § 446 of the Internal
Revenue Code and to account for invento-
ries under § 471. This revenue procedure
also provides the procedures by which a
qualifying taxpayer (as defined in section
3 of this revenue procedure) may obtain
automatic consent to change to the cash
receipts and disbursements method of ac-
counting (the cash method) and to a
method of accounting for inventory as
materials and supplies that are not inci-
dental under § 1.162–3 of the Income Tax
Regulations.
SECTION 2. BACKGROUND AND
CHANGES
.01 Section 446(a) provides that taxable
income must be computed under the
method of accounting on the basis of
which the taxpayer regularly computes in-
come in keeping the taxpayer’s books.
.02 Section 446(c) generally allows a
taxpayer to select the method of accounting
it will use to compute its taxable income. A
taxpayer is entitled to adopt any one of the
permissible methods for each separate trade
or business, including the cash method and
an accrual method, subject to certain re-
strictions. For example, § 446(b) provides
that the selected method must clearly re-
flect income. In addition, § 1.446–
1(c)(2)(i) requires that a taxpayer use an ac-
crual method of accounting with regard to
purchases and sales of merchandise when-
ever § 471 requires the taxpayer to account
for inventories, unless otherwise authorized
by the Commissioner under §1.446–
1(c)(2)(ii). Under § 1.446–1(c)(2)(ii), the
Commissioner has the authority to permit a
taxpayer to use a method of accounting that
clearly reflects income even though the
method is not specifically authorized by the
regulations.
.03 The cash method generally requires
an item to be included in income when ac-
tually or constructively received and per-
mits a deduction for an expense when
paid. § 1.446–1(c)(1)(i).
.04 Section 471 provides that when-
ever, in the opinion of the Secretary, the
use of inventories is necessary to clearly
determine the income of the taxpayer, in-
ventories must be taken by the taxpayer.
Section 1.471–1 requires a taxpayer to ac-
count for inventories when the produc-
tion, purchase, or sale of merchandise is
January 8, 20012722001–2 I.R.B.

an income-producing factor in the tax-
payer’s business.
.05 Section 1.162–3 requires taxpayers
carrying materials and supplies (other
than incidental materials and supplies) on
hand to deduct the cost of materials and
supplies only in the amount that they are
actually consumed and used in operations
during the tax year.
.06 Section 263A generally requires
direct costs and an allocable portion of in-
direct costs of certain property produced
or acquired for resale by a taxpayer to be
included in inventory costs, in the case of
property that is inventory, or to be capital-
ized, in the case of other property. How-
ever, resellers with gross receipts of
$10,000,000 or less and producers with
$200,000 or less of indirect costs are not
required to capitalize costs under § 263A.
See §§ 263A(b)(2)(B) and 1.263A–
2(b)(3)(iv).
.07 Sections 446(e) and 1.446–1(e)
state that, except as otherwise provided, a
taxpayer must secure the consent of the
Commissioner before changing a method
of accounting for federal income tax pur-
poses. Section 1.446–1(e)(3)(ii) autho-
rizes the Commissioner to prescribe ad-
ministrative procedures setting forth the
limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain
consent to change a method of accounting
in accordance with § 446(e).
.08 Section 481(a) requires those ad-
justments necessary to prevent amounts
from being duplicated or omitted to be
taken into account when the taxpayer’s
taxable income is computed under a
method of accounting different from the
method used to compute taxable income
for the preceding tax year.
.09 Rev. Proc. 2000–22 is modified in
the following respects:
(1) Section 3 is modified to make
clear that this revenue procedure does not
apply to taxpayers described in
§ 448(a)(3) (tax shelters).
(2) Section 4.02 is added to clarify
the proper time to take into account the
cost of inventoriable items (i.e., merchan-
dise purchased for resale and raw materi-
als purchased for use in producing fin-
ished goods) that are treated as materials
and supplies that are not incidental under
§ 1.162–3;
(3) The conformity requirement of
section 5.07 has been removed. Taxpay-
ers are reminded that they must comply
with the requirements under § 446(a) and
the regulations thereunder to maintain ad-
equate books and records, which may in-
clude a reconciliation of any differences
between such books and records and their
return. See § 1.446–1(a)(4);
(4) Section 6.02(1) is modified to
provide that qualifying taxpayers using an
accrual method of accounting that are not
required under § 471 to account for inven-
tories may use the automatic consent pro-
visions of this revenue procedure to
change to the cash method;
(5) Section 6.02(2) is modified to
provide that qualifying taxpayers (includ-
ing taxpayers not currently accounting for
inventories) may use the automatic con-
sent provisions of this revenue procedure
to change to the method of accounting for
inventoriable items as materials and sup-
plies that are not incidental under
§ 1.162–3;
(6) Section 6.03 is added to provide
guidance on the computation of the ad-
justment required under § 481(a) in con-
nection with the automatic changes in
method of accounting under this revenue
procedure; and
(7) Section 8 is modified in accor-
dance with the removal of the conformity
requirement of section 5.07.
SECTION 3. SCOPE
This revenue procedure applies to tax-
payers (other than a taxpayer described in
§ 448(a)(3)) with “average annual gross
receipts” of $1,000,000 or less (as defined
in section 5.01 of this revenue procedure)
(“qualifying taxpayers”).
SECTION 4. SMALL TAXPAYER
EXCEPTION
.01 Pursuant to the discretion under
§§ 446(b) and 471, and to simplify book-
keeping requirements for small taxpayers,
the Commissioner, as a matter of adminis-
trative convenience, will except qualify-
ing taxpayers from the requirements to
use an accrual method under § 446 and to
account for inventories under § 471. For
purposes of this revenue procedure,
notwithstanding § 1001 and the regula-
tions thereunder, qualifying taxpayers that
use the cash method include amounts in
income attributable to open accounts re-
ceivable (i.e., receivables due in 120 days
or less) as amounts are actually or con-
structively received. However, § 1001
may be applicable to other transactions.
Qualifying taxpayers that do not want to
account for inventories must treat invento-
riable items (i.e., merchandise purchased
for resale and raw materials purchased for
use in producing finished goods) in the
same manner as materials and supplies
that are not incidental under § 1.162–3.
Section 263A does not apply to inventori-
able items that are treated as materials and
supplies that are not incidental.
.02 Under § 1.162–3, materials and
supplies that are not incidental are de-
ductible only in the year in which they are
actually consumed and used in the tax-
payer’s business. For purposes of this
revenue procedure, inventoriable items
that are treated as materials and supplies
that are not incidental are consumed and
used in the year in which the taxpayer
sells the merchandise or finished goods.
Thus, under the cash method, the cost of
such inventoriable items are deductible
only in that year, or in the year in which
the taxpayer actually pays for the invento-
riable items, whichever is later. Produc-
ers may use any reasonable method of es-
timating the amount of raw materials in
their year-end work-in-process and fin-
ished goods inventory to determine the
amount of raw materials that were used to
produce finished goods that are sold dur-
ing the tax year, provided that method is
used consistently.
.03 The Service and Treasury expect to
provide further guidance on when items
may be treated as incidental materials and
supplies (the cost of which may be de-
ducted currently under § 1.162–3) and
when items are inventoriable items (the
cost of which, under this revenue proce-
dure, may be deducted no earlier than the
year in which the items are consumed and
used).
SECTION 5. DEFINITIONS
.01 Average annual gross receipts de-
fined.A taxpayer has average annual
gross receipts of $1,000,000 or less if, for
each prior tax year ending on or after De-
cember 17, 1998, the taxpayer’s average
annual gross receipts for the 3-tax-year
period ending with the applicable prior
tax year does not exceed $1,000,000.
.02 Gross receipts defined.Gross re-
ceipts is defined consistent with
§ 1.448–1T(f)(2)(iv) of the temporary
2001–2 I.R.B.273January 8, 2001

regulations. Thus, gross receipts for a tax
year equal all receipts derived from all of
the taxpayer’s trades or businesses that
must be recognized under the method of
accounting actually used by the taxpayer
for that tax year for federal income tax
purposes. For example, gross receipts in-
clude total sales (net of returns and al-
lowances), all amounts received from ser-
vices, interest, dividends, and rents.
However, gross receipts do not include
amounts received by the taxpayer with re-
spect to sales tax or other similar state and
local taxes if, under the applicable state or
local law, the tax is legally imposed on the
purchaser of the good or service, and the
taxpayer merely collects and remits the
tax to the taxing authority.
.03 Aggregation of gross receipts.For
purposes of computing gross receipts, all
taxpayers treated as a single employer
under subsection (a) or (b) of § 52 or sub-
section (m) or (o) of § 414 (or that would
be treated as a single employer under
these sections if the taxpayers had em-
ployees) will be treated as a single tax-
payer. However, when transactions occur
between taxpayers that are treated as a
single taxpayer by the previous sentence,
gross receipts arising from these transac-
tions will not be treated as gross receipts
for purposes of the average annual gross
receipts limitation. See§ 1.448–
1T(f)(2)(ii).
.04 Taxpayer not in existence for 3 tax
years.If a taxpayer has been in existence
for less than the 3-tax-year period referred
to in section 5.01 of this revenue proce-
dure, the taxpayer must determine its av-
erage annual gross receipts for the num-
ber of years (including short tax years)
that the taxpayer has been in existence.
.05 Treatment of short tax years.In the
case of a short tax year, the taxpayer’s
gross receipts must be annualized by mul-
tiplying the gross receipts of the short tax
year by 12 and then dividing the product
by the number of months in the short tax
year. See§ 1.448–1T(f)(2)(iii).
.06 Treatment of predecessors.Any
reference to taxpayer in this section 5 in-
cludes a reference to any predecessor of
such taxpayer.
.07 Example.Taxpayer A, a calendar
year taxpayer, manufactures and sells wid-
gets. For federal income tax purposes, Tax-
payer Auses an overall accrual method of
accounting. Further, Taxpayer Acomplies
with the requirements of § 1.471–1 to use
inventory accounts and § 263A to capitalize
direct and indirect costs.
Taxpayer Ahas gross receipts (as
defined in section 5.02 of this revenue
procedure) of $200,000 in 1996, $800,000
in 1997 and $1,100,000 in 1998.
To determine whether it qualifies for
the small taxpayer exception set forth in
section 4 of this revenue procedure begin-
ning with the 1999 tax year, Taxpayer A
computes its average annual gross receipts
for each prior tax year ending on or after
December 17, 1998, that is, its 1998 tax
year. Taxpayer A’s average annual gross
receipts for 1998 is $700,000 ($200,000
(1996) + $800,000 (1997) + $1,100,000
(1998) = $2,100,000/3).
Taxpayer A’s average annual gross
receipts for each prior tax year ending
after December 17, 1998, does not exceed
$1,000,000. Therefore, Taxpayer Aquali-
fies for the small taxpayer exception for
its 1999 tax year. By following the proce-
dures set forth in section 6.02 of this rev-
enue procedure, Taxpayer Amay change
to the cash method and a method of treat-
ing inventoriable items in the same man-
ner as materials and supplies that are not
incidental under § 1.162–3 for the tax year
ending December 31, 1999.
Taxpayer Amust determine its applica-
bility for the small taxpayer exception set
forth in section 4 of this revenue proce-
dure each year. Thus, to qualify for the
exception for its 2000 tax year, Taxpayer
A’s average annual gross receipts for 1999
(i.e., the average of A’s gross receipts for
1999, 1998, and 1997) also must be
$1,000,000 or less. If, in any later year,
Taxpayer Aceases to qualify for the small
taxpayer exception set forth in section 4 of
this revenue procedure, it must change to
an inventory method and an accrual
method with respect to the production and
sale of widgets in accordance with section
6.04 of this revenue procedure.
SECTION 6. CHANGE IN
ACCOUNTING METHOD
.01 In general. Any change in a tax-
payer’s method of accounting pursuant to
this revenue procedure is a change in
method of accounting to which the provi-
sions of §§ 446 and 481 and the regula-
tions thereunder apply.
.02 Automatic change for taxpayers with-
in the scope of this revenue procedure.
(1) Automatic change to the cash
method.A qualifying taxpayer that
wants to change to the cash method must
follow the automatic change in account-
ing method provisions of Rev. Proc.
99–49, 1999–52 I.R.B. 725 (or its succes-
sor) with the following modifications:
(a) The scope limitations in sec-
tion 4.02 of Rev. Proc. 99–49 do not
apply. However, if the taxpayer is under
examination, before an appeals office, or
before a federal court with respect to any
income tax issue, the taxpayer must pro-
vide a copy of the Form 3115,Application
for Change in Accounting Method, to the
examining agent(s), appeals officer, or
counsel for the government, as appropri-
ate, at the same time that it files the copy
of the Form 3115 with the national office.
The Form 3115 must contain the name(s)
and telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate;
(b) A taxpayer making a change
under section 6.02 of this revenue proce-
dure for its first tax year ending on or after
December 17, 1999, that, on or before
January 16, 2001, files or filed its original
federal income tax return for such year, is
not required to comply with the filing
requirement in section 6.02(2)(a) of Rev.
Proc. 99–49, provided the taxpayer com-
plies with the following filing require-
ment. The taxpayer must complete and
file a Form 3115 in duplicate. The origi-
nal must be attached to the taxpayer’s
amended federal income tax return for the
taxpayer’s first tax year ending on or after
December 17, 1999. This amended return
must be filed no later than June 15, 2001.
A copy of the Form 3115 must be filed
with the national office (see section
6.02(5) of Rev. Proc. 99–49 for the
address) no later than when the taxpayer’s
amended return is filed;
(c) For a change in method of
accounting within the scope of this rev-
enue procedure, the provisions of Rev.
Proc. 99–49 are effective for tax years
ending on or after December 17, 1999;
and
(d) Taxpayers filing Form 3115 for
a change in method of accounting under
section 6.02 of this revenue procedure are
reminded to complete all applicable parts
of the form, including Part II, line 17
(regarding information on gross receipts
in previous years) and Part III (regarding
January 8, 20012742001–2 I.R.B.

the § 481(a) adjustment). Such taxpayers
must also complete Part I of Schedule A
of Form 3115, but need not complete Part
II. Taxpayers should write “Filed under
Rev. Proc. 2001–10” at the top of the
form.
(2) Automatic change to § 1.162–3.
A qualifying taxpayer that does not want
to account for inventories must make any
necessary change from the taxpayer’s cur-
rent method of accounting for inventori-
able items (including, if applicable, from
the method of capitalizing costs under
§ 263A) to treat inventoriable items in the
same manner as materials and supplies
that are not incidental under § 1.162–3.
For purposes of such a change, the rules
of section 6.02(1) of this revenue proce-
dure apply. Taxpayers may file a single
Form 3115 for both changes described in
sections 6.02(1) and (2).
.03 Section 481(a) adjustment. The net
amount of the § 481(a) adjustment com-
puted under this revenue procedure must
take into account both increases and
decreases in the applicable account bal-
ances such as accounts receivable,
accounts payable, and inventory. For
example, a taxpayer that wants to treat
inventory as materials and supplies that
are not incidental under § 1.162–3 must
take into account the difference resulting
from this recharacterization in determin-
ing the § 481(a) adjustment.
.04 Taxpayers not within the scope of
this revenue procedure. A taxpayer that
ceases to qualify for the small taxpayer
exception described in section 4 of this
revenue procedure and otherwise is
required to use an accrual method (e.g.,a
taxpayer otherwise required to account for
inventories) must change to an accrual
method and, if applicable, an inventory
method that complies with §§ 263A and
471 using either the automatic change in
accounting method provisions of section
5.01 of the APPENDIX to Rev. Proc.
99–49, if applicable, or the advance con-
sent provisions of Rev. Proc. 97–27,
1997–1 C.B. 680 (or its successor).
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2000–22 is modified and, as
modified, is superseded. Rev. Proc.
99–49 is modified and amplified to
include this automatic change in section 5
of the APPENDIX.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for
tax years ending on or after December 17,
1999. However, the Service will not chal-
lenge a taxpayer’s use of the cash method
under § 446 (or a taxpayer’s failure to
account for inventories under § 471) in an
earlier year if the taxpayer would satisfy
the 3-tax-year-period gross receipts test of
section 5.01 of this revenue procedure
(applied by testing the 3-tax-year period
ending prior to such earlier year).
DRAFTING INFORMATION
The principal author of this revenue
procedure is Cheryl Lynn Oseekey of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Ms. Oseekey at (202) 622-
4970 (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, § 6662.)
Rev. Proc. 2001–11
SECTION 1. PURPOSE
.01 This revenue procedure updates Rev.
Proc. 99–41, 1999–2 C.B. 566, and identi-
fies circumstances under which the disclo-
sure on a taxpayer’s return of a position
with respect to an item is adequate for the
purpose of reducing the understatement of
income tax under § 6662(d) of the Internal
Revenue Code (relating to the substantial
understatement aspect of the accuracy-re-
lated penalty), and for the purpose of avoid-
ing the preparer penalty under § 6694(a)
(relating to understatements due to unreal-
istic positions). This revenue procedure
does not apply with respect to any other
penalty provision (including the negligence
or disregard provisions of the § 6662 accu-
racy-related penalty).
.02 This revenue procedure applies to
any return filed on 2000 tax forms for a
taxable year beginning in 2000, and to
any return filed on 2000 tax forms in 2001
for short taxable years beginning in 2001.
SEC. 2. CHANGES FROM REV. PROC.
99–41
The following will no longer constitute
adequate disclosure for purposes of re-
ducing the understatement of income tax
under § 6662(d) and avoiding the preparer
penalty under § 6694(a): The completion
of Schedule M (Form 5471), Transactions
Between Controlled Foreign Corporation
and Shareholders or Other Related Per-
sons, lines 19 and 20, and Form 5472,
Part IV, Monetary Transactions Between
Reporting Corporations and Foreign Re-
lated Party, lines 7 and 18. Additionally,
minor editorial changes have been made
in updating Rev. Proc. 99–41.
SEC. 3. BACKGROUND
.01 If § 6662 applies to any portion of
an underpayment of tax required to be
shown on a return, an amount equal to 20
percent of the portion of the underpay-
ment to which the section applies is added
to the tax. (The penalty rate is 40 percent
in the case of certain gross valuation mis-
statements.) Under § 6662(b)(2), § 6662
applies to the portion of an underpayment
that is attributable to a substantial under-
statement of income tax.
.02 Section 6662(d)(1) provides that
there is a substantial understatement of in-
come tax if the amount of the understate-
ment exceeds the greater of 10 percent of
the amount of tax required to be shown on
the return for the taxable year or $5,000
($10,000 in the case of a corporation
other than an S corporation or a personal
holding company). Section 6662(d)(2)
defines an understatement as the excess of
the amount of tax required to be shown on
the return for the taxable year over the
amount of the tax that is shown on the re-
turn reduced by any rebate (within the
meaning of § 6211(b)(2)).
.03 In the case of an item not attribut-
able to a tax shelter, § 6662(d)(2)(B)(ii)
provides that the amount of the under-
statement is reduced by the portion of the
understatement attributable to any item
with respect to which the relevant facts af-
fecting the item’s tax treatment are ade-
quately disclosed on the return or on a
statement attached to the return, and there
is a reasonable basis for the tax treatment
of such item by the taxpayer.
.04 In general, this revenue procedure
provides guidance in determining when
disclosure is adequate for purposes of
§ 6662(d). For purposes of this revenue
procedure, the taxpayer must furnish all
required information in accordance with
the applicable forms and instructions, and
2001–2 I.R.B.275January 8, 2001

the money amounts entered on these
forms must be verifiable. Guidance under
§ 6662(d) for returns filed for 1999, 1998,
and 1997 is provided in Rev. Proc.
99–41; Rev. Proc. 98–62, 1998–2 C.B.
816; and Rev. Proc. 97–56, 1997–2 C.B.
582, respectively.
SEC. 4. PROCEDURE
.01 Additional disclosure of facts rele-
vant to, or positions taken with respect to,
issues involving any of the items set forth
below is unnecessary for purposes of re-
ducing any understatement of income tax
under § 6662(d) provided that the forms
and attachments are completed in a clear
manner and in accordance with their in-
structions. The money amounts entered
on the forms must be verifiable, and the
information on the return must be dis-
closed in the manner described below.
For purposes of this revenue procedure, a
number is verifiable if, on audit, the tax-
payer can demonstrate the origin of the
number (even if that number is not ulti-
mately accepted by the Internal Revenue
Service) and the taxpayer can show good
faith in entering that number on the ap-
plicable form.
(1) Form 1040, Schedule A, Itemized
Deductions:
(a) Medical and Dental Expenses:
Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through
9, supplying all required information.
Line 8 must list each type of tax and the
amount paid.
(c) Interest Expense: Complete
lines 10 through 14, supplying all re-
quired information. This section
4.01(1)(c) does not apply to (i) amounts
disallowed under § 163(d) unless Form
4952,Investment Interest Expense Deduc-
tion, is completed, or (ii) amounts disal-
lowed under § 265.
(d) Contributions: Complete lines
15 through 18, supplying all required in-
formation. Merely entering the amount of
the donation on Schedule A, however, will
not constitute adequate disclosure if the
taxpayer receives a substantial benefit
from the donation shown. If a contribu-
tion of property other than cash is made
and the amount claimed as a deduction
exceeds $500, a properly completed Form
8283,Noncash Charitable Contributions,
must be attached to the return. This sec-
tion 4.01(1)(d) will not apply to any con-
tribution of $250 or more unless the con-
temporaneous written acknowledgment
requirement of § 170(f)(8) is satisfied.
(e) Casualty and Theft Losses:
Complete Form 4684,Casualties and
Thefts, and attach to the return. Each item
or article for which a casualty or theft loss
is claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses
(including, for purposes of this section
4.01(2), the following six expenses as
they relate to the rental of property):
(a) Casualty and Theft Losses: The
procedure outlined in section 4.01(1)(e)
above must be followed.
(b) Legal Expenses: The amount
claimed must be stated. This section
4.01(2)(b) does not apply, however, to
amounts properly characterized as capital
expenditures, personal expenses, or nonde-
ductible lobbying or political expenditures,
including amounts that are required to be (or
that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off:
The amount written off must be stated.
(d) Reasonableness of Officers’ Com-
pensation: Form 1120, Schedule E,Com-
pensation of Officers, must be completed
when required by its instructions. The time
devoted to business must be expressed as a
percentage as opposed to “part” or “as
needed.” This section 4.01(2)(d) does not
apply to “golden parachute” payments, as
defined under § 280G. This section
4.01(2)(d) will not apply to the extent that
remuneration paid or incurred exceeds the
$1 million-employee-remuneration limita-
tion, if applicable.
(e) Repair Expenses: The amount
claimed must be stated. This section
4.01(2)(e) does not apply, however, to
any repair expenses properly character-
ized as capital expenditures or personal
expenses.
(f) Taxes (other than foreign taxes):
The amount claimed must be stated.
(3) Form 1120, Schedule M-1,Recon-
ciliation of Income (Loss) per Books With
Income per Return, provided:
(a) The amount of the deviation
from the financial books and records is
not the result of a computation that in-
cludes the netting of items; and
(b) The information provided rea-
sonably may be expected to apprise the
Internal Revenue Service of the nature of
the potential controversy concerning the
tax treatment of the item.
(4) Foreign Tax Items:
(a) International Boycott Transac-
tions: Transactions disclosed on Form
5713,International Boycott Report.
(b) Treaty-Based Return Position:
Transactions and amounts under § 6114
or § 7701(b) as disclosed on Form 8833,
Treaty-Based Return Position Disclosure.
(5) Other:
(a) Moving Expenses: Complete
Form 3903,Moving Expenses, and attach
to the return.
(b) Employee Business Expenses:
Complete Form 2106,Employee Business
Expenses, or Form 2106-EZ, Unreim-
bursed Employee Business Expenses, and
attach to the return. This section
4.01(5)(b) does not apply to club dues, or
to travel expenses for any non-employee
accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form
4136,Credit for Federal Tax Paid on
Fuels,and attach to the return.
(d) Investment Credit: Complete
Form 3468,Investment Credit, and attach
to the return.
SEC. 5. EFFECTIVE DATE
This revenue procedure applies to
any return filed on 2000 tax forms for a
taxable year beginning in 2000, and to
any return filed on 2000 tax forms in 2001
for short taxable years beginning in 2001.
SEC. 6. DRAFTING INFORMATION
The principal author of this revenue
procedure is Willie Armstrong, Jr. of the
Office of Associate Chief Counsel (Proce-
dure & Administration), Administrative
Provisions & Judicial Practice Division.
For further information regarding this rev-
enue procedure, contact Mr. Armstrong at
(202) 622-7920 (not a toll-free call).
January 8, 20012762001–2 I.R.B.

Voluntary Tip Agreements for
Employers of Tipped Employees
Announcement 2001–1
The Internal Revenue Service has final-
ized pro formaTip Rate Determination
Agreements (TRDA) and Tip Reporting
Alternative Commitment (TRAC) agree-
ments for use in its Tip Rate Determina-
tion/Education Program (TRD/EP). The
TRD/EP is designed to enhance tax com-
pliance among tipped employees through
taxpayer education and voluntary advance
agreements instead of traditional audit
techniques.
The Service published five voluntary
agreements in proposed form on May 8,
2000 (see 2000–19 I.R.B.): (1) a revised
TRAC agreement for use in the cosmetol-
ogy and barber industry (Announcement
2000–21, 2000–19 I.R.B. 983), (2) a re-
vised TRAC agreement for use in the food
and beverage industry (Announcement
2000–22, 2000–19 I.R.B. 987), (3) a re-
vised TRDA for use in the food and bev-
erage industry (Announcement 2000–23,
2000–19 I.R.B. 992), (4) a new TRAC
agreement for use in industries other than
the food and beverage industry and the
cosmetology and barber industry in which
tipped employees receive both cash and
charged tips (Announcement 2000–19,
2000–19 I.R.B. 973), and (5) a new
TRDA for use in industries other than the
food and beverage industry and the gam-
ing industry (Announcement 2000–20,
2000–19 I.R.B. 977).
Final versions of these agreements are
available on the IRS website at http://
www.irs.gov/bus_info/msu-info.html.
They can also be obtained from any IRS
office. The substance of the revised
agreements has not changed.
The Service received comments from
interested persons and has incorporated
most of the comments in the final ver-
sions. Two commentators expressed con-
cern about the employer that has already
entered into an agreement and that may be
interested in replacing its existing agree-
ment with the new updated agreement.
One commentator suggested that the up-
dated provisions of the revised agree-
ments automatically be extended to em-
ployers that have an existing agreement.
The Service wants to offer employers the
broadest choice of voluntary compliance
agreements and recognizes that some em-
ployers may choose to continue to be
bound by their existing agreements.
Another commentator suggested noti-
fying employers who have existing agree-
ments of the availability of the new up-
dated agreement. These employers would
be advised that, if they choose to enter
into a new agreement, the old agreement
will automatically terminate. In response
to this comment, the Service has added a
new Termination of prior agreementsec-
tion to the termination provisions of the
first three agreements listed above. The
new provision states:
Termination of prior agreements.Any
prior [TRAC agreement or TRDA] re-
lating to an Establishment covered by
this Agreement shall terminate on the
day preceding the effective date of this
Agreement with respect to the Estab-
lishment.
Some commentators requested clarifi-
cation of certain provisions. They won-
dered, for example, whether the Service
intends to terminate a TRAC agreement if
only one establishment fails to meet a re-
quirement, or whether the Service will in-
voke the termination provision under the
administrative or judicial action provision
by instituting an examination of a tax re-
turn. These kinds of issues will be ad-
dressed in the IRS manual, Handbook
104.6.7.12.1, entitled TRDA/TRAC
Agreements. This section of the manual
is currently being revised to reflect these
new provisions and address these issues.
The appropriate manual provision will be
available on the IRS website at
http://www.irs.gov/bus_info/tax_pro/irm-
part/part04.html.The Service expects to
make these provisions available soon.
Taxpayers interested in learning more
about these agreements should contact their
local tip coordinator. A list of tip coordina-
tors is available at http://www.irs.gov/
bus_info/tip-coord.html.
DRAFTING INFORMATION
The principal author of this announce-
ment is Karin Loverud of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this announcement or any of the voluntary
agreements, contact Ida Volz of the Office
of Compliance Policy at (202) 622-5532.
Announcement 2001–2
New Revision of Publication
551, Basis of Assets
Publication 551, revised December
2000, will be available soon from the In-
ternal Revenue Service. It replaces the
April 1999 revision.
This publication provides information
on how to figure your basis in property in
order to compute depreciation, amortiza-
tion, depletion, and casualty loss deduc-
tions, as well as gain or loss on sales or
other dispositions of property.
You can get a copy of this publication
by calling 1-800-TAX-FORM (1-800-
829-3676). You can also write to the IRS
Forms Distribution Center nearest you.
Check your income tax package for the
address. The publication is also available
on the IRS Internet web site at
www.irs.gov.
2001–2 I.R.B.277January 8, 2001
Part IV. Items of General Interest

January 8, 20012782001–2 I.R.B.
Magnetic Media Specifications for Form 1042-S
Announcement 2001–3
Revenue Procedure 98–44, IR Bulletin 1998–32, dated August 10, 1998, Specifications for Filing Form 1042-S,Foreign Person’s
U.S. Source Income Subject to Withholding, Magnetically or Electronically, reprinted as Publication 1187 (Rev. 8–98), will be used
to prepare Forms 1042-S for Tax Year (TY) 2000 filed in Calendar Year (CY) 2001.
Please use the 2000 Instructions for paper Forms 1042-S and other appropriate publications listed in Part A, Sec. 1.04, in the
preparation of 2000 Forms 1042-S.
Please make note of the following changes to the Publication 1187 (Rev. 8–98). These changes need to be adhered to in order for
your Forms 1042-S to be filed correctly both magnetically/electronically with the Internal Revenue Service at the Martinsburg Com-
puting Center.
1. The Tax Year reported in the Transmitter “T” Record, Recipient “Q” Record, and Withholding Agent “W” Record will be 2000,
unless filing for a prior tax year.
2. The addresses for the Martinsburg Computing Center have changed.
A. The new address for filing Form 1042-S magnetically/electronically to the Martinsburg Computing Center is:
If by Postal Service, truck, or air freight:
IRS-Martinsburg Computing Center
Information Reporting Program
230 Murall Drive
Kearneysville, WV 25430
B. All requests for an extension of time filed on Form 8809 or filed magnetically on tape, tape cartridge, or 3 1/2 inch diskette,
requests for undue hardship waivers filed on Form 8508, and requests for extension of time to furnish the statements to recipients
should be sent using the following address:
If by Postal Service, truck or air freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn: Extension of Time Coordinator
240 Murall Drive
Kearneysville, WV 25430
NOTE:Due to security regulations at MCC, the Internal Revenue police officers will not accept media from Private Delivery Services
(PDSs) or couriers between the hours of 3:00 p.m. to 11:00 p.m. seven days a week, and 11:00 p.m. to 7:00 a.m., Saturday and Sunday.
3. The following types of media are no longer accepted by IRS/MCC:
1. 5 1/4-inch diskettes
2. 3 1/2-inch diskettes created on a non-MS-DOS system
3. 3 1/2-inch diskettes created on a System 36 or AS400
NOTE:Beginning in calendar year 2003 for Tax Year 2002, 9 track magnetic tape will no longer be an acceptable method for sub-
mitting Information Returns to IRS/MCC.
4. The acceptable sizes of Quarter Inch Cartridges (QIC) have changed. Part B, Section 4.08(b) delete Quarter Inch Cartridges
with a size of QIC-11, QIC-320, and QIC-1350.
5. Beginning in Calendar Year 2002 for Tax Year 2001, IRS/MCC will no longer return problem media in need of replace-
ment.Filers will continue to receive a tracking form, listing and letter detailing the reason(s) their media could not be processed.
Filers will be expected to send in replacement media within the prescribed time frame. This makes it imperativethat filers maintain
backup copies and/or recreate capabilities for their information return files.
6. Part C, Bisynchronous (Mainframe) Electronic Filing Specifications, and Part D, Asynchronous (IRP-BBS) Electronic Filing
Specifications, contained in Publication 1187 (Rev. 8–98) will no longer be used for electronic filing of Forms 1042-S. A revised
Part C, Electronic Filing Specifications, included below, must be used for submitting all electronic files to the Martinsburg Comput-
ing Center beginning November 1, 1999. The new telephone number for electronic filing is 304-262-2400.
Part C. Electronic Filing Specifications
Sec. 1 Background
01.All electronic filing of information returns are received at IRS/MCC via the FIRE (Filing Information Returns Electronically)
System. The FIRE System can be accessed via analog and ISDN BRI connections. The system is designed to support the elec-
tronic filing of information returns only. The telephone number for electronic filing is (1-304-262-2400). Publications and

forms are no longer available electronically from MCC. Users needing the publications and forms will need to download them
from the IRS’s Internet Web Site at www.irs.govor order them by calling 1-800-TAX-FORM (1-800-829-3676).
Sec. 2. Advantages of Filing Electronically
Some of the advantages of filing electronically are as follows:
(1)Acknowledgment of files received.
(2)Results available within 20 workdays as to the acceptability of the data transmitted. (30 days for replacement transmis-
sions).
(3)Better customer service due to on-line availability of transmitters files for research purposes.
Sec. 3. General
.01 Electronic filing of Forms 1042-S originals, corrections, and replacements of information returns is offered as an alternative to
magnetic media (tape, tape cartridge, or diskette) or paper filing, but is not a requirement. Transmitters filing electronically will ful-
fill the magnetic media requirements for those payers who are required to file magnetically. It may also be used by payers who are
under the filing threshold requirement, but would prefer to file their information returns this way. If the original file was sent mag-
netically, but was returned for replacement, the replacement may be transmitted electronically. Also, if the original file was submit-
ted via magnetic media, any corrections may be transmitted electronically.
.02The electronic filing of information returns is not affiliated with the Form 1040 electronic filing program. These two pro-
grams are totally independent, and filers must obtain separate approval to participate in each of them. All inquiries concerning the
electronic filing of information returns should be directed to IRS/MCC. IRS/MCC personnel cannot answer questions or assist tax-
payers in the filing of Form 1040 tax returns. Filers with questions of this nature will be directed to the Customer Service toll-free
number (1-800-829-1040) for assistance.
.03Files submitted to IRS/MCC electronically must be in standard ASCII code. No magnetic media or paper forms are to be
submitted with the same information as the electronically submitted file.
.04 If`a request for extension is approved, transmitters who file electronically will be granted an extension of time to file. Part
A, Sec. 11, explains procedures for requesting extensions of time. Filers are encouraged to file their data as soon as possible.
.05The formats of the “T”, “Q”, “W”, and “Y” Records are the same for electronically filed records as they are for 3 1/2-inch
diskettes, tapes, and tape cartridges, and must be in standard ASCII code. For electronically filed documents, each transmission is
considered a separate file; therefore, each transmission mustbegin with a Transmitter “T” Record and end with an End of
Transmission (EOT) “Y” Record.
Sec. 4. Electronic Filing Approval Procedure
.01Filers must obtain, or already have, a Transmitter Control Code (TCC) assigned prior to submitting their files electronically.
(Filers who currently have a TCC for magnetic media filing of Form 1042-S, beginning with “22”, do not have to request a second
TCC for electronic filing.) Refer to Part A, Sec. 7, for information on how to obtain a TCC.
.02Once a TCC is obtained, electronic filers assign their own passwords and do not need prior or special approval.
.03With all passwords, it is the user’s responsibility to remember the password and not allow the password to be compromised.
Passwords are user assigned at first logon and are up to 8 alpha/numerics, which are case sensitive. However, if filers do forget their
password, call 304-263-8700for assistance.
Note: Passwords are case sensitive.
Sec. 5. Test Files
.01Filers are not required to submit a test file; however, the submission of a test file is encouraged for all electronic filers because
of the new hardware and software. If filers wish to submit an electronic test file for Tax Year 2000 (returns to be filed in 2001), it
mustbe submitted to IRS/MCC no earlier thanDecember 1, 2000, and no later thanFebruary 15, 2001.
.02If a filer encounters problems while transmitting the electronic test files, contact IRS/MCC for assistance.
.03Filers can verify the status of their transmitted test data by dialing the FIRE System phone number (1-304-262-2400). This
information will be available within 20 workdays (30 workdays for replacements) after their transmission is received by IRS/MCC.
Sec. 6. Electronic Submissions
.01Electronically filed information may be submitted to IRS/MCC 24 hours a day, 7 days a week. Technical assistance will be
available Monday through Friday between 8:30 a.m. and 4:30 p.m. Eastern Time by calling 304-263-8700.
.02 The FIRE System will be down from December 29, 2000, through January 7, 2001. This will allow time for IRS/MCC
to update their system to reflect current year changes.
.03Data compression is encouraged when submitting information returns electronically. WinZip and PKZip are acceptable com-
pression packages. UNIX COMPRESS may be acceptable; however, a test file is recommended to verify compatibility. IRS/MCC
cannot accept self-extracting zip files or compressed files containing multiple files.
The time required to transmit information returns electronically will vary depending on the modem speed and the type of data
2001–2 I.R.B.279January 8, 2001

compression used, if any. The time required to transmit a file can be reduced by as much as 95 percent by using software
compression and hardware compression.
The following are actual transmission rates achieved in test uploads at MCC using compressed files. The actual transmission rates
will vary depending on the modem speeds.
January 8, 20012802001–2 I.R.B.
Transmission Speed
In bps1000 Records10,000 Records100,000 Records
19.2K34 Sec.6 Min.60 Min.
56K20 Sec.3 1/2 Min.33 Min.
128K (ISDN)8 Sec.1 Min.10 Min.
.04Files submitted electronically will be assigned a unique filename by the IRS system (the users may name files anything they choose
from their end). The IRS assigned filename will consist of, submission type [TEST, ORIG (original), CORR (correction), and REPL
(replacement)] the filer’s TCC and a four digit number sequence. The sequence number will be incremented for every file sent. For exam-
ple, if it is your first original file for the calendar year and your TCC is 22000, the IRS assigned filename would be ORIG.22000.0001.
Record the filename. This information will be needed by MCC in order to identify the file, if assistance is required, and to complete Form
4804.
.05If a file was submitted timely and is bad, the filer will have up to 45 days to transmit the first replacement, and 30 days there-
after, if additional replacements are necessary.
.06 Filers are advised not to resubmit an entire file if records were omitted from the original transmission. This will result
in duplicate filing. A new file should be sent consisting of the records that had not previously been submitted.
.07The TCC (beginning with the numbers “22”) in the Transmitter “T” Record must be the TCC used to transmit the file; oth-
erwise, the file will be considered in error.
Sec. 7. Transmittal Requirements
.01The results of the electronic transmission will be available in the File Status area of the FIRE System within 20 workdays (30
workdays for replacements) after the signed Form 4804 is received. The Form 4804 must be postmarked by the due date of the
return. No return is considered filed until a Form 4804 is received by IRS/MCC. The Form 4804 may be faxed to 304-264-5602.
.02Form 4804 can be ordered by calling the IRS toll-free forms and publication order number 1-800-TAX-FORM (1-800-829-
3676),or it may be computer-generated. It may also be obtained from the IRS’s Internet Web Site at www.irs.gov. If a filer choos-
es to computer-generate Form 4804, all of the information contained on the original form, including the affidavit, must also be con-
tained on the computer-generated form.
.03The TCC used in the Transmitter “T” Record (beginning with numbers “22”) is the TCC which must appear on the transmit-
tal Form 4804.
.04Forms 4804 may be mailed to the following address:
If by Postal Service, air or truck freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn: Special Projects Coordinator
230 Murall Drive
Kearneysville, WV 25430
Please indicate on the envelope the following message:
CONTAINS FORM 4804 INFORMATION - NO MAGNETIC MEDIA
Sec. 8. Electronic Filing Specifications
.01The FIRE System is designed exclusively for the filing of Forms 1042-S, 1099, 1098, 5498, 8027, W2-G and W-4.
.02A transmitter must have a TCC before a file can be transmitted. If you have a TCC for magnetic media filing which begins
with the numbers “22’, that TCC can also be used for electronic filing .
.03Filers can determine the acceptability of files submitted by checking the file status area of the system. These reports will be
available on the electronic system within 20 workdays (30 workdays for replacements) after the Form 4804 is received by IRS/MCC.

.04Contact the FIRE System by dialing 304-262-2400.This number supports analog connections from 1200bps to 56Kbps or
ISDN BRI 128Kbps connections. The system can be accessed via Dial-up network/web browser or communications software. The
Dial-up network/web browser provides an Internet-like look without going through the Internet (point to point). If you do not have
this capability, a text interface is provided that can be accessed via typical communications software such as Hyperterminal,
Procomm, PCAnywhere, etc.
Sec. 9. Dial-up Network/Browser Specifications (Web Interface)
.01 The following are some general instructions (many of these settings may already be set by default in your software:
Dial-up network settings:
(a)Set dial-up server type to PPP
(b)Set network protocol to TCP/IP
Browser settings:
(a)Set to receive ‘cookies’
(b)Enable JavaScript or Jscript
(c)Browser must be capable of file uploads (i.e., Internet Explorer 4.0, Netscape 2.0 or higher)
(d)Enter the URL address of http://10.225.224.2(Remember, this is a point-to-point connection, not the Internet.)
.02Due to the large number of communication products available, it is impossible to provide specific information on all soft-
ware/hardware configurations. However, since most of our filers use Windows 95, 98, or NT software, the following instructions are
geared toward those products:
UPLO
ADING FILES WITH DIAL-UP NETWORKING/WEB BROWSER IN WINDOWS 95/98
Tips
(1) This is a point-to-point connection – not the Internet.
(2) Your browser must be capable of file uploads, i.e., Internet Explorer 4.0 or Netscape Navigator 2.0 or higher.
(3) If you currently access the Internet via a LAN or a PROXY server, you will need to disable those options in your browser and en-
able ‘Connect to the Internet using a modem’.
Select Programs
Accessories
Communications (Windows 98)
Dial-Up Networking
First time connecting with Dial-Up Network (If you have logged on previously, skip to Subsequent Dial-up Network
Connections.)
The first time you dial-in, you will need to configure your Dial-Up Networking.
Select ‘Make new connection’.
Type a descriptive name for the system you are calling.
Select your modem.
Click ‘Next’.
Enter area code 304 and telephone number262-2400.
Click ‘Next’.
When you receive a message that you have successfully created a new Dial-Up Networking connection, click‘Finish’.
Click ‘Connect’ to dial. If you are prompted for a user name and password,
complete according to local procedures; otherwise, click ‘OK’.
When you receive the message that you have connected to our system, click on your Web Browser (remember, you are not
connecting via the Internet – this is a point-to-point connection).
In the URL Address enter http://10.225.224.2and press ENTER.
Subsequent Dial-Up Netw
ork connections
Click ‘Connect’.
If prompted for user name and password, complete according to local procedures; otherwise, click ‘OK’.
2001–2 I.R.B.281January 8, 2001

When you receive ‘Connection Complete’, click ‘OK’.
Click on your Web Browser (remember, you are not connecting via the Internet).
In the URL Address enter http://10.225.224.2and press ENTER.
First time connection to
T
he FIRE System
(If you have logged on previously, skip to Subsequent Connections to the FIRE
System.)
Click ‘Create New Account’.
Fill out the registration form and click ‘Create’.
Enter your logon name(most users logon with their first and last name).
Enter your password(the password is user assigned and is case sensitive).
Click ‘Create’.
If you receive the message ‘account created’, click ‘OK’.
Click ‘Start the Fire Application’
Subsequent connections to The FIRE System
Click ‘Log On’.
Enter yourlogon name(most users logon with their first and last name).
Enter your password(the password is user assigned and is case sensitive).
At Menu Options:
Click ‘Information Returns’
Enter your TCC:
Enter your EIN:
Click ‘Submit’.
The system will then display the company name, address, city, state, ZIP code and phone number. This information will be
used to contact or send any correspondence regarding this transmission. Update as appropriate and/or click ‘Accept’.
Click one of the following:
Original File
Correction File
Test File
Replacement File(if you select this option, select one of the following):
FIRE Replacement (file was originally transmitted on this system)
Click file to be replaced
Magnetic Media Replacement File
Enter the alpha character from Form 9267, Media Tracking Slip, that was returned with your magnetic media shipment.
Click ‘Submit’.
Enter the drive/path/filename of the file you want to upload or click ‘Browse’to locate the file.
Click ‘Upload’.
When the upload is complete, the screen will display the total bytes received and the file
name to be recorded on your Form 4804, Box 7b.
If you have more files to upload for that TCC:
Click ‘File Another’; otherwise,
Click ‘Back to Main Menu’.
It is your responsibility to check the acceptability of your file; therefore, be sure to dial back into the system in 20 business
days.
At the Main Menu:
Click ‘File Stats’.
Enter your TCC:
Enter your EIN:
Click ‘Search’.
January 8, 20012822001–2 I.R.B.

If ‘Results’ indicate:
‘File Good’and you agree with the ‘Count of Payees’ and have mailed your Form 4804, you are finished with this file. (Form
4804 is not needed on a replacement file unless the number of payees has changed from the original/correction file.)
‘File Bad’- Correct the errors and resubmit the file as a ‘replacement’.
‘Not Yet Processed’- File has been received, but we do not have results available yet. Please check back in a few days.
Click on the desired file for a detailed report of your transmission.
When finished viewing your files, click on ‘Main Menu’.
Click ‘Log Off’.
Close your Web Browser.
IMPORTANT
Go back into your Dial-Up Network and click ‘hang-up’; otherwise, you may stay connected and incur unnecessary phone
charges.
Sec. 10. Communication Software Specifications (Text Interface)
.01Communications software settings must be:
- No parity
- Eight data bits
- One stop bit
.02 Terminal Emulation must be VT100.
.03Due to the large number of communication products available, it is impossible to provide specific information on all soft-
ware/hardware configurations. However, since most of our filers use Windows 95, 98 or NT software, the following instruc-
tions are geared toward those products (Procomm, PCAnywhere and many other communications packages are also accept-
able and the product does not necessarily need to be Windows based.):
UPLO
ADING FILES USING HYPERTERMINAL IN WINDOWS 95, 98 OR NT
Select Programs
Accessories
Communications (Windows 98)
Hyperterminal
The first time you log on, select Hyperterminal,Hypertermor Hyperterm.exe, whichever is available on your system.
Thereafter, you can just select the icon that you have saved.
A box will appear titled ‘Connection Description’.
Enter a name and choose an iconfor the connection:
Country Code: United States of America
Area Code:304
Phone Number:262-2400
Connect Using: (default)
(If you need to modify the phone number, select File,then Propertiesto enter defaults for the area code,
phone numbers and/or special access codes.)
Click on Dial.
A ‘Connect’ box will appear to show the status.
Once you have connected to The FIRE System, if you do not get a menu within a few seconds, press the ENTERkey
one time.
F
irst Time Logon
When you have connected to the system, enter ‘new’ to create your logon name and password.
Complete the registration information and enter ‘y’ to create account.
Lo
gon Name and Password
Logon Name: Enter a logon name. Most users enter their first and last name as the logon name.
Password: Enter a password of your choosing (1-8 alpha/numerics - case sensitive).
After entering the password, you will go to the Main Menu.
2001–2 I.R.B.283January 8, 2001

Transferring Your Electronic File
Enter ‘A’for Electronic Filing.
After reading Information Notice, pressENTER.
Enter ‘A’ for Forms 1098, 1099, 5498, W-2G, 1042-S, 8027 and Questionable Forms W-4.
Press the Tab key to advance to TCC box; otherwise, enter ‘E’ to exit.
Enter your TCC:
Enter your EIN:
The system will then display the company name, address, city, state, ZIP code, and phone number. This information
will be used to contact or send correspondence (if necessary) regarding this transmission. If you need to update, enter
‘n’ to change information; otherwise, enter ‘y’ to accept.
Select one of the following:
‘A’ for an Original file
‘B’ for a Replacement file
‘C’ for a Correction file
‘D’ for a Test file
If you selected ‘B’ for a replacement file, select one of the following:
‘A’ Replacement Files For This System
This option is to replace an original/correction file that was submitted electronically on this system but was
bad and needs to be replaced. Select the file needing replaced.
‘B’ Magnetic media replacement files
Enter the alpha character from Form 9267, Media Tracking Slip, that was returned with your magnetic
media shipment.
Choose one of the following protocols (Hyperterminal is normally set to Zmodem by default):
X- Xmodem
Y- Ymodem
Z- Zmodem (Zmodem will normally give you the fastest transfer rate.)
At this point, you must start the upload from your PC.
To send a file:
Go to the hyperterminal menu bar.
Click on Transfer.
Click on Send file.
A box will appear titled ‘Send File’.
Enter the drive/path/filename or click on Browseto locate your file.
Click on Send.
When the upload is complete, the screen will display the total bytes received and the file name to be
recorded on your Form 4804, Box 7b.
Press ENTERto continue.
If you have more files to send for the same TCC/EIN, enter ‘y’; otherwise, enter ‘n’.
It is your responsibility to check the acceptability of your file; therefore, be sure to dial back into the system in 20 workdays.
At the Main Menu:
Enter ‘B’ for file status.
Press the Tab key to advance to TCC box; otherwise, enter ‘E’ to exit.
Enter your TCC:
Enter your EIN:
Tab to the file you want to look at and press ENTER.
If ‘Results’ indicate:
‘File Good’and you agree with the ‘Count of Payees’ and have mailed your Form 4804, you are finished with this file. (Form
4804 is not needed on a replacement file unless the number of payees changes from the original/correction file.)
January 8, 20012842001–2 I.R.B.

‘File Bad’- Correct the errors and resubmit the file as a replacement.
‘Not Yet Processed’- File has been received, but we do not have results available yet. Please check back in a few days.
When you are finished, enter ‘E’ from the Main Menu to logoff.
Enter ‘2’ to hang-up.
Sec. 11. Modem Configuration
.01Hardware features
(a) Enable hardware flow control
(b)Enable modem error control
(c) Enable modem compression
Sec. 12. Common Problems Associated with Electronic Filing
.01Refer to Part A, Section 17, for Major Problems Encountered with Form 1042-S magnetic/electronic files.
.02The following are the major non-format errors associated with electronic filing:
1. No Form 4804, Transmittal of Information Returns Reported Magnetically/Electronically.
Even though you have sent your information returns electronically, you still need to mail a signed Form 4804 by the due date of
the return. No processing will occur on the file until the form is received.
2. Transmitter does not dial back to the electronic system to determine file acceptability.
The results of your file transfer are posted to the FIRE System within 20 workdays (30 workdays for replacements) from the
receipt of Form 4804. It is your responsibility to verify file acceptability and, if the file contains errors, you can get an online list-
ing of the errors. Date received and number of payee records are also displayed.
3. Incorrect file is not replaced timely.
If your file is bad, correct the file and timely resubmit as a replacement.
4. Transmitter compresses several files into one.
Only compress one file at a time. For example, if you have 10 uncompressed files to send, compress each file separately and send
10 separate compressed files.
5. Transmitter sends a file and File Status indicates that the file is good, but the transmitter wants to send a replacement
or correction file to replace the original/correction/replacement file.
Once a file has been transmitted, you cannot send a replacement file unless File Status indicates the file is bad . If you do not
want us to process the file, you must first contact us at 304-263-8700 to see if this is a possibility. However, this will count as a
replacement. (See Part A. Sec. 16, for the definition of replacement.)
6. Transmitter sends an original file that is good, then sends a correction file for the entire file even though there are only a
few changes.
The correction file, containing the proper coding, should only contain the records needing correction, not the entire file.
7. File is formatted as EBCDIC.
All files submitted electronically must be in standard ASCII code.
2001–2 I.R.B.285January 8, 2001

Guidance Regarding Claims for
Certain Income Tax Convention
Benefits; Correction
Announcement 2001–4
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains
corrections to final regulations (T.D. 8889
[2000–30 I.R.B. 124]) which were pub-
lished in the Federal Register on Monday,
July 3, 2000 (65 F.R. 40993). The final
regulations relate to claims for certain in-
come tax convention benefits.
DATES: This correction is effective July
3, 2000.
FOR FURTHER INFORMATION CON-
TACT: Shawn R. Pringle (202) 622-3850
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are subject to
these corrections are under section 894 of
the Internal Revenue Code.
Need for Correction
As published, final regulations (T.D.
8889) contains errors that may prove to be
misleading and are in need of clarification.
Correction of Publication
Accordingly, the publication of final regu-
lations (T.D. 8889), which was the subject of
FR Doc. 00-16761, is corrected as follows:
1. On page 40996, column 2, in the
preamble under the paragraph heading
“D. Treatment of Complex Trusts”, para-
graph 2, line 13 from the bottom of the
paragraph, the language “the hands of the
interest holder are” is corrected to read
“the hands of the interest holder are not”.
2. On page 40997, column 1, in the
preamble under the paragraph heading
“Special Analyses”, paragraph 1, line 2,
the language “treasury decision not a sig-
nificant” is corrected to read “Treasury
decision is not a significant”.
§1.894–1 [Corrected]
3. On page 40997, column 1, correct
the amendatory instruction for Par. 2. to
read as follows:
Par. 2. Section 1.894–1 is amended as
follows:
1. Paragraph (d) is redesignated as
paragraph (e), and a new paragraph (d) is
added.
2. In newly designated paragraph (e),
add a sentence at the end of the para-
graph.
The additions read as follows:
4. On page 40999, column 2,
§1.894–1(d)(5), paragraph (i) of Exam-
ple 7., line 10, the language “legal per-
sonality of the arrangement, A is not” is
corrected to read “legal personality in
Country X of the arrangement, A is not”.
5. On page 40999, column 2,
§1.894–1(d)(5), paragraph (i) of Exam-
ple 7., lines 11 and 12, the language “li-
able to tax at the entity level in Country
X and is not a resident within the mean-
ing of” is corrected to read “liable to tax
as a person at the entity level in Country
X and is thus not a resident within the
meaning of”.
6. On page 40999, column 2,
§1.894–1(d)(5), paragraph (ii) of Exam-
ple 7., line 9, the language “is not con-
sidered a resident of Country X” is cor-
rected to read “is not considered a
person in Country X and thus not a resi-
dent of Country X”.
7. On page 40999, column 2,
§1.894–1(d)(5), paragraph (ii) of Exam-
ple 7., line 12, the language “derive the
income for purposes of the U.S.-” is cor-
rected to read “derive the income as a
resident of Country X for purposes of
the U.S.-”.
8. On page 41000, column 1,
§1.894–1(d)(5), paragraph (i) of Exam-
ple 11., the last line of the paragraph, the
language “subject to tax by Country X.”
is corrected to read “taxed by Country
X.”.
9. On page 41000, column 2,
§1.894–1, after paragraph (d)(6), add a
sentence at the end of paragraph (e) to
read as follows:
§1.894–1 Income affected by treaty.
* * * * *
(e) * * * See paragraph (d) (6) of
this section for applicability dates for
paragraph (d) of this section.
10. On page 41000, column 2, a new
amendatory instruction Par. 3. is added to
read as follows:
§1.894–1T [Removed]
Par. 3. Section 1.894–1T is removed.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Office of Special Counsel
(Modernization & Strategic Planning).
(Filed by the Office of the Federal Register on De-
cember 7, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 8, 2000,
65 F.R. 76932)
Cumulative Bulletin 1998–2;
Corrections
Announcement 2001–5
The following is a reprint of the cor-
rected pages of the Numerical Finding
List, Finding List of Current Actions on
Previously Published Items, and the Index
for Cumulative Bulletin 1998–2.
January 8, 20012862001–2 I.R.B.

Announcements:
98–57, 1998–28 I.R.B.11,57
98–58, 1998–28 I.R.B. 12,58
98–59, 1998–28 I.R.B. 12,58
98–60, 1998–27 I.R.B.39,38
98–61, 1998–27 I.R.B. 38,37
98–62, 1998–29 I.R.B. 13,79
98–63, 1998–28 I.R.B.12,58
98–64, 1998–28 I.R.B. 14,60
98–65, 1998–28 I.R.B.14,60
98–66, 1998–28 I.R.B. 15,61
98–67, 1998–28 I.R.B.15,61
98–68, 1998–29 I.R.B. 14,80
98–69, 1998–30 I.R.B. 16,101
98–70, 1998–30 I.R.B. 17,102
98–71, 1998–30 I.R.B. 17,102
98–72, 1998–31 I.R.B.14,120
98–73, 1998–31 I.R.B.14,120
98–74, 1998–31 I.R.B.15,121
98–75, 1998–31 I.R.B.15,121
98–76, 1998–32 I.R.B.64,192
98–77, 1998–34 I.R.B.30,245
98–78, 1998–34 I.R.B.30,245
98–79, 1998–34 I.R.B.31,246
98–80, 1998–34 I.R.B.32,247
98–81, 1998–36 I.R.B.35,304
98–82, 1998–35 I.R.B. 17,267
98–83, 1998–36 I.R.B. 36,305
98–84, 1998–38 I.R.B.30,390
98–85, 1998–38 I.R.B.30,390
98–86, 1998–38 I.R.B.31,391
98–87, 1998–40 I.R.B.11,458
98–88, 1998–41 I.R.B. 14,483
98–89, 1998–40 I.R.B.11,458
98–90, 1998–42 I.R.B.22,510
98–91, 1998–40 I.R.B.12,459
98–92, 1998–41 I.R.B.15,484
98–93, 1998–43 I.R.B.10,532
98–94, 1998–43 I.R.B.32,554
98–95, 1998–44 I.R.B.13,572
98–96, 1998–44 I.R.B.18,577
98–97, 1998–44 I.R.B.18,577
98–98, 1998–44 I.R.B.18,577
98–99, 1998–46 I.R.B.34,650
98–100, 1998–46 I.R.B.42,658
98–101, 1998–45 I.R.B.27,612
98–102, 1998–45 I.R.B.28,613
98–103, 1998–47 I.R.B.12,672
98–104, 1998–47 I.R.B. 13,673
98–105, 1998–49 I.R.B.21,712
98–106, 1998–48 I.R.B.10,686*
98–107, 1998–48 I.R.B.10,687
98–108, 1998–48 I.R.B.12,688
98–109, 1998–50 I.R.B.20,739
98–110, 1998–50 I.R.B.21,740
98–111, 1998–50 I.R.B.21,740
98–112, 1998–51 I.R.B.46,789
98–113, 1998–51 I.R.B.48,791
98–114, 1998–52 I.R.B. 88,881
Court Decisions:
2063, 1998–49 I.R.B. 6,697
2064, 1998–37 I.R.B. 4,315
2065, 1998–39 I.R.B.7,400
Notices:
98–34, 1998–27 I.R.B. 30,29
98–35, 1998–27 I.R.B. 35,34*
98–36, 1998–29 I.R.B. 8,74
98–37, 1998–30 I.R.B.13,98
98–38, 1998–34 I.R.B.7,222
Notices—Continued
98–39, 1998–33 I.R.B.11,205
98–40, 1998–35 I.R.B. 7,257
98–41, 1998–33 I.R.B.12,206
98–42, 1998–33 I.R.B.12,206
98–43, 1998–33 I.R.B.13,207
98–44, 1998–34 I.R.B.7,222
98–45, 1998–35 I.R.B.7,257
98–46, 1998–36 I.R.B. 21,290
98–47, 1998–37 I.R.B. 8,319
98–48, 1998–39 I.R.B.17,410
98–49, 1998–38 I.R.B.5,365
98–50, 1998–44 I.R.B.10,569
98–51, 1998–44 I.R.B. 11,570
98–52, 1998–46 I.R.B. 16,632
98–53, 1998–46 I.R.B. 24,640
98–54, 1998–46 I.R.B. 25,641
98–55, 1998–46 I.R.B. 26,642
98–56, 1998–47 I.R.B.9,669
98–57, 1998–47 I.R.B.9,669
98–58, 1998–49 I.R.B. 13,704
98–59, 1998–49 I.R.B.16,707
98–60, 1998–49 I.R.B.17,708
98–61, 1998–51 I.R.B. 13,756
98–62, 1998–51 I.R.B. 15,758
98–63, 1998–51 I.R.B. 15,758
98–64, 1998–52 I.R.B. 10,803
98–65, 1998–52 I.R.B. 10,803
98–66, 1998–52 I.R.B. 17,810
98–67, 1998–52 I.R.B. 18,811
Railroad Retirement Quarterly Rates:
1998–31 I.R.B. 7,113
1998–50 I.R.B. 4,723
Proposed Regulations:
REG–101363–98, 1998–40 I.R.B.10,457
REG–102023–98, 1998–48 I.R.B. 6,683
REG–104565–97, 1998–39 I.R.B.21,414
REG–104641–97, 1998–29 I.R.B. 9,75
REG–105170–97, 1998–50 I.R.B. 10,729
REG–106177–97, 1998–37 I.R.B.33,344
REG–106221–98, 1998–41 I.R.B.10,479
REG–109708–97, 1998–45 I.R.B.29,614
REG–110332–98, 1998–33 I.R.B.18,212
REG–110403–98, 1998–29 I.R.B.11,77
REG–115393–98, 1998–39 I.R.B.34,427
REG–115446–97, 1998–36 I.R.B. 23,292
REG–116608–97, 1998–29 I.R.B. 12,78
REG–118926–97, 1998–39 I.R.B.23,416
REG–118966–97, 1998–39 I.R.B.29,422
REG–119227–97, 1998–30 I.R.B. 13,98
REG–122488–97, 1998–42 I.R.B. 19,508
REG–209060–86, 1998–39 I.R.B. 18,411
REG–209446–82, 1998–36 I.R.B. 24,293
REG–209769–95, 1998–41 I.R.B.8,477
REG–209813–96, 1998–35 I.R.B. 9,259
REG–246256–96, 1998–34 I.R.B.9,224
Revenue Procedures:
98–38, 1998–27 I.R.B. 29,28
98–40, 1998–32 I.R.B. 6,134
98–41, 1998–32 I.R.B. 7,135
98–42, 1998–28 I.R.B. 9,55
98–43, 1998–29 I.R.B. 8,74
98–44, 1998–32 I.R.B. 11,139
98–45, 1998–34 I.R.B.8,223
98–46, 1998–36 I.R.B. 21,290
98–47, 1998–37 I.R.B. 8,319
98–48, 1998–38 I.R.B.7,367
98–49, 1998–37 I.R.B. 9,320
Revenue Procedures—Continued
98–50, 1998–38 I.R.B.8,368
98–51, 1998–38 I.R.B.20,380
98–52, 1998–37 I.R.B. 13,324
98–53, 1998–40 I.R.B.9,456
98–54, 1998–43 I.R.B.7,529
98–55, 1998–46 I.R.B.27,643
98–56, 1998–46 I.R.B.33,649
98–57, 1998–48 I.R.B.5,682
98–58, 1998–49 I.R.B.19,710
98–59, 1998–50 I.R.B.8,727
98–60, 1998–51 I.R.B. 16,759
98–61, 1998–52 I.R.B. 18,811
98–62, 1998–52 I.R.B. 23,816
98–63, 1998–52 I.R.B. 23,818
98–64, 1998–52 I.R.B. 32,825
98–65, 1998–52 I.R.B. 40,833
Revenue Rulings:
98–33, 1998–27 I.R.B. 26,25
98–34, 1998–31 I.R.B. 12,118
98–35, 1998–30 I.R.B. 4,89
98–36, 1998–31 I.R.B.6,112
98–37, 1998–32 I.R.B.5,133
98–38, 1998–32 I.R.B.4,132
98–39, 1998–33 I.R.B.4,198
98–40, 1998–33 I.R.B.4,198
98–41, 1998–35 I.R.B.6,256
98–42, 1998–35 I.R.B. 5,255
98–43, 1998–36 I.R.B. 9,278
98–44, 1998–37 I.R.B.4,315
98–45, 1998–38 I.R.B.4,364
98–46, 1998–39 I.R.B. 10,403
98–47, 1998–39 I.R.B. 4,397
98–48, 1998–39 I.R.B. 6,399
98–49, 1998–40 I.R.B.4,451
98–50, 1998–40 I.R.B.7,454
98–51, 1998–43 I.R.B.4,526
98–52, 1998–45 I.R.B.4,589
98–53, 1998–46 I.R.B.12,628
98–54, 1998–46 I.R.B.14,630
98–55, 1998–47 I.R.B. 5,665
98–56, 1998–47 I.R.B.5,665
98–57, 1998–49 I.R.B.4,695
98–58, 1998–52 I.R.B. 6,799
98–59, 1998–52 I.R.B. 8,801
98–60, 1998–51 I.R.B.6,749
98–61, 1998–51 I.R.B.8,751
98–62, 1998–51 I.R.B.4,747
Tax Convention:
1998–43 I.R.B. 6,528
Treasury Decisions:
8769, 1998–28 I.R.B. 4,50
8770, 1998–27 I.R.B. 4,3
8771, 1998–29 I.R.B. 6,72
8772, 1998–31 I.R.B. 8,114
8773, 1998–29 I.R.B. 4,70
8774, 1998–30 I.R.B. 5,90
8775, 1998–31 I.R.B.4,110
8776, 1998–33 I.R.B.6,200*
8777, 1998–34 I.R.B.4,219
8778, 1998–36 I.R.B. 4,273
8779, 1998–36 I.R.B. 11,280
8780, 1998–39 I.R.B.14,407
8781, 1998–40 I.R.B. 4,451
8782, 1998–41 I.R.B.5,474
8783, 1998–41 I.R.B.4,473
8784, 1998–42 I.R.B.4,493*
8785, 1998–42 I.R.B.5,494*
8786, 1998–44 I.R.B. 4,563
2001–2 I.R.B.287January 8, 2001
Numerical Finding List
The page number in this 1998–2Cumulative Bulletin is shown in boldface type.

Treasury Decisions—Continued
8787, 1998–46 I.R.B. 5,621
8788, 1998–45 I.R.B.6,591
8790, 1998–50 I.R.B.4,723
January 8, 20012882001–2 I.R.B.
Numerical Finding List
—
Continued
The page number in this 1998–2Cumulative Bulletin is shown in boldface type.
*
A later action changed this item. See Finding List
of Current Actions on Previously Published Items.

Announcement:
98–47
Corrected by
ANN 98–59, 1998–28 I.R.B. 5,58
98–106
Corrected by
ANN 98–113, 1998–51 I.R.B. 48,791
Notices:
87–13
Modified by
98–49, 1998–38 I.R.B. 5,365
87–16
Modified by
98–49, 1998–38 I.R.B. 5,365
92–36
Modified by
98–39, 1998–33 I.R.B. 11,205
96–64
Modified by
98–39, 1998–33 I.R.B. 11,205
97–19
Modified by
98–34, 1998–27 I.R.B. 30,29
97–50
Modified by
98–47, 1998–37 I.R.B. 8,319
97–73
Modified by
98–46, 1998–36 I.R.B. 21,290
Modified by
98–59, 1998–49 I.R.B. 16,707
98–7
Modified by
98–54, 1998–46 I.R.B. 25,641
98–46
Modified by
98–59, 1998–49 I.R.B. 16,707
Proposed Regulations:
REG–106031–98
Corrected by
ANN 98–74, 1998–31 I.R.B. 15,121
REG–209276–87
Corrected by
ANN 98–66, 1998–28 I.R.B. 15,61
REG–209463–82
Corrected by
ANN 98–63, 1998–28 I.R.B. 12,58
REG–245256–96
Corrected by
ANN 98–97, 1998–44 I.R.B. 18,577
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
87–50
Modified by
98–59, 1998–50 I.R.B. 8,727
88–17
Clarified, modified, and superseded by
98–54, 1998–43 I.R.B. 7,529
Revenue Procedures—Continued
92–81
Superseded by
98–52, 1998–37 I.R.B. 13,324
94–23
Amplified and superseded by
98–55, 1998–46 I.R.B. 27,643
96–53
Modified by
Notice 98–65, 1998–52 I.R.B. 10,803
97–37
Modified and amplified by
RR 98–39, 1998–33 I.R.B. 4,198
Clarified, modified, amplified and superseded by
98–60, 1998–51 I.R.B. 16,759
97–40
Amplified and superseded by
98–55, 1998–46 I.R.B. 27,643
97–54
Superseded by
98–65, 1998–52 I.R.B. 40,833
97–58
Superseded by
98–63, 1998–52 I.R.B. 25,818
97–59
Superseded by
98–64, 1998–52 I.R.B. 32,825
97–60
Superseded by
98–50, 1998–38 I.R.B. 8,368
97–61
Superseded by
98–51, 1998–38 I.R.B. 20,380
98–3
Modified by
98–40, 1998–32 I.R.B. 6,134
98–8
Modified by
98–59, 1998–50 I.R.B. 8,727
98–14
Modified by
98–53, 1998–40 I.R.B. 9,456
98–35
Corrected by
ANN 98–72, 1998–31 I.R.B. 14,120
Corrected by
ANN 98–104, 1998–47 I.R.B. 13,673
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
67–301
Modified by
98–41, 1998–35 I.R.B. 6,256
70–225
Obsoleted by
98–44, 1998–37 I.R.B. 4,315
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
Revenue Rulings—Continued
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
2001–2 I.R.B.289January 8, 2001
Finding List of Current Actions on Previously Published Items
The page number in this 1998–2Cumulative Bulletin is shown in boldface type.

Revenue Rulings—Continued
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–91
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5,133
97–37
Modified and amplified by
98–39, 1998–33 I.R.B. 4,198
97–56
Supplemented and Superseded by
98–58, 1998–52 I.R.B. 6,799
97–57
Supplemented and Superseded by
98–59, 1998–52 I.R.B. 8,801
98–39
Modified by
98–60, 1998–51 I.R.B. 16,759
Treasury Decisions:
8685
Corrected by
Notice 98–36, 1998–29 I.R.B. 8,74
8739
Corrected by
ANN 98–64, 1998–28 I.R.B. 14,60
8748
Corrected by
ANN 98–65, 1998–28 I.R.B. 14,60
8776
Corrected by
ANN 98–96, 1998–44 I.R.B. 18,577
8784
Corrected by
ANN 98–110, 1998–50 I.R.B. 21,740
8785
Corrected by
ANN 98–109, 1998–50 I.R.B. 20,739
January 8, 20012902001–2 I.R.B.
Finding List of Current Actions on Previously Published Items—Continued
The page number in this 1998–2Cumulative Bulletin is shown in boldface type.

Index
1
for 1998–2 C.B.
Internal Revenue Bulletins
1998–27 Through 1998–52
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item.
Key to Abbreviations:
ANNAnnouncement
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Amount exempt from levy on wages,
salary, and other income (Forms
668–W(c) and 668–W(c)(DO) in 1999
(Notice 60) 49,17, 708
Magnetic media; electronic filing:
1998 Form 8027 (RP 52) 37,13, 324
Proposed regulations:
26 CFR 1.411(d)–4, amended; pro-
tected benefits (REG–101363–98)
40,10, 457
26 CFR 31.3221–4, added; exception
from supplemental annuity tax on
railroad employers (REG–209769–
95) 41,8, 477
26 CFR 31.6302–1(f)(4), revised; fed-
eral employment tax deposits de
minimisrule (REG–110403–98) 29,
11,77
Railroad retirement; rate determination;
quarterly beginning April 1, 1998 and
July 1, 1998,31,7, 113; quarterly
beginning October 1, 1998, 50,4, 723
Regulations:
26 CFR 1.411(d)–4, amended;
1.411(d)–4T, added; protected bene-
fits (TD 8781) 40,4, 451
26 CFR 1.6045–1T, –2T, removed;
1.6045–1, –2, amended; 301.6011–2,
amended; 301.6011–2T, removed;
magnetic filing requirements for in-
formation returns (TD 8772) 31,8,
114
26 CFR 31.6302–1(f)(4), 31.6302–1T,
added; federal employment tax de-
posits de minimisrule (TD 8771) 29,
6,72
Social security contribution and benefit
base; domestic employee coverage
threshold for 1999, 52,87, 880
Worker classification; Section 530; Tax
Court review (Notice 43) 33,13, 207
ESTATE TAX
Regulations:
26 CFR 20.2044–1(e), added; 20.2044–
1T, removed; 20.2056(b)–7, revised;
20.2056(b)–7T, removed; 20.2056(b)–
10, revised; 20.2056(b)–10T, removed;
certain property for which marital de-
duction was previously allowed (TD
8779) 36,11, 280
EXCISE TAX
Ad valoremtax, export clause (Ct.D.
2064) 37,4, 315
Deposit of excise taxes, amendment (No-
tice 36) 29,8,74
Excise tax changes (ANN 83) 36,36, 305
Forms:
Form 8849, comments requested (ANN
90) 42,21, 510
Gasoline and diesel fuel, T.D. 8748,
1998–8 I.R.B. 24, corrected (ANN 65)
28,14,60
Kerosene tax and floor stocks tax (ANN
57) 28,11,57
Proposed regulations:
26 CFR 48.4052–1, added; 48.4081–1,
amended; 48.4082–6 through –10
and intermediary sections, 48.4091–
3, added; 48.4101–2, amended;
48.4101–3, 48.6427–10, –11, added;
kerosene tax, aviation fuel tax, tax
on heavy trucks and trailers (REG–
119227–97) 30,13,98
26 CFR 53.4958; 301.6213–1,
301.6501(e)–1, 301.6501(n)–1,
301.7422–1, amended; 53.4958–0
through –7 and intermediary sections,
added; failure by certain charitable or-
ganizations to meet certain qualifica-
tion requirements, taxes on excess
benefit transactions (REG–246256–
96) 34,9, 224; corrected (ANN 97)
44,18, 577
Regulations:
26 CFR 48.4081–1T, 48.4082–6T
through –10T and intermediary sec-
tions, 48.4091–3T, 48.4101–2T, –3T,
48.6427–10T, –11T, added; 145.4052–
1, amended; kerosene, aviation fuel,
heavy trucks and trailers tax (TD
8774) 30,5,90
INCOME TAX
Abatement of Notices, REG–209276–87,
C.B. 1998–1, 700, corrected (ANN 66)
28,15,61
Administrative appeal of adverse determi-
nation of tax-exempt status of bond
issue (Notice 58) 49,13, 704
Advance pricing agreements, small busi-
ness taxpayers (Notice 65) 52,10, 803
Alternative minimum tax, change in ac-
counting method (RP 58) 49,19, 710
Bankrupcy procedures (ANN 89) 40,11,
458
Below-market loans; second mortgage
loans under the MAHRA Act (RR 34)
31,12, 118
Beneficiary under retirement plan,
REG–209463–82, 1998–21 I.R.B. 27,
corrected (ANN 63) 28,12,58
CPI adjustment for below-market loans
under section 7872(g) for 1999 (RR 59)
52,8, 801
Business expenses:
Environmental remediation expendi-
tures (RP 47) 37,8, 319
Cafeteria plan temporary regulation,
delay (ANN 105) 49,21, 712
Common Trust Funds, unrelated business
taxable income (RR 41) 35,6, 256
Continuous levy under section 6331(h)
(Notice 62) 51,15, 758
Cost-of-living adjustments for 1999 (RP
61) 52,18, 811
Courier’s Desk Early closing (Notice 67)
52,18, 811
2001–2 I.R.B.291January 8, 2001
1
Numbers following a specific item indicate the
item can be found as follows:
29 – I.R.B. 1998–29
15– I.R.B. page number
81– C.B. page number
EMPLOYMENT TAX—
Continued
EXCISE TAX—
Continued

INCOME TAX—Continued
CPI adjustment:
Below-market loans under section
7872(g) for 1999 (RR 59) 52,8, 801
Certain loans under section 1274A for
1999 (RR 58) 52,6, 799
Credits against tax:
Earned income credit; disqualified in-
come (RR 56) 47,5, 665
Deductions:
When taken:
All events test; accrued cooperative
advertising expenses (RR 39) 33,
4, 198
Depletion Marginal production rates
(Notice 42) 33,12, 206
Determination letters:
Section 1374 determination letters (RP
56) 46,33, 649
Disaster Relief extended (ANN 81) 36,
35, 304
Disclosure authorization list (RP 43) 29,
8,74
Distribution codes of Form 1099-R,
changes (ANN 106) 48,9, 686; cor-
rected (ANN 113) 57,48, 791
Distribution of stock and securities of a
newly formed controlled corporation;
limitations (RR 44) 37,4, 315
District of Columbia Enterprise Zone,
Identification of census tracts (Notice
57) 47,9, 669
Eleventh Annual Institute on Current Is-
sues in International Taxation (ANN
102) 45,28, 613
Employee plans:
Determination letter requests, remedial
amendments (RP 53) 40,9, 456
Discrimination:
Safe harbors (Notice 52) 46,16, 632
Funding:
Full funding limitations, weighted
average interest for July 1998
(Notice 37) 30,13, 98; August
1998 (Notice 44) 34,7, 222;
September 1998 (Notice 48)
39,17, 410; October 1998 (No-
tice 51) 44,11, 570; November
1998 (Notice 56) 47,9, 669;
December 1998 (Notice 64) 52,
10, 803
Individual retirement arrangements:
Roth IRAs (Notice 49) 38,5, 365; (No-
tice 50) 44,10, 569
Roth IRAs; prototypes (RP 59) 50,8,
727
INCOME TAX—Continued
Limit on contributions and benefits;
cost-of-living adjustments (Notice
53) 46,24, 640
Forms:
1040:
e-fileprogram (RP 50) 38,8, 368
On-line filing program (RP 51) 38,
20, 380
1042S:
Specifications for filing subsitute,
computer-prepared, computer-
generated tax forms and sched-
ules for 1998 (RP 65) 52,40, 833
Minimum:
Remedial amendments (RP 42) 28,
9,55
Qualification:
Church plans (Notice 39) 33,11, 205
Covered compensation (RR 53) 46,
12, 628
Section 457:
Model amendments (RP 41) 32,7,
135
Ruling program (RP 40) 32,6, 134
Enhanced oil recovery credit (Notice 41)
33,12, 206
Exempt Organizations:
Classified as private foundations (ANN
112) 51,46, 789; (ANN 111) 50,21,
740; (ANN 107) 48,10, 687; (ANN
104) 47,13, 673; (ANN 101) 45,27,
612; (ANN 94) 43,32, 554; (ANN
91) 40,12, 459; (ANN 80) 34,32,
247; (ANN 76) 32,64, 192; (ANN
71) 30,17, 102; (ANN 75) 31,15,
121; (ANN 68) 29,14,80; (ANN 67)
28,15,61; (ANN 60) 27,39,38
Contributions are not deductible under
section 170 (ANN 114) 52,88, 881;
(ANN 98) 44,18, 577; (ANN 86)
38,31, 391; (ANN 70) 30,17, 102
Expatriate, private letter rulings under
sections 877, 2107, and 2501(a)(3)
(Notice 34) 27,30,29
Foreign liquidation and reorganization,
amended (ANN 69) 30,16, 101
Foreign loss provisions, effective date
(Notice 40) 35,7, 257
Foreign taxpayers trade, REG–106031–
98, 1998–26 I.R.B. 38, corrected
(ANN 74) 31,15, 121
Foreign tax treaties ANN 98–47, 1998–
23 I.R.B. 5, corrected (ANN 64) 28,
14,60
INCOME TAX—Continued
Fringe benefits aircraft valuation formula,
second half of 1998 (RR 40) 33,4, 198
Hope Credit, Lifetime Learning Credit;
information reporting (Notice 59) 49,
16, 707; (Notice 46) 36,21, 290
Hospitality industry:
Resolution of employee meals (ANN
78) 34,30, 245
Training material applied to employee
means (ANN 77) 34,30, 245
Hybrid arrangements, treatment under
subpart F (Notice 35) 27,35,34
Information reporting:
Hope Scholarship and Lifetime Learn-
ing credits (Notice 46) 36,21, 290;
(Notice 59) 49,16, 707
Innocent spouse equitable relief (Notice
61) 51,13,756; proposed revision
(ANN 95) 44,13, 572
Insurance companies:
Differential earnings rate and recom-
puted differential earnings rate for
mutual life insurance companies (RR
38) 32,4, 132
“Reserve strengthening,” reasonable
interpretation (Ct.D. 2065) 39,7,
400
Interest Rate, weighted rate (Notice 64)
52,10, 803
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for July 1998 (RR
33) 27,26,25; August 1998 (RR
36) 31,6, 112; September 1998
(RR 43) 36,9, 278; October 1998
(RR 50) 40,7, 454; November
1998 (RR 52) 45,4, 589; Decem-
ber 1998 (RR 57) 49,4, 695
Rates, underpayments and overpay-
ments calendar quarter beginning
October 1, 1998 (RR 46) 39,10,
403; calendar quarter beginning
January 1, 1999 (RR 61) 51,8,
751
International operation of ships and/or
aircraft, United Arab Emirates, 43,6,
528
Inventory:
LIFO:
Automobile and truck dealers (RP
46) 36,21, 290
Price indexes; department stores for
July 1998 (RR 48) 39,6, 399; Au-
gust 1998 (RR 51) 43,4, 526;
September 1998 (RR 54) 46,14,
January 8, 20012922001–2 I.R.B.

630; October 1998 (RR 62) 51,4,
747
Price indexes; inventory price com-
putation method (RP 49) 37,9,
320
Lien for taxes; validity and priority against
third parties; judgment creditor (Ct.D.
2063) 49,6, 697
Lifetime learning credit, hope credit,
information reporting (Notice 59) 49,
16, 707; (Notice 46) 36,21, 290
Low-income housing credit:
Housing credit carryovers (RP 45) 34,
8, 223
HUD programs (RR 49) 40,4, 451
Satisfactory bond; “bond factor”
amounts for the period July-Septem-
ber 1998 (RR 45) 38,4, 364
Medical Savings Account, cut-off year
corrected (ANN 88) 41,14, 483
Methods of accounting:
Automatic consent (RP 60) 51,16, 759
Notice and Consent requirements
(ANN 87) 40,11, 458
Optional standard mileage rates for 1999
(RP 63) 52,25, 818
Partnership property and interest, REG–
209682–94, C.B. 1998–1, 994, changed
(ANN 79) 34,31, 246
Penalties; substantial understatement (RP
62) 52,23, 816
Per diem allowances for 1999 (RP 64) 52,
32, 825
Private delivery services; timely filing or
payment (Notice 47) 37,8, 319
Proposed regulations:
26 CFR 1.32–3, added; EIC eligibility
requirements (REG–116608–97) 29,
12,78
26 CFR 1.41–0, –1, –4, revised; 1.41–2,
amended; 1.41–3 redesignated as
1.41–3A, added; new 1.41–3, added;
1.41–5 redesignated as 1.41–4A,
amended; 1.41–6 redesignated as
1.41–5, amended; 1.41–7 redesig-
nated as 1.41–5A, amended; 1.41–8
redesignated as 1.41–6, amended;
1.41–9 redesignated as 1.41–7; new
1.41–8, added; 1.41–0A, added;
1.218–0, removed (REG–105170–
97) 50,10, 729
26 CFR 1.62–2(e)(2), revised; 1.62–2T,
removed; 1.274–5, added; –5T,
1.274(d)–1, amended; substantiation
of business expenses, use of mileage
rates to substantiate automobile ex-
penses (REG–122488–97) 42,19,
508
26 CFR 1.83–6, 1.1032–2, amended;
1.1032–3, added; treatment of a dis-
position by one corporation of the
stock of another corporation in a tax-
able transaction (REG–106221–98)
41,10, 479
26 CFR 1.408A–0 through –9 and in-
termediary sections, added; Roth
IRAs, questions and answers
(REG–115393–98) 39,34, 427
26 CFR 1.529–0 through –6 and inter-
mediary sections, added; Qualified
State Tuition Programs (REG–
106177–97) 37,33, 344
26 CFR 1.671–4, 1.6049–7, 301.6109–
1, amended; reporting requirements
for widely held fixed investment
trusts (REG–209813–96) 35,9, 259
26 CFR 1.936–1T, added; termination
of Puerto Rico and possession tax
credit, new lines of business prohib-
ited (REG–115446–97) 36,23, 292
26 CFR 1.985–8, 1.1001–5, added; con-
version to the euro (REG–
110332–98) 33,18, 212
26 CFR 1.1092(c)–1, added; equity op-
tions without standard terms, special
rules and definitions (REG–104641–
97) 29,9,75
26 CFR 1.1366–1, –2, removed;
1.1366–0 through –5 and intermedi-
ary sections, added; 1.1367–0, –1,
amended; 1.1367–3, removed;
1.1368–0, –1, –2, –3, amended;
1.1368–4, revised; pass through of
items of an S corporation to its share-
holders (REG–209446– 82) 36,24,
293
26 CFR 1.6031(a)–1(e)(1)(iv), added;
301.6011–3, added; 301.6031–1, re-
vised; 301.6721–1, amended; part-
nership returns required on magnetic
media (REG–102023–98) 48,6, 683
26 CFR 1.6038–3, added; information
returns for certain foreign partner-
ships (REG–118966–97) 39,29, 422
26 CFR 1.6038B–1, amended;
1.6038B– 2, added; reporting of cer-
tain transfers to foreign corporations
and foreign partnerships (REG–
118926–97) 39,23, 416
26 CFR 1.6046A–1, added; return re-
quirement for U.S. persons owning
interests in foreign partnerships
(REG–209060–86) 39,18, 411
26 CFR 54.9811–1, added; HIPAA
Newborns’ and Mothers’ Health Pro-
tection Act (REG–109708–97) 45,
29, 614
26 CFR 301.6402–5(h), added; –6(n),
revised; tax refund offset program
(REG–104565–97) 39,21, 414
Public hearing on REG–251698–97,
(ANN 82) 35, 17, 267
Qualified Funeral Trust, guidance (Notice
6) 3,52; (Notice 66) 52,17, 810
Qualified offer rule; award of administra-
tive and litigation costs (Notice 55) 46,
26, 642
Qualified small business stock (RP 48)
38,7, 367
Qualified student loan interest (Notice 54)
46,25, 641
Qualified Zone Academy Bonds (RP) 3,
100; limitations for 1999 (RP 57) 48,5,
682
Regulations:
26 CFR 1.32–3T, added; EIC eligibility
requirements (TD 8773) 29,4,70
26 CFR 1.62–2, 1–274(d)–1, amended;
1.62–2T, 1.274(d)–1T, added; sub-
stantiation requirements (TD 8784)
42,4, 493
26 CFR 1.108–4, added; 1.108(c)–1,
redesignated; 1.108–6, added;
1.108(a)–1, –2, –(b)–1, 1.1016–7,
–8, removed; 1.1017–1, revised;
1.1017–2, removed; 301.9100–13T,
removed; basis reduction due to dis-
charge of indebtedness (TD 8787)
46,5, 621
26 CFR 1.367(a)–1T, –3, amended;
1.367(a)–3T, removed; 1.367(a)–8,
1.367(b)–1, –4, added; 1.367(d)–1T,
amended; 1.6038B–1, added;
1.6038B–1T; 7.367(b)–1, –4, –7,
amended; certain transfers of stock
or securities by U.S. persons to for-
eign corporations (TD 8770) 27,4,3
26 CFR 1.368–1(e)(6), revised; conti-
nuity of interest requirement for cor-
porate reorganizations (TD 8783) 41,
4, 473
26 CFR 1.411(d)–4, amended; permit-
ted elimination of preretirement op-
tional forms of benefit (TD 8769) 28,
4,50
2001–2 I.R.B.293January 8, 2001
INCOME TAX—ContinuedINCOME TAX—ContinuedINCOME TAX—Continued

26 CFR 1.460–6T,removed;
1.460–6(i), (j), added; election not to
apply look-back method in de min-
imiscases (TD 8775) 31,4, 110
26 CFR 1.465–27, added; qualified
nonrecourse financing under section
465(b)(6) (TD 8777) 34,4, 219
26 CFR 1.861–18, added; transactions
involving computer programs (TD
8785) 42,5, 494
26 CFR 1.863–3, revised; 1.936–4, –5,
–6, –7, removed; 1.863–3(f), (h),
amended; 1.936–6(a)(5) Q and A 7a,
added; source of income from sales
of inventory (TD 8786) 44,4, 563;
corrected (ANN 109) 50,20, 739
26 CFR 1.927(e)–1T, removed;
1.927(e)(1), added; source rules for
foreign sales corporation transfer
pricing (TD 8782) 41,5, 474
26 CFR 1.936–11T, added; termination
of Puerto Rico and possession tax
credit; new lines of business prohib-
ited (TD 8778) 36,4, 273
26 CFR 1.985–1, 1.985–4, amended;
functional currency; 1.985–8T spe-
cial rules; euro conversion; 1.001–
5T added (TD 8776) 33,6, 200
26 CFR 1.6662–0, –2, –3, –4,
1.6664–0, amended; 1.6662–7(d),
1.6664–4(g), revised; accuracy-re-
lated penalty (TD 8790) 50,4, 723
26 CFR 54.9801–1T, amended; –2, re-
vised; 54.9811–1T, added; 54.9831–
1T(b)(1), revised; interim rules for
group health plans and health insur-
ance issuers under the Newborns’
and Mothers’ Health Protection Act
(TD 8788) 45,6, 591
26 CFR 301.7623–1,revised;
301.7623–1T, removed; rewards for
information relating to violations of
internal revenue laws (TD 8780) 39,
14, 407
REIT impermissible tenant service in-
come under section 856(d)(7) (RR 60)
51,6, 749
Rescission of notice deficiency (RP 54)
43,7, 529
Residential rental property, exempt facili-
ty bond (RR 47) 39,4, 397
Returns preparers:
Identifying numbers (Notice 63) 51,
15, 758
Sales or exchanges:
S corporations:
Late election relief for (RP 55) 46,
27, 643
SRLY notice (Notice 38) 34,7, 222
Stock and securities:
Distribution; limitations of newly
formed controlled corporations (RR
44) 37,4, 315
T-bill rate for 1998 (RR 55) 47,5, 665
Revenue Procedure 98–32, 1998–21
I.R.B. 6, corrected (ANN 104) 47,13,
673
Taxpayer Relief Act of 1997, section
1510, request for comments (ANN 62)
29,13,79
Trials no penalty for missing or incorrect
(ANN 73) 31,14, 120
Veterans of Foreign Wars Post 5316
(ANN 61) 27,38,37
Waiver of period of stay in foreign coun-
try (RP 38) 27,29,28
January 8, 20012942001–2 I.R.B.
INCOME TAX—ContinuedINCOME TAX—ContinuedINCOME TAX—Continued

2001–2 I.R.B.iJanuary 8, 2001
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

January 8, 2001ii2001–2 I.R.B.
Numerical Finding List
1
Bulletin 2001–1
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–27 through
2000–52 is in Internal Revenue Bulletin 2001–1,
dated January 2, 2001.

2001–2 I.R.B.iiiJanuary 8, 2001
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2001–1
Revenue Procedures:
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–27 through 2000–52 is in Internal Revenue
Bulletin 2001–1, dated January 2, 2001.

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