Internal Revenue Bulletin 2001-11 (PDF rendition): IRS Announcements

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

# Internal Revenue bulletin
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## 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.

## INCOME TAX

Rev. Rul. 2001-12, page 811.
Federal rates; adjusted federal rates; adjusted feder-
al long-term rate; and the long-term exempt rate. For
purposes of sections 382, 1274, 1288, and other sections
of the Code, tables set forth the rates for March 2001.

### T.D. 8927, page 807.

Final regulations under section 985 of the Code relate to
U.S. taxpayers operating, investing, or otherwise con-
ducting business in the currencies of certain European
countries that replace their national currencies with a sin-
gle, multinational currency called the euro. These regula-
tions provide rules relating to adjustments required for
qualified business units operating in such currencies and
rules relating to the tax effect of holding such currencies,
or financial instruments or contracts denominated in such
currencies.

### T.D. 8932, page 813.

Final regulations under section 7502 of the Code extend the
timely-mailing-treated-as-timely-filing rule to electronically
filed documents. The regulations also provide that under cer-
tain circumstances a claim for credit or refund made on a
late-filed original tax return will be treated as filed on the
postmark date for purposes of determining the timeliness of
the claim.

### T.D. 8933, page 794.

Final regulations under section 132(f) of the Code provide
guidance on qualified transportation fringe benefits (van-
pooling, transit passes, and qualified parking) provided by
employers to their employees. Notice 94-3 modified.
Announcement 2000-78 obsolete.

### T.D. 8937, page 806.

Final regulations under section 367(b) of the Code address
distributions with respect to, or a disposition of, certain
stock that was subject to prior temporary regulations under
section 367(b).

REG-106030-98, page 820.

Proposed regulations under sections 863(a), (d), and (e) of
the Code provide rules for sourcing income of U.S. and for-
eign persons from space and ocean activity and from com-
munications activity. A public hearing is scheduled for March
28, 2001.

### Notice 2001-21, page 818.

Low-income housing tax credit. This notice reproduces
the proper population figures to be used for determining the
2001 calendar year population-based component of the
state housing credit ceiling under section 42(h) of the Code
and the 2001 calendar year volume cap under section 146
of the Code.

Announcement 2001-26, page 896.

This document contains corrections to final regulations (T.D.
8913, 2001-3 I.R.B. 300) providing guidance on recognition
of gain on certain distributions of stock or securities.

## EMPLOYEE PLANS

REG-130477-00 and REG-130481-00,
page 865.

Proposed regulations under sections 457 and 403(b) of the
Code provide comprehensive rules for determining required
minimum distributions for qualified plans, tax-sheltered annu-
ities, and individual retirement plans. This is the corrected

(Continued on the next page)

Finding Lists begin on page ii.

Department of the Treasury
Internal Revenue Service

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version of the proposed regulations published in the Federal
Register on January 17, 2001. A public hearing is scheduled
for June 1, 2001.

Notice 2001-20, page 818.

Weighted average interest rate update. The weighted
average interest rate for February 2001 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.

## ESTATE AND GIFT TAXES

Announcement 2001-22, page 895.

Advance valuation of art. This announcement informs tax-
payers who wish to request from the Service a Statement of
Value under Rev. Proc. 96-15, 1996-1 C.B. 627, for use in
substantiating the value of art for income, estate, and gift
tax purposes of a change of address for submission of such
requests. Rev. Proc. 96-15 modified.

## ADMINISTRATIVE

### REG-111835-99, page 834.

Proposed regulations relate to practice before the Internal
Revenue Service (Circular 230). These regulations would
affect individuals who are eligible to practice before the
Service. The proposed modifications would clarify the gen-

eral standards of practice before the Service and would
modify the standards for providing advice regarding tax shel-
ters. A public hearing is scheduled for May 2, 2001.

### REG-126100-00, page 862.

Guidance is provided on the reporting requirements for inter-
est on deposits maintained at the U.S. office of certain finan-
cial institutions and paid to nonresident alien individuals.
These proposed regulations affect persons making pay-
ments of interest with respect to such a deposit. A public
hearing is scheduled for March 21, 2001.

### Announcement 2001-22, page 895.

Advance valuation of art. This announcement informs tax-
payers who wish to request from the Service a Statement of
Value under Rev. Proc. 96-15, 1996-1 C.B. 627, for use in
substantiating the value of art for income, estate, and gift
tax purposes of a change of address for submission of such
requests. Rev. Proc. 96-15 modified.

### Announcement 2001-25, page 895.

This document contains corrections to Rev. Proc. 2001-3,
2001-1 I.R.B. 111, relating to issues on which the Service
will not issue letter rulings or determination letters.

Announcement 2001-27, page 897.

Proposed regulations (REG-116048-99, 2000-6 I.R.B.
584) that relate to an election available to certain taxpayers
under section 367(b) of the Code are withdrawn. The with-
drawal corresponds to the upcoming expiration of the avail-
ability of the election.

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## 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 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 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.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

### Section 42 .- Low-income Housing Credit

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

### Section 132 .- Certain Fringe Benefits

26 CFR 1.132-9: Qualified transportation fringes.

T.D. 8933

DEPARTMENT OF THE TREASURY
Internal Revenue Service (IRS)
26 CFR Parts 1 and 602

### Qualified Transportation Fringe Benefits

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains
final regulations relating to qualified
transportation fringe benefits. These final
regulations provide rules to ensure that
transportation benefits provided to
employees are excludable from gross
income. These final regulations reflect
changes to the law made by the Energy
Policy Act of 1992, the Taxpayer Relief
Act of 1997, and the Transportation
Equity Act for the 21st Century. These
final regulations affect employers that
offer qualified transportation fringes and
employees who receive these benefits.

DATES: Effective Date: These regula-
tions are effective January 11, 2001.

Applicability Date: For dates of applic-
ability, see §1.132-9(b), Q/A-25.

FOR FURTHER INFORMATION CON-
TACT: John Richards, (202) 622-6040
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

### Paperwork Reduction Act

The collection of information contained
in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507) under control
number 1545-1676. Responses to this
collection of information are mandatory
to obtain the benefit described under sec-
tion 132(f).

An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.

The estimated average annual record-
keeping burden per recordkeeper is 26.5
hours. The estimated annual reporting
burden per respondent is .8 hours.

Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
Reports Clearance Officer, W:CAR:
MP:FP:S:O, Washington, DC 20224, and
to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.

Books or records relating to a collec-
tion of information must be retained as
long as their contents might become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

### Background

This document contains amendments to
26 CFR part 1 (Income Tax Regulations).
On January 27, 2000, a proposed regula-
tion (REG-113572-99, 2000-7 I.R.B.
624) relating to qualified transportation
fringes was published in the Federal
Register (65 FR 4388). A public hearing
was held on June 1, 2000. Written or elec-
tronic comments responding to the notice
of proposed rulemaking were received.
After consideration of all the comments,
the proposed regulations are adopted as
amended by this Treasury decision. The
revisions are discussed below.

### Explanation of Provisions and Summary of Comments

In general, comments received on the
proposed regulations were favorable and,
accordingly, the final regulations retain
the general structure of the proposed reg-

ulations, including the question and
answer format and a variety of examples
illustrating the substance of the final reg-
ulations. However, commentators made a
number of specific recommendations for
modifications and clarifications of the
regulations. In response to these com-
ments, the final regulations incorporate
the modifications and clarifications
described below.

#### A. Whether Vouchers are Readily Available

Section 132(f)(3) provides that quali-
fied transportation fringes include cash
reimbursement for transit passes "only if a
voucher or similar item which may be
exchanged only for a transit pass is not
readily available for direct distribution by
the employer to the employee." Thus, if
vouchers are readily available, the
employer must use vouchers and cash
reimbursement of a mass transit expense
would not be a qualified transportation
fringe.

Most of the comments received
addressed the issue of whether vouchers
are "readily available." Commentators
representing employers generally favored
rules permitting cash reimbursement.
Commentators representing transit opera-
tors and voucher providers generally
favored rules not permitting cash reim-
bursement. The following discusses three
issues raised by commentators: first,
whether the proposed regulations' 1 per-
cent safe harbor should be retained; sec-
ond, whether internal administrative costs
should be considered in applying the 1
percent test; and third, whether other non-
financial restrictions should be considered
in determining whether vouchers are read-
ily available.

##### 1. The 1 percent safe harbor

Under Notice 94-3, 1994-1 C.B. 327,
and the proposed regulations, a voucher is
readily available if an employer can
obtain it on terms no less favorable than
those available to an individual employee
and without incurring a significant admin-
istrative cost. Under the proposed regula-
tions, administrative costs relate only to
fees paid to fare media providers, and the
determination of whether obtaining a

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voucher would result in a significant
administrative cost is made with respect
to each transit system voucher. The pro-
posed regulations provide a rule under
which administrative costs are treated as
significant if the average monthly admin-
istrative costs incurred by the employer
for a voucher (disregarding delivery
charges imposed by the fare media
provider to the extent not in excess of $15
per order) are more than 1 percent of the
average monthly value of the vouchers for
a system.

Commentators, in particular those rep-
resenting fare media providers and transit
operators, suggested that the fare media
provider fee percentage causing vouchers
to not be readily available should be
raised because many fare media providers
charge fees in excess of the 1 percent limit
and, thus, under this test, transit vouchers
would not be considered readily available
in some large metropolitan areas. These
commentators assert that the 1 percent test
is therefore contrary to the intent of the
statute. Commentators suggested that the
1 percent test, particularly if combined
with inadequate cash reimbursement sub-
stantiation requirements, may result in
taxpayer abuse, with the result that the
benefit might not be used for the purpose
for which it is intended, which is to
increase the use of mass transit. In addi-
tion, commentators testified at the public
hearing that the mandatory use of vouch-
ers (with no ability to use cash reimburse-
ment if vouchers are readily available)
would increase the use of vouchers and
promote the development of advanced
technologies that minimize the burden on
employers while ensuring that the benefit
is used for mass transit. These new tech-
nologies might allow an employer to
make payment directly to the transit oper-
ator, who in turn credits fare to the
employee's magnetic media fare card,
thus eliminating the need for employers to
incur the expense of distributing vouch-
ers.

Other commentators, in particular
groups representing employers, generally
favored the 1 percent test, but suggested
that internal costs be considered in apply-
ing the test (discussed below). These
commentators took the position that an
increase in the percentage might affect the
market charge for such services. There
was also a concern that a strict voucher-

use requirement would result in fewer
employers adopting transit pass programs,
thus frustrating the purpose of section
132(f) to increase the use of mass transit.

The final regulations retain the 1 per-
cent test. The 1 percent test, applicable
for years beginning after December 31,
2003, is appropriate in light of the rule
(discussed below) that only voucher
provider fees are considered in determin-
ing availability. It is intended that the
delayed application of this rule would
provide sufficient time for those affected
by this rule to modify their systems and
procedures appropriately. The 1 percent
threshold, coupled with the exclusion of
internal administrative costs from the
readily available determination, repre-
sents a balanced approach that will pro-
mote the growth of voucher programs in
most transportation areas. In addition,
raising the percentage threshold could
curtail the growth in transit benefit pro-
grams, which would be contrary to the
goal of increasing the use of mass transit.
Finally, in cases where cash reimburse-
ment is allowed, adequate substantiation
requirements will ensure that transit pass
benefits will actually go toward mass
transportation usage. In this regard, the
proposed regulations provide that
employers must implement reasonable
procedures to ensure that an amount equal
to the reimbursement was incurred for
transit passes. For example, the final reg-
ulations clarify that in circumstances
when employee certification is a reason-
able reimbursement procedure, it must
occur after the expense is incurred.

The final regulations also clarify the
application of the 1 percent rule if multi-
ple vouchers for a transit system are avail-
able for distribution by an employer to
employees, and if multiple transit system
vouchers are required in an area to meet
the transit needs of an employer's
employees. The final regulations provide
that if multiple transit system vouchers
are available for direct distribution to
employees, the employer must consider
the lowest cost voucher for purposes of
determining whether the voucher provider
fees cause vouchers to not be readily
available. However, if multiple vouchers
are required in an area to meet the transit
needs of the individual employees in that
area, the employer has the option of aver-
aging the costs applied to vouchers from

each system for purposes of determining
whether the voucher provider fees cause
vouchers to not be readily available.

##### 2. Internal administrative costs

Several commentators representing
employers recommended that, in addition
to fare media provider fees, internal admin-
istrative costs, especially security and dis-
tribution costs, should be considered in
determining whether vouchers are readily
available. These commentators noted that
administrative costs are increased when an
employer must maintain both a voucher
system and a reimbursement system to pro-
vide qualified transportation fringes. For
example, the employer may maintain a
cash reimbursement system for transporta-
tion in a commuter highway vehicle and
qualified parking, and also maintain a
voucher system for transit passes. In addi-
tion, several commentators suggested that
the increased costs and administrative bur-
den for employers that maintain offices in
multiple cities should also be considered in
determining whether vouchers are readily
available.

The final regulations retain the test con-
sidering only fees paid to voucher
providers in determining availability
based on a plain reading of the terms of
the statute. The language "readily avail-
able for direct distribution by the employ-
er to the employee" under section
132(f)(3) in its plain, ordinary sense
means that vouchers are easily obtainable
for direct distribution to the employer's
employees. The determination of avail-
ability bears no relationship with costs
that may be incurred after vouchers have
been obtained. The service fees charged
by voucher providers and delivery costs
can reasonably be viewed as affecting
whether vouchers are easily obtainable;
an employer's internal costs of subse-
quently administering a voucher program
would not. Thus, based upon the plain
language of section 132(f), internal
administrative costs do not affect whether
vouchers are readily available.

Moreover, the test considering only
voucher provider fees is a comparatively
simple bright line test. A test that depends
on the employer's internal administrative
costs would necessarily be complex,
requiring complex rules that would be dif-
ficult for employers to apply.

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#### 3. Other nonfinancial restrictions

Commentators representing employers
suggested that nonfinancial factors should
be considered in determining whether
vouchers are readily available. They sug-
gested that factors such as whether there
are reasonable advance purchase and min-
imum purchase requirements, and
whether vouchers can be purchased in
appropriate denominations, should be
considered in determining availability.
The final regulations adopt this sugges-
tion because nonfinancial restrictions
would reasonably affect whether vouchers
are available for distribution by an
employer to an employee.

The final regulations provide guidance
on the types of nonfinancial restrictions
that cause vouchers to not be readily
available. The final regulations provide
that certain nonfinancial restrictions, such
as a voucher provider not making vouch-
ers available for purchase at reasonable
intervals or failing to provide the vouch-
ers within a reasonable period after
receiving payment for the voucher, cause
vouchers to not be readily available. In
addition, if a voucher provider does not
provide vouchers in reasonably appropri-
ate quantities, or in reasonably appropri-
ate denominations, vouchers may not be
readily available.

When and as the standards in these
final regulations go into effect, they will
supercede the current law standards in
Notice 94-3.

#### B. Advance Transit Passes

Commentators suggested that the
administrability of transit pass programs
would be improved if vouchers were per-
mitted to be distributed in advance for
more than one month. The final regula-
tions adopt this suggestion.

In October of this year, the IRS issued
Announcement 2000-78 (2000-43 I.R.B.
428) to notify taxpayers that, when final-
ized, the regulations will clarify that tran-
sit passes may be distributed in advance
for more than one month (such as for a
calendar quarter) by taking into account
the monthly limits for all months for
which the transit passes are distributed.
The announcement further provides, how-
ever, that if an employee receives advance
transit passes, and the employee's

employment terminates before the begin-
ning of the last month of the period for
which the transit passes were provided,
the employer must include in the employ-
ee's wages, for income and for employ-
ment tax purposes (FICA, FUTA, and
income tax withholding), the value of the
passes provided for those month(s) begin-
ning after the employee's employment
terminates to the extent the employer does
not recover those transit passes or the
value of those passes. The announcement
provides that pending the issuance of
these final regulations, employers may
rely on the announcement.

The final regulations differ from the
announcement in one respect. In any case
in which transit passes are provided in
advance for a period of no more than three
months (such as for a calendar quarter),
but the recipient ceases to be an employee
before the beginning of the last month in
that period, the final regulations provide
that the value of a transit pass provided in
advance for a month is excluded from
wages for employment tax (FICA, FUTA,
and income tax withholding) purposes
(but not for income tax purposes) unless
at the time the transit passes were distrib-
uted there was an established termination
date that was before the beginning of the
last month of that period and the employ-
ee does in fact terminate employment
before the beginning of the last month of
that period.

#### C. Qualified Parking

The final regulations address whether
reimbursement paid to an employee for
parking at a work location away from the
employee's permanent work location is
excludable from wages for income and
employment tax purposes under section
132(f). Section 132(f)(5)(C) defines qual-
ified parking, in part, as "parking provid-
ed to an employee on or near the business
premises of the employer .... " The final
regulations provide that qualified parking
includes parking on or near a work loca-
tion at which the employee performs ser-
vices for the employer. However, quali-
fied parking does not include
reimbursement for parking that is other-
wise excludable from gross income as a
reimbursement treated as paid under an
accountable plan under §1.62-2 of the
Income Tax Regulations, or parking pro-

vided in kind to an employee that is
excludable from the employee's gross
income as a working condition fringe
under section 132(a)(3). Thus, if the
exclusion at §1.62-2 or section 132(a)(3)
is available (even if not reimbursed by the
employer), then section 132(f) does not
apply.

Whether a reimbursement for local
transportation expenses, including parking
at a work location away from the employ-
ee's permanent work location, is exclud-
able from the employee's gross income
under §1.62-2, or whether parking provid-
ed in kind to an employee is excludable
from the employee's gross income under
section 132(a)(3), is determined based
upon whether the parking expenses would
be deductible if paid or incurred by the
employee under section 162(a) as an
expense incurred in the employee's trade
or business of being an employee for the
employer. §§1.62-2(d); 1.132-5(a)(2).
Revenue Ruling 99-7 (1999-1 C.B. 361)
addresses under what circumstances daily
transportation expenses, including park-
ing, incurred by a taxpayer in going
between the taxpayer's residence and a
work location are deductible by the tax-
payer under section 162(a).

The final regulations provide the mini-
mum requirements to ensure that trans-
portation benefits are qualified transporta-
tion fringes under section 132(f). An
employer may have a transit benefit pro-
gram that is more restrictive than a pro-
gram meeting the minimum requirements
under the regulations. In addition, these
regulations do not affect the application of
authorities outside the Internal Revenue
Code which may restrict a transportation
benefit program. Federal Government
agencies, for example, may be required by
other federal law to implement restric-
tions beyond those required under these
regulations.

#### D. Applicability Date

The regulations are generally applica-
ble for taxable years beginning after
December 31, 2001. However, in order to
provide a transition period for those
affected by the 1 percent rule (described
under "The 1 percent safe harbor" in this
preamble), that rule is applicable for tax-
able years beginning after December 31,
2003.

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### Effect on Other Documents

The following document is obsolete as
of January 11, 2001:

Announcement 2000-78 (2000-43 I.R.B.
428).

The following document is modified as
of the date these regulations become
applicable (see Q/A-25):
Notice 94-3 (1994-1 C.B. 327).

### Special Analyses

It has been determined that this
Treasury Decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. A final regulatory flexibility analy-
sis has been prepared for the collection of
information in this Treasury decision
under 5 U.S.C. 604. A summary of the
analysis is set forth in this preamble under
the heading "Summary of Final
Regulatory Flexibility Analysis."

### Summary of Final Regulatory Flexibility Analysis

This analysis is required under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6). The collection of information
under this rule is based upon the require-
ments under section 132(f). We estimate
that approximately 265,000 employers
that provide qualified transportation
fringes to their employees will be affected
by the recordkeeping requirements of this
rule. None of the comments received in
response to the notice of proposed rule-
making specifically addressed the initial
regulatory flexibility analysis.

Section 132(f)(3) provides that quali-
fied transportation fringes may be provid-
ed in the form of cash reimbursement.
The legislative history indicates that an
employer providing cash reimbursement
to the employer's employees for qualified
transportation fringes must establish a
bona fide reimbursement arrangement.
As a condition to providing cash reim-
bursement for qualified transportation
fringes, this rule provides that employers
must receive substantiation from employ-
ees. The objective of this rule is to ensure
that reimbursements are made for quali-
fied transportation fringes.

Whether an arrangement constitutes a
bona fide reimbursement arrangement
varies depending on the facts and circum-
stances, including the method or methods
of payment utilized within a mass transit
system. An employee certification in
either written or electronic form may be
sufficient depending upon the facts and
circumstances. For example, if receipts
are not provided in the ordinary course of
business, such as with respect to metered
parking or used transit passes that cannot
be returned to the user, an employee cer-
tification that expenses have been
incurred constitutes a reasonable reim-
bursement procedure. A certification that
expenses will be incurred in the future, by
itself, is not a reasonable reimbursement
procedure. There are no particular pro-
fessional skills required to maintain these
records.

In addition, section 132(f)(4) provides
that an employee may choose between
cash compensation and qualified trans-
portation fringes. This rule provides that
an employer may allow an employee the
choice to receive either a fixed amount of
cash compensation at a specified future
date or a fixed amount of qualified trans-
portation fringes to be provided for a
specified future period (such as qualified
parking to be used during a future calen-
dar month). This rule provides that
employers must keep records with
respect to employee compensation reduc-
tion elections. An employee's election
must be in writing or some other perma-
nent and verifiable form, and include the
date of the election, the amount of com-
pensation to be reduced, and the period
for which the qualified transportation
fringes will be provided. The objective
of this rule is to ensure against recharac-
terization of taxable compensation after it
has been paid to the employee. There are
no particular professional skills required
to maintain these records.

A less burdensome alternative for small
organizations would be to exempt those
entities from the recordkeeping require-
ments under this rule. However, it would
be inconsistent with the statutory provi-
sions and legislative history to exempt
those entities from the recordkeeping
requirements imposed under this rule.

This rule provides several options
which avoid more burdensome record-
keeping requirements for small entities.

This rule provides that (1) there are no
substantiation requirements if the employ-
er distributes transit passes in kind; (2) a
compensation reduction election may be
made electronically; (3) an election to
reduce compensation may be automatical-
ly renewed; (4) an employer may provide
for deemed compensation reduction elec-
tions under its qualified transportation
fringe benefit plan; and (5) a requirement
that a voucher be distributed in-kind by
the employer is satisfied if the voucher is
distributed by the employer or by another
person on behalf of the employer (for
example, if a transit operator credits
amounts to the employee's fare card as a
result of payments made to the operator
by the employer).

### Drafting Information

The principal author of these regula-
tions is John Richards, Office of the As-
sistant Chief Counsel (Exempt Organiza-
tions/Employment Tax/Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.

* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602
are amended as follows:

PART I-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.132-0 is amended by:

1\. Adding an entry for §1.132-5(p)(4)

2\. Adding entries for §1.132-9.

The additions read as follows:

§1.132-0 Outline of regulations under
section 132.

* * * * *

§1.132-5 Working condition fringes.

* * * * *

(p) ** *
(4) Dates of applicability.

* * * * *

§1.132-9 Qualified transportation
fringes.

(a) Table of contents.

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(b) Questions and answers.

Par. 3. Section 1.132-5 is amended by
adding paragraph (p)(4) to read as fol-
lows:

§1.132-5 Working condition fringes.

* * * * *

(p)

(4) Dates of applicability. This para-
graph (p) applies to benefits provided
before January 1, 1993. For benefits pro-
vided after December 31, 1992, see
§1.132-9.

* * * * *

Par. 4. Section 1.132-9 is added to read
as follows:

§1.132-9 Qualified transportation
fringes.

(a) Table of contents. This section con-
tains a list of the questions and answers in
§1.132-9.

(1) General rules.

Q-1. What is a qualified transportation
fringe?

Q-2. What is transportation in a com-
muter highway vehicle?

Q-3. What are transit passes?

Q-4. What is qualified parking?

Q-5. May qualified transportation fringes
be provided to individuals who are not
employees?

Q-6. Must a qualified transportation
fringe benefit plan be in writing?

(2) Dollar limitations.

Q-7. Is there a limit on the value of qual-
ified transportation fringes that may be
excluded from an employee's gross
income?

Q-8. What amount is includible in an
employee's wages for income and
employment tax purposes if the value of
the qualified transportation fringe exceeds
the applicable statutory monthly limit?

Q-9. Are excludable qualified transporta-
tion fringes calculated on a monthly
basis?

Q-10. May an employee receive qualified
transportation fringes from more than one
employer?

(3) Compensation reduction.

Q-11. May qualified transportation
fringes be provided to employees pur-

suant to a compensation reduction agree-
ment?

Q-12. What is a compensation reduction
election for purposes of section 132(f)?

Q-13. Is there a limit to the amount of the
compensation reduction?

Q-14. When must the employee have
made a compensation reduction election
and under what circumstances may the
amount be paid in cash to the employee?
Q-15. May an employee whose qualified
transportation fringe costs are less than
the employee's compensation reduction
carry over this excess amount to subse-
quent periods?

(4) Expense reimbursements.

Q-16. How does section 132(f) apply to
expense reimbursements?

Q-17. May an employer provide nontax-
able cash reimbursement under section
132(f) for periods longer than one month?
Q-18. What are the substantiation
requirements if an employer distributes
transit passes?

Q-19. May an employer choose to impose
substantiation requirements in addition to
those described in this regulation?

(5) Special rules for parking and
vanpools.

Q-20. How is the value of parking deter-
mined?

Q-21. How do the qualified transporta-
tion fringe rules apply to van pools?

(6) Reporting and employment taxes.

Q-22. What are the reporting and
employment tax requirements for quali-
fied transportation fringes?

(7) Interaction with other fringe benefits.

Q-23. How does section 132(f) interact
with other fringe benefit rules?

(8) Application to individuals who are not
employees.

Q-24. May qualified transportation
fringes be provided to individuals who are
partners, 2-percent shareholders of S-cor-
porations, or independent contractors?

(9) Effective date.

Q-25. What is the effective date of this
section?

(b) Questions and answers.

Q-1. What is a qualified transportation
fringe?

A-1. (a) The following benefits are
qualified transportation fringe benefits:

(1) Transportation in a commuter high-
way vehicle.

(2) Transit passes.

(3) Qualified parking.

(b) An employer may simultaneously
provide an employee with any one or
more of these three benefits.

Q-2. What is transportation in a com-
muter highway vehicle?

A-2. Transportation in a commuter
highway vehicle is transportation provid-
ed by an employer to an employee in con-
nection with travel between the employ-
ee's residence and place of employment.
A commuter highway vehicle is a high-
way vehicle with a seating capacity of at
least 6 adults (excluding the driver) and
with respect to which at least 80 percent
of the vehicle's mileage for a year is rea-
sonably expected to be-

(a) For transporting employees in con-
nection with travel between their resi-
dences and their place of employment;
and

(b) On trips during which the number
of employees transported for commuting
is at least one-half of the adult seating
capacity of the vehicle (excluding the dri-
ver).

Q-3. What are transit passes?

A-3. A transit pass is any pass, token,
farecard, voucher, or similar item (includ-
ing an item exchangeable for fare media)
that entitles a person to transportation-

(a) On mass transit facilities (whether
or not publicly owned); or

(b) Provided by any person in the busi-
ness of transporting persons for compen-
sation or hire in a highway vehicle with a
seating capacity of at least 6 adults
(excluding the driver).

Q-4. What is qualified parking?

A-4. (a) Qualified parking is parking
provided to an employee by an employ-
er-

(1) On or near the employer's business
premises; or

(2) At a location from which the
employee commutes to work (including
commuting by carpool, commuter high-
way vehicle, mass transit facilities, or
transportation provided by any person in
the business of transporting persons for
compensation or hire).

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(b) For purposes of section 132(f),
parking on or near the employer's busi-
ness premises includes parking on or near
a work location at which the employee
provides services for the employer.
However, qualified parking does not
include-

(1) The value of parking provided to an
employee that is excludable from gross
income under section 132(a)(3) (as a
working condition fringe), or

(2) Reimbursement paid to an employ-
ee for parking costs that is excludable
from gross income as an amount treated
as paid under an accountable plan. See
§1.62-2.

(c) However, parking on or near prop-
erty used by the employee for residential
purposes is not qualified parking.

(d) Parking is provided by an employer
if-

(1) The parking is on property that the
employer owns or leases;

(2) The employer pays for the parking;
or

(3) The employer reimburses the
employee for parking expenses (see Q/A-
16 of this section for rules relating to cash
reimbursements).

Q-5. May qualified transportation
fringes be provided to individuals who are
not employees?

A-5. An employer may provide quali-
fied transportation fringes only to individ-
uals who are currently employees of the
employer at the time the qualified trans-
portation fringe is provided. The term
employee for purposes of qualified trans-
portation fringes is defined in
§1.132-1(b)(2)(i). This term includes
only common law employees and other
statutory employees, such as officers of
corporations. See Q/A-24 of this section
for rules regarding partners, 2-percent
shareholders, and independent contrac-
tors.

Q-6. Must a qualified transportation
fringe benefit plan be in writing?

A-6. No. Section 132(f) does not
require that a qualified transportation
fringe benefit plan be in writing.

Q-7. Is there a limit on the value of
qualified transportation fringes that may
be excluded from an employee's gross
income?

A-7. (a) Transportation in a commuter
highway vehicle and transit passes.
Before January 1, 2002, up to $65 per

month is excludable from the gross
income of an employee for transportation
in a commuter highway vehicle and tran-
sit passes provided by an employer. On
January 1, 2002, this amount is increased
to $100 per month.

(b) Parking. Up to $175 per month is
excludable from the gross income of an
employee for qualified parking.

(c) Combination. An employer may
provide qualified parking benefits in addi-
tion to transportation in a commuter high-
way vehicle and transit passes.

(d) Cost-of-living adjustments. The
amounts in paragraphs (a) and (b) of this
Q/A-7 are adjusted annually, beginning
with 2000, to reflect cost-of-living. The
adjusted figures are announced by the
Service before the beginning of the year.

Q-8. What amount is includible in an
employee's wages for income and
employment tax purposes if the value of
the qualified transportation fringe exceeds
the applicable statutory monthly limit?

A-8. (a) Generally, an employee must
include in gross income the amount by
which the fair market value of the benefit
exceeds the sum of the amount, if any,
paid by the employee and any amount
excluded from gross income under section
132(a)(5). Thus, assuming no other statu-
tory exclusion applies, if an employer pro-
vides an employee with a qualified trans-
portation fringe that exceeds the
applicable statutory monthly limit and the
employee does not make any payment, the
value of the benefits provided in excess of
the applicable statutory monthly limit is
included in the employee's wages for
income and employment tax purposes.
See §1.61-21(b)(1).

(b) The following examples illustrate
the principles of this Q/A-8:

Example 1. (i) For each month in a year in which
the statutory monthly transit pass limit is $100 (i.e.,
a year after 2001), Employer M provides a transit
pass valued at $110 to Employee D, who does not
pay any amount to Employer M for the transit pass.

(ii) In this Example 1, because the value of the
monthly transit pass exceeds the statutory monthly
limit by $10, $120 ($110 - $100, times 12 months)
must be included in D's wages for income and
employment tax purposes for the year with respect to
the transit passes.

Example 2. (i) For each month in a year in which
the statutory monthly qualified parking limit is $175,
Employer M provides qualified parking valued at
$195 to Employee E, who does not pay any amount
to M for the parking.

(ii) In this Example 2, because the fair market
value of the qualified parking exceeds the statutory

monthly limit by $20, $240 ($195 - $175, times 12
months) must be included in Employee E's wages
for income and employment tax purposes for the
year with respect to the qualified parking.

Example 3. (i) For each month in a year in which
the statutory monthly qualified parking limit is $175,
Employer P provides qualified parking with a fair
market value of $220 per month to its employees,
but charges each employee $45 per month.

(ii) In this Example 3, because the sum of the
amount paid by an employee ($45) plus the amount
excludable for qualified parking ($175) is not less
than the fair market value of the monthly benefit, no
amount is includible in the employee's wages for
income and employment tax purposes with respect
to the qualified parking.

Q-9. Are excludable qualified trans-
portation fringes calculated on a monthly
basis?

A-9. (a) In general. Yes. The value of
transportation in a commuter highway
vehicle, transit passes, and qualified park-
ing is calculated on a monthly basis to
determine whether the value of the bene-
fit has exceeded the applicable statutory
monthly limit on qualified transportation
fringes. Except in the case of a transit
pass provided to an employee, the applic-
able statutory monthly limit applies to
qualified transportation fringes used by
the employee in a month. Monthly exclu-
sion amounts are not combined to provide
a qualified transportation fringe for any
month exceeding the statutory limit. A
month is a calendar month or a substan-
tially equivalent period applied consis-
tently.

(b) Transit passes. In the case of tran-
sit passes provided to an employee, the
applicable statutory monthly limit applies
to the transit passes provided by the
employer to the employee in a month for
that month or for any previous month in
the calendar year. In addition, transit
passes distributed in advance for more
than one month, but not for more than
twelve months, are qualified transporta-
tion fringes if the requirements in para-
graph (c) of this Q/A-9 are met (relating
to the income tax and employment tax
treatment of advance transit passes). The
applicable statutory monthly limit under
section 132(f)(2) on the combined amount
of transportation in a commuter highway
vehicle and transit passes may be calcu-
lated by taking into account the monthly
limits for all months for which the transit
passes are distributed. In the case of a
pass that is valid for more than one month,
such as an annual pass, the value of the

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pass may be divided by the number of
months for which it is valid for purposes
of determining whether the value of the
pass exceeds the statutory monthly limit.

(c) Rule if employee's employment ter-
minates- (1) income tax treatment. The
value of transit passes provided in
advance to an employee with respect to a
month in which the individual is not an
employee is included in the employee's
wages for income tax purposes.

(2) Reporting and employment tax treat-
ment. Transit passes distributed in advance
to an employee are excludable from wages
for employment tax purposes under sec-
tions 3121, 3306, and 3401 (FICA, FUTA,
and income tax withholding) if the employ-
er distributes transit passes to the employee
in advance for not more than three months
and, at the time the transit passes are dis-
tributed, there is not an established date that
the employee's employment will terminate
(for example, if the employee has given
notice of retirement) which will occur
before the beginning of the last month of
the period for which the transit passes are
provided. If the employer distributes tran-
sit passes to an employee in advance for not
more than three months and at the time the
transit passes are distributed there is an
established date that the employee's
employment will terminate, and the
employee's employment does terminate
before the beginning of the last month of
the period for which the transit passes are
provided, the value of transit passes provid-
ed for months beginning after the date of
termination during which the employee is
not employed by the employer is included
in the employee's wages for employment
tax purposes. If transit passes are distrib-
uted in advance for more than three months,
the value of transit passes provided for the
months during which the employee is not
employed by the employer is includible in
the employee's wages for employment tax
purposes regardless of whether at the time
the transit passes were distributed there was
an established date of termination of the
employee's employment.

(d) Examples. The following examples
illustrate the principles of this Q/A-9:

Example 1. (i) Employee E incurs $150 for qual-
ified parking used during the month of June of a year
in which the statutory monthly parking limit is $175,
for which E is reimbursed $150 by Employer R.
Employee E incurs $180 in expenses for qualified
parking used during the month of July of that year,
for which E is reimbursed $180 by Employer R.

(ii) In this Example 1, because monthly exclusion
amounts may not be combined to provide a benefit
in any month greater than the applicable statutory
limit, the amount by which the amount reimbursed
for July exceeds the applicable statutory monthly
limit ($180 minus $175 equals $5) is includible in
Employee E's wages for income and employment
tax purposes.

Example 2. (i) Employee F receives transit pass-
es from Employer G with a value of $195 in March
of a year (for which the statutory monthly transit
pass limit is $65) for January, February, and March
of that year. F was hired during January and has not
received any transit passes from G.

(ii) In this Example 2, the value of the transit
passes (three months times $65 equals $195) is
excludable from F's wages for income and employ-
ment tax purposes.

Example 3. (i) Employer S has a qualified trans-
portation fringe benefit plan under which its employ-
ees receive transit passes near the beginning of each
calendar quarter for that calendar quarter. All
employees of Employer S receive transit passes from
Employer S with a value of $195 on March 31 for
the second calendar quarter covering the months
April, May, and June (of a year in which the statuto-
ry monthly transit pass limit is $65).

(ii) In this Example 3, because the value of the
transit passes may be calculated by taking into
account the monthly limits for all months for which
the transit passes are distributed, the value of the
transit passes (three months times $65 equals $195)
is excludable from the employees' wages for income
and employment tax purposes.

Example 4. (i) Same facts as in Example 3,
except that Employee T, an employee of Employer
S, terminates employment with S on May 31. There
was not an established date of termination for
Employee T at the time the transit passes were dis-
tributed.

(ii) In this Example 4, because at the time the
transit passes were distributed there was not an
established date of termination for Employee T, the
value of the transit passes provided for June ($65) is
excludable from T's wages for employment tax pur-
poses. However, the value of the transit passes dis-
tributed to Employee T for June ($65) is not exclud-
able from T's wages for income tax purposes.

(iii) If Employee T's May 31 termination date
was established at the time the transit passes were
provided, the value of the transit passes provided for
June ($65) is included in T's wages for both income
and employment tax purposes.

Example 5. (i) Employer F has a qualified trans-
portation fringe benefit plan under which its employ-
ees receive transit passes semi-annually in advance
of the months for which the transit passes are pro-
vided. All employees of Employer F, including
Employee X, receive transit passes from F with a
value of $390 on June 30 for the 6 months of July
through December (of a year in which the statutory
monthly transit pass limit is $65). Employee X's
employment terminates and his last day of work is
August 1. Employer F's other employees remain
employed throughout the remainder of the year.

(ii) In this Example 5, the value of the transit
passes provided to Employee X for the months
September, October, November, and December ($65
times 4 months equals $260) of the year is included

in X's wages for income and employment tax pur-
poses. The value of the transit passes provided to
Employer F's other employees is excludable from
the employees' wages for income and employment
tax purposes.

Example 6. (i) Each month during a year in
which the statutory monthly transit pass limit is $65,
Employer R distributes transit passes with a face
amount of $70 to each of its employees. Transit
passes with a face amount of $70 can be purchased
from the transit system by any individual for $65.

(ii) In this Example 6, because the value of the
transit passes distributed by Employer R does not
exceed the applicable statutory monthly limit ($65),
no portion of the value of the transit passes is includ-
ed as wages for income and employment tax purpos-
es.

Q-10. May an employee receive quali-
fied transportation fringes from more than
one employer?

A-10. (a) General rule. Yes. The statu-
tory monthly limits described in Q/A-7 of
this section apply to benefits provided by
an employer to its employees. For this
purpose, all employees treated as
employed by a single employer under sec-
tion 414(b), (c), (m), or (o) are treated as
employed by a single employer. See sec-
tion 414(t) and §1.132-1(c). Thus, quali-
fied transportation fringes paid by entities
under common control under section
414(b), (c), (m), or (o) are combined for
purposes of applying the applicable statu-
tory monthly limit. In addition, an indi-
vidual who is treated as a leased employ-
ee of the employer under section 414(n) is
treated as an employee of that employer
for purposes of section 132. See section
414(n)(3)(C).

(b) Examples. The following examples
illustrate the principles of this Q/A-10:

Example 1. (i) During a year in which the statu-
tory monthly qualified parking limit is $175,
Employee E works for Employers M and N, who are
unrelated and not treated as a single employer under
section 414(b), (c), (m), or (o). Each month, M and
N each provide qualified parking benefits to E with
a value of $100.

(ii) In this Example 1, because M and N are unre-
lated employers, and the value of the monthly park-
ing benefit provided by each is not more than the
applicable statutory monthly limit, the parking ben-
efits provided by each employer are excludable as
qualified transportation fringes assuming that the
other requirements of this section are satisfied.

Example 2. (i) Same facts as in Example 1,
except that Employers M and N are treated as a sin-
gle employer under section 414(b).

(ii) In this Example 2, because M and N are treat-
ed as a single employer, the value of the monthly
parking benefit provided by M and N must be com-
bined for purposes of determining whether the
applicable statutory monthly limit has been exceed-
ed. Thus, the amount by which the value of the park-

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ing benefit exceeds the monthly limit ($200 minus
the monthly limit amount of $175 equals $25) for
each month in the year is includible in E's wages for
income and employment tax purposes.

Q-11. May qualified transportation
fringes be provided to employees pur-
suant to a compensation reduction agree-
ment?

A-11. Yes. An employer may offer
employees a choice between cash com-
pensation and any qualified transportation
fringe. An employee who is offered this
choice and who elects qualified trans-
portation fringes is not required to include
the cash compensation in income if-

(a) The election is pursuant to an
arrangement described in Q/A-12 of this
section;

(b) The amount of the reduction in cash
compensation does not exceed the limita-
tion in Q/A-13 of this section;

(c) The arrangement satisfies the timing
and reimbursement rules in Q/A-14 and
16 of this section; and

(d) The related fringe benefit arrange-
ment otherwise satisfies the requirements
set forth elsewhere in this section.

Q-12. What is a compensation reduc-
tion election for purposes of section
132(f)?

A-12. (a) Election requirements gener-
ally. A compensation reduction arrange-
ment is an arrangement under which the
employer provides the employee with the
right to elect whether the employee will
receive either a fixed amount of cash
compensation at a specified future date or
a fixed amount of qualified transportation
fringes to be provided for a specified
future period (such as qualified parking to
be used during a future calendar month).
The employee's election must be in writ-
ing or another form, such as electronic,
that includes, in a permanent and verifi-
able form, the information required to be
in the election. The election must contain
the date of the election, the amount of the
compensation to be reduced, and the peri-
od for which the benefit will be provided.
The election must relate to a fixed dollar
amount or fixed percentage of compensa-
tion reduction. An election to reduce
compensation for a period by a set amount
for such period may be automatically
renewed for subsequent periods.

(b) Automatic election permitted. An
employer may provide under its qualified
transportation fringe benefit plan that a
compensation reduction election will be

deemed to have been made if the employ-
ee does not elect to receive cash compen-
sation in lieu of the qualified transporta-
tion fringe, provided that the employee
receives adequate notice that a compensa-
tion reduction will be made and is given
adequate opportunity to choose to receive
the cash compensation instead of the qual-
ified transportation fringe.

Q-13. Is there a limit to the amount of
the compensation reduction?

A-13. Yes. Each month, the amount of
the compensation reduction may not
exceed the combined applicable statutory
monthly limits for transportation in a
commuter highway vehicle, transit passes,
and qualified parking. For example, for a
year in which the statutory monthly limit
is $65 for transportation in a commuter
highway vehicle and transit passes, and
$175 for qualified parking, an employee
could elect to reduce compensation for
any month by no more than $240 ($65
plus $175) with respect to qualified trans-
portation fringes. If an employee were to
elect to reduce compensation by $250 for
a month, the excess $10 ($250 minus
$240) would be includible in the employ-
ee's wages for income and employment
tax purposes.

Q-14. When must the employee have
made a compensation reduction election
and under what circumstances may the
amount be paid in cash to the employee?

A-14. (a) The compensation reduction
election must satisfy the requirements set
forth under paragraphs (b), (c), and (d) of
this Q/A-14.

(b) Timing of election. The compensa-
tion reduction election must be made
before the employee is able currently to
receive the cash or other taxable amount at
the employee's discretion. The determina-
tion of whether the employee is able cur-
rently to receive the cash does not depend
on whether it has been constructively
received for purposes of section 451. The
election must specify that the period (such
as a calendar month) for which the quali-
fied transportation fringe will be provided
must not begin before the election is made.
Thus, a compensation reduction election
must relate to qualified transportation
fringes to be provided after the election.
For this purpose, the date a qualified trans-
portation fringe is provided is-

(1) The date the employee receives a
voucher or similar item; or

(2) In any other case, the date the
employee uses the qualified transportation
fringe.

(c) Revocability of elections. The
employee may not revoke a compensation
reduction election after the employee is
able currently to receive the cash or other
taxable amount at the employee's discre-
tion. In addition, the election may not be
revoked after the beginning of the period
for which the qualified transportation
fringe will be provided.

(d) Compensation reduction amounts
not refundable. Unless an election is
revoked in a manner consistent with para-
graph (c) of this Q/A-14, an employee
may not subsequently receive the com-
pensation (in cash or any form other than
by payment of a qualified transportation
fringe under the employer's plan). Thus,
an employer's qualified transportation
fringe benefit plan may not provide that
an employee who ceases to participate in
the employer's qualified transportation
fringe benefit plan (such as in the case of
termination of employment) is entitled to
receive a refund of the amount by which
the employee's compensation reductions
exceed the actual qualified transportation
fringes provided to the employee by the
employer.

(e) Examples. The following examples
illustrate the principles of this Q/A-14:

Example 1. (i) Employer P maintains a qualified
transportation fringe benefit arrangement during a
year in which the statutory monthly limit is $100 for
transportation in a commuter highway vehicle and
transit passes (2002 or later) and $180 for qualified
parking. Employees of P are paid cash compensa-
tion twice per month, with the payroll dates being
the first and the fifteenth day of the month. Under
P's arrangement, an employee is permitted to elect at
any time before the first day of a month to reduce his
or her compensation payable during that month in an
amount up to the applicable statutory monthly limit
($100 if the employee elects coverage for trans-
portation in a commuter highway vehicle or a mass
transit pass, or $180 if the employee chooses quali-
fied parking) in return for the right to receive quali-
fied transportation fringes up to the amount of the
election. If such an election is made, P will provide
a mass transit pass for that month with a value not
exceeding the compensation reduction amount elect-
ed by the employee or will reimburse the cost of
other qualified transportation fringes used by the
employee on or after the first day of that month up to
the compensation reduction amount elected by the
employee. Any compensation reduction amount
elected by the employee for the month that is not
used for qualified transportation fringes is not
refunded to the employee at any future date.

(ii) In this Example 1, the arrangement satisfies
the requirements of this Q/A-14 because the election

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is made before the employee is able currently to
receive the cash and the election specifies the future
period for which the qualified transportation fringes
will be provided. The arrangement would also satis-
fy the requirements of this Q/A-14 and Q/A-13 of
this section if employees are allowed to elect to
reduce compensation up to $280 per month ($100
plus $180).

(iii) The arrangement would also satisfy the
requirements of this Q/A-14 (and Q/A-13 of this sec-
tion) if employees are allowed to make an election at
any time before the first or the fifteenth day of the
month to reduce their compensation payable on that
payroll date by an amount not in excess of one-half
of the applicable statutory monthly limit (depending
on the type of qualified transportation fringe elected
by the employee) and P provides a mass transit pass
on or after the applicable payroll date for the com-
pensation reduction amount elected by the employee
for the payroll date or reimburses the cost of other
qualified transportation fringes used by the employ-
ee on or after the payroll date up to the compensation
reduction amount elected by the employee for that
payroll date.

Example 2. (i) Employee Q elects to reduce his
compensation payable on March 1 of a year (for
which the statutory monthly mass transit limit is
$65) by $195 in exchange for a mass transit voucher
to be provided in March. The election is made on
the preceding February 27. Employee Q was hired
in January of the year. On March 10 of the year, the
employer of Employee Q delivers to Employee Q a
mass transit voucher worth $195 for the months of
January, February, and March.

(ii) In this Example 2, $65 is included in
Employee Q's wages for income and employment
tax purposes because the compensation reduction
election fails to satisfy the requirement in this Q/A-
14 and Q/A-12 of this section that the period for
which the qualified transportation fringe will be pro-
vided not begin before the election is made to the
extent the election relates to $65 worth of transit
passes for January of the year. The $65 for February
is not taxable because the election was for a future
period that includes at least one day in February.

(iii) However, no amount would be included in
Employee Q's wages as a result of the election if
$195 worth of mass transit passes were instead pro-
vided to Q for the months of February, March, and
April (because the compensation reduction would
relate solely to fringes to be provided for a period
not beginning before the date of the election and the
amount provided does not exceed the aggregate limit
for the period, i.e., the sum of $65 for each of
February, March, and April). See Q/A-9 of this sec-
tion for rules governing transit passes distributed in
advance for more than one month.

Example 3. (i) Employee R elects to reduce his
compensation payable on March 1 of a year (for
which the statutory monthly parking limit is $175)
by $185 in exchange for reimbursement by
Employer T of parking expenses incurred by
Employee R for parking on or near Employer T's
business premises during the period beginning after
the date of the election through March. The election
is made on the preceding February 27. Employee R
incurs $10 in parking expenses on February 28 of the
year, and $175 in parking expenses during the month

of March. On April 5 of the year, Employer T reim-
burses Employee R $185 for the parking expenses
incurred on February 28, and during March, of the
year.

(ii) In this Example 3, no amount would be
includible in Employee R's wages for income and
employment tax purposes because the compensation
reduction related solely to parking on or near
Employer R's business premises used during a peri-
od not beginning before the date of the election and
the amount reimbursed for parking used in any one
month does not exceed the statutory monthly limita-
tion.

Q-15. May an employee whose quali-
fied transportation fringe costs are less
than the employee's compensation reduc-
tion carry over this excess amount to sub-
sequent periods?

A-15. (a) Yes. An employee may carry
over unused compensation reduction
amounts to subsequent periods under the
plan of the employee's employer.

(b) The following example illustrates
the principles of this Q/A-15:

Example. (i) By an election made before
November 1 of a year for which the statutory month-
ly mass transit limit is $65, Employee E elects to
reduce compensation in the amount of $65 for the
month of November. E incurs $50 in employee-
operated commuter highway vehicle expenses dur-
ing November for which E is reimbursed $50 by
Employer R, E's employer. By an election made
before December, E elects to reduce compensation
by $65 for the month of December. E incurs $65 in
employee-operated commuter highway vehicle
expenses during December for which E is reim-
bursed $65 by R. Before the following January, E
elects to reduce compensation by $50 for the month
of January. E incurs $65 in employee-operated com-
muter highway vehicle expenses during January for
which E is reimbursed $65 by R because R allows E
to carry over to the next year the $15 amount by
which the compensation reductions for November
and December exceeded the employee-operated
commuter highway vehicle expenses incurred during
those months.

(ii) In this Example, because Employee E is reim-
bursed in an amount not exceeding the applicable
statutory monthly limit, and the reimbursement does
not exceed the amount of employee-operated com-
muter highway vehicle expenses incurred during the
month of January, the amount reimbursed ($65) is
excludable from E's wages for income and employ-
ment tax purposes.

Q-16. How does section 132(f) apply
to expense reimbursements?

A-16. (a) In general. The term quali-
fied transportation fringe includes cash
reimbursement by an employer to an
employee for expenses incurred or paid
by an employee for transportation in a
commuter highway vehicle or qualified
parking. The term qualified transporta-
tion fringe also includes cash reimburse-

ment for transit passes made under a bona
fide reimbursement arrangement, but, in
accordance with section 132(f)(3), only if
permitted under paragraph (b) of this
Q/A-16. The reimbursement must be
made under a bona fide reimbursement
arrangement which meets the rules of
paragraph (c) of this Q/A-16. A payment
made before the date an expense has been
incurred or paid is not a reimbursement.
In addition, a bona fide reimbursement
arrangement does not include an arrange-
ment that is dependent solely upon an
employee certifying in advance that the
employee will incur expenses at some
future date.

(b) Special rule for transit passes- (1)
In general. The term qualified trans-
portation fringe includes cash reimburse-
ment for transit passes made under a bona
fide reimbursement arrangement, but, in
accordance with section 132(f)(3), only if
no voucher or similar item that may be
exchanged only for a transit pass is readi-
ly available for direct distribution by the
employer to employees. If a voucher is
readily available, the requirement that a
voucher be distributed in-kind by the
employer is satisfied if the voucher is dis-
tributed by the employer or by another
person on behalf of the employer (for
example, if a transit operator credits
amounts to the employee's fare card as a
result of payments made to the operator
by the employer).

(2) Voucher or similar item. For pur-
poses of the special rule in paragraph (b)
of this Q/A-16, a transit system voucher is
an instrument that may be purchased by
employers from a voucher provider that is
accepted by one or more mass transit
operators (e.g., train, subway, and bus) in
an area as fare media or in exchange for
fare media. Thus, for example, a transit
pass that may be purchased by employers
directly from a voucher provider is a tran-
sit system voucher.

(3) Voucher provider. The term vouch-
er provider means any person in the trade
or business of selling transit system
vouchers to employers, or any transit sys-
tem or transit operator that sells vouchers
to employers for the purpose of direct dis-
tribution to employees. Thus, a transit
operator might or might not be a voucher
provider. A voucher provider is not, for
example, a third-party employee benefits

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administrator that administers a transit
pass benefit program for an employer
using vouchers that the employer could
obtain directly.

(4) Readily available. For purposes of
this paragraph (b), a voucher or similar
item is readily available for direct distrib-
ution by the employer to employees if and
only if an employer can obtain it from a
voucher provider that-

(i) does not impose fare media charges
that cause vouchers to not be readily
available as described in paragraph (b)(5)
of this section; and

(ii) does not impose other restrictions
that cause vouchers to not be readily
available as described in paragraph (b)(6)
of this section.

(5) Fare media charges. For purposes
of paragraph (b)(4) of this section, fare
media charges relate only to fees paid by
the employer to voucher providers for
vouchers. The determination of whether
obtaining a voucher would result in fare
media charges that cause vouchers to not
be readily available as described in this
paragraph (b) is made with respect to each
transit system voucher. If more than one
transit system voucher is available for
direct distribution to employees, the
employer must consider the fees imposed
for the lowest cost monthly voucher for
purposes of determining whether the fees
imposed by the voucher provider satisfy
this paragraph. However, if transit system
vouchers for multiple transit systems are
required in an area to meet the transit
needs of the individual employees in that
area, the employer has the option of aver-
aging the costs applied to each transit sys-
tem voucher for purposes of determining
whether the fare media charges for transit
system vouchers satisfy this paragraph.
Fare media charges are described in this
paragraph (b)(5), and therefore cause
vouchers to not be readily available, if and
only if the average annual fare media
charges that the employer reasonably
expects to incur for transit system vouch-
ers purchased from the voucher provider
(disregarding reasonable and customary
delivery charges imposed by the voucher
provider, e.g., not in excess of $15) are
more than 1 percent of the average annual
value of the vouchers for a transit system.

(6) Other restrictions. For purposes of
paragraph (b)(4) of this section, restric-
tions that cause vouchers to not be readily

available are restrictions imposed by the
voucher provider other than fare media
charges that effectively prevent the
employer from obtaining vouchers appro-
priate for distribution to employees.
Examples of such restrictions include-

(i) Advance purchase requirements.
Advance purchase requirements cause
vouchers to not be readily available only
if the voucher provider does not offer
vouchers at regular intervals or fails to
provide the voucher within a reasonable
period after receiving payment for the
voucher. For example, a requirement that
vouchers may be purchased only once per
year may effectively prevent an employer
from obtaining vouchers for distribution
to employees. An advance purchase
requirement that vouchers be purchased
not more frequently than monthly does
not effectively prevent the employer from
obtaining vouchers for distribution to
employees.

(ii) Purchase quantity requirements.
Purchase quantity requirements cause
vouchers to not be readily available if the
voucher provider does not offer vouchers
in quantities that are reasonably appropri-
ate to the number of the employer's
employees who use mass transportation
(for example, the voucher provider
requires a $1,000 minimum purchase and
the employer seeks to purchase only $200
of vouchers).

(iii) Limitations on denominations of
vouchers that are available. If the vouch-
er provider does not offer vouchers in
denominations appropriate for distribu-
tion to the employer's employees, vouch-
ers are not readily available. For exam-
ple, vouchers provided in $5 increments
up to the monthly limit are appropriate for
distribution to employees, while vouchers
available only in a denomination equal to
the monthly limit are not appropriate for
distribution to employees if the amount of
the benefit provided to the employer's
employees each month is normally less
than the monthly limit.

(7) Example. The following example
illustrates the principles of this paragraph
(b):

Example. (i) Company C in City X sells mass
transit vouchers to employers in the metropolitan area
of X in various denominations appropriate for distrib-
ution to employees. Employers can purchase vouch-
ers monthly in reasonably appropriate quantities.
Several different bus, rail, van pool, and ferry opera-
tors service X, and a number of the operators accept

the vouchers either as fare media or in exchange for
fare media. To cover its operating expenses, C impos-
es on each voucher a 50 cents charge, plus a reason-
able and customary $15 charge for delivery of each
order of vouchers. Employer M disburses vouchers
purchased from C to its employees who use operators
that accept the vouchers and M reasonably expects
that $55 is the average value of the voucher it will pur-
chase from C for the next calendar year.

(ii) In this Example, vouchers for X are readily
available for direct distribution by the employer to
employees because the expected cost of the vouchers
disbursed to M's employees for the next calendar
year is not more than 1 percent of the value of the
vouchers (50 cents divided by $55 equals 0.91 per-
cent), the delivery charges are disregarded because
they are reasonable and customary, and there are no
other restrictions that cause the vouchers to not be
readily available. Thus, any reimbursement of mass
transportation costs in X would not be a qualified
transportation fringe.

(c) Substantiation requirements.
Employers that make cash reimbursements
must establish a bona fide reimbursement
arrangement to establish that their employ-
ees have, in fact, incurred expenses for
transportation in a commuter highway
vehicle, transit passes, or qualified parking.
For purposes of section 132(f), whether
cash reimbursements are made under a
bona fide reimbursement arrangement may
vary depending on the facts and circum-
stances, including the method or methods
of payment utilized within the mass transit
system. The employer must implement
reasonable procedures to ensure that an
amount equal to the reimbursement was
incurred for transportation in a commuter
highway vehicle, transit passes, or quali-
fied parking. The expense must be sub-
stantiated within a reasonable period of
time. An expense substantiated to the
payor within 180 days after it has been paid
will be treated as having been substantiat-
ed within a reasonable period of time. An
employee certification at the time of reim-
bursement in either written or electronic
form may be a reasonable reimbursement
procedure depending on the facts and cir-
cumstances. Examples of reasonable reim-
bursement procedures are set forth in para-
graph (d) of this Q/A-16.

(d) Illustrations of reasonable reim-
bursement procedures. The following are
examples of reasonable reimbursement
procedures for purposes of paragraph (c)
of this Q/A-16. In each case, the reim-
bursement is made at or within a reason-
able period after the end of the events
described in paragraphs (d)(1) through
(d)(3) of this section.

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(1) An employee presents to the
employer a parking expense receipt for
parking on or near the employer's busi-
ness premises, the employee certifies that
the parking was used by the employee,
and the employer has no reason to doubt
the employee's certification.

(2) An employee either submits a used
time-sensitive transit pass (such as a
monthly pass) to the employer and certi-
fies that he or she purchased it or presents
an unused or used transit pass to the
employer and certifies that he or she pur-
chased it and the employee certifies that
he or she has not previously been reim-
bursed for the transit pass. In both cases,
the employer has no reason to doubt the
employee's certification.

(3) If a receipt is not provided in the
ordinary course of business (e.g., if the
employee uses metered parking or if used
transit passes cannot be returned to the
user), the employee certifies to the
employer the type and the amount of
expenses incurred, and the employer has
no reason to doubt the employee's certifi-
cation.

Q-17. May an employer provide non-
taxable cash reimbursement under section
132(f) for periods longer than one month?

A-17. (a) General rule. Yes. Qualified
transportation fringes include reimburse-
ment to employees for costs incurred for
transportation in more than one month,
provided the reimbursement for each
month in the period is calculated separate-
ly and does not exceed the applicable
statutory monthly limit for any month in
the period. See Q/A-8 and 9 of this sec-
tion if the limit for a month is exceeded.

(b) Example. The following example
illustrates the principles of this Q/A-17:

Example. (i) Employee R pays $100 per month
for qualified parking used during the period from
April 1 through June 30 of a year in which the statu-
tory monthly qualified parking limit is $175. After
receiving adequate substantiation from Employee R,
R's employer reimburses R $300 in cash on June 30
of that year.

(ii) In this Example, because the value of the
reimbursed expenses for each month did not exceed
the applicable statutory monthly limit, the $300
reimbursement is excludable from R's wages for
income and employment tax purposes as a qualified
transportation fringe.

Q-18. What are the substantiation
requirements if an employer distributes
transit passes?

A-18. There are no substantiation
requirements if the employer distributes

transit passes. Thus, an employer may
distribute a transit pass for each month
with a value not more than the statutory
monthly limit without requiring any certi-
fication from the employee regarding the
use of the transit pass.

Q-19. May an employer choose to
impose substantiation requirements in
addition to those described in this regula-
tion?

A-19. Yes.

Q-20. How is the value of parking
determined?

A-20. Section 1.61-21(b)(2) applies
for purposes of determining the value of
parking.

Q-21. How do the qualified transporta-
tion fringe rules apply to van pools?

A-21. (a) Van pools generally.
Employer and employee-operated van
pools, as well as private or public transit-
operated van pools, may qualify as quali-
fied transportation fringes. The value of
van pool benefits which are qualified
transportation fringes may be excluded up
to the applicable statutory monthly limit
for transportation in a commuter highway
vehicle and transit passes, less the value
of any transit passes provided by the
employer for the month.

(b) Employer-operated van pools. The
value of van pool transportation provided
by or for an employer to its employees is
excludable as a qualified transportation
fringe, provided the van qualifies as a com-
muter highway vehicle as defined in sec-
tion 132(f)(5)(B) and Q/A-2 of this section.
A van pool is operated by or for the
employer if the employer purchases or
leases vans to enable employees to com-
mute together or the employer contracts
with and pays a third party to provide the
vans and some or all of the costs of operat-
ing the vans, including maintenance, liabil-
ity insurance and other operating expenses.

(c) Employee-operated van pools.
Cash reimbursement by an employer to
employees for expenses incurred for
transportation in a van pool operated by
employees independent of their employer
are excludable as qualified transportation
fringes, provided that the van qualifies as
a commuter highway vehicle as defined in
section 132(f)(5)(B) and Q/A-2 of this
section. See Q/A-16 of this section for the
rules governing cash reimbursements.

(d) Private or public transit-operated
van pool transit passes. The qualified

transportation fringe exclusion for transit
passes is available for travel in van pools
owned and operated either by public transit
authorities or by any person in the business
of transporting persons for compensation
or hire. In accordance with paragraph (b)
of Q/A-3 of this section, the van must seat
at least 6 adults (excluding the driver). See
Q/A-16(b) and (c) of this section for a spe-
cial rule for cash reimbursement for transit
passes and the substantiation requirements
for cash reimbursement.

(e) Value of van pool transportation
benefits. Section 1.61-21(b)(2) provides
that the fair market value of a fringe ben-
efit is based on all the facts and circum-
stances. Alternatively, transportation in
an employer-provided commuter highway
vehicle may be valued under the automo-
bile lease valuation rule in §1.61-21(d),
the vehicle cents-per-mile rule in
§1.61-21(e), or the commuting valuation
rule in §1.61-21(f). If one of these spe-
cial valuation rules is used, the employer
must use the same valuation rule to value
the use of the commuter highway vehicle
by each employee who share the use. See
§1.61-21(c)(2)(i)(B).

(f) Qualified parking prime member. If
an employee obtains a qualified parking
space as a result of membership in a car or
van pool, the applicable statutory monthly
limit for qualified parking applies to the
individual to whom the parking space is
assigned. This individual is the prime
member. In determining the tax conse-
quences to the prime member, the statuto-
ry monthly limit amounts of each car pool
member may not be combined. If the
employer provides access to the space and
the space is not assigned to a particular
individual, then the employer must desig-
nate one of its employees as the prime
member who will bear the tax conse-
quences. The employer may not desig-
nate more than one prime member for a
car or van pool during a month. The
employer of the prime member is respon-
sible for including the value of the quali-
fied parking in excess of the statutory
monthly limit in the prime member's
wages for income and employment tax
purposes.

Q-22. What are the reporting and
employment tax requirements for quali-
fied transportation fringes?

A-22. (a) Employment tax treatment
generally. Qualified transportation

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fringes not exceeding the applicable statu-
tory monthly limit described in Q/A-7 of
this section are not wages for purposes of
the Federal Insurance Contributions Act
(FICA), the Federal Unemployment Tax
Act (FUTA), and federal income tax with-
holding. Any amount by which an
employee elects to reduce compensation
as provided in Q/A-11 of this section is
not subject to the FICA, the FUTA, and
federal income tax withholding.
Qualified transportation fringes exceeding
the applicable statutory monthly limit
described in Q/A-7 of this section are
wages for purposes of the FICA, the
FUTA, and federal income tax withhold-
ing and are reported on the employee's
Form W-2, Wage and Tax Statement.

(b) Employment tax treatment of cash
reimbursement exceeding monthly limits.
Cash reimbursement to employees (for
example, cash reimbursement for quali-
fied parking) in excess of the applicable
statutory monthly limit under section
132(f) is treated as paid for employment
tax purposes when actually or construc-
tively paid. See §§31.3121(a)-2(a),
31.3301-4, 31.3402(a)-1(b) of this chap-
ter. Employers must report and deposit
the amounts withheld in addition to
reporting and depositing other employ-
ment taxes. See Q/A-16 of this section for
rules governing cash reimbursements.

(c) Noncash fringe benefits exceeding
monthly limits. If the value of noncash
qualified transportation fringes exceeds
the applicable statutory monthly limit, the
employer may elect, for purposes of the
FICA, the FUTA, and federal income tax
withholding, to treat the noncash taxable
fringe benefits as paid on a pay period,
quarterly, semi-annual, annual, or other
basis, provided that the benefits are treat-
ed as paid no less frequently than annual-
ly.

Q-23. How does section 132(f) inter-
act with other fringe benefit rules?

A-23. For purposes of section 132, the
terms working condition fringe and de
minimis fringe do not include any quali-
fied transportation fringe under section
132(f). If, however, an employer provides
local transportation other than transit
passes (without any direct or indirect

compensation reduction election), the
value of the benefit may be excludable,
either totally or partially, under fringe
benefit rules other than the qualified
transportation fringe rules under section
132(f). See §§1.132-6(d)(2)(i) (occasion-
al local transportation fare),
1.132-6(d)(2)(iii) (transportation provid-
ed under unusual circumstances), and
1.61-21(k) (valuation of local transporta-
tion provided to qualified employees).
See also Q/A-4(b) of this section.

Q-24. May qualified transportation
fringes be provided to individuals who are
partners, 2-percent shareholders of S-cor-
porations, or independent contractors?

A-24. (a) General rule. Section
132(f)(5)(E) states that self-employed
individuals who are employees within the
meaning of section 401(c)(1) are not
employees for purposes of section 132(f).
Therefore, individuals who are partners,
sole proprietors, or other independent
contractors are not employees for purpos-
es of section 132(f). In addition, under
section 1372(a), 2-percent shareholders of
S corporations are treated as partners for
fringe benefit purposes. Thus, an individ-
ual who is both a 2-percent shareholder of
an S corporation and a common law
employee of that S corporation is not con-
sidered an employee for purposes of sec-
tion 132(f). However, while section
132(f) does not apply to individuals who
are partners, 2-percent shareholders of S
corporations, or independent contractors,
other exclusions for working condition
and de minimis fringes may be available
as described in paragraphs (b) and (c) of
this Q/A-24. See §§1.132-1(b)(2) and
1.132-1(b)(4).

(b) Transit passes. The working con-
dition and de minimis fringe exclusions
under section 132(a)(3) and (4) are avail-
able for transit passes provided to individ-
uals who are partners, 2-percent share-
holders, and independent contractors. For
example, tokens or farecards provided by
a partnership to an individual who is a
partner that enable the partner to commute
on a public transit system (not including
privately-operated van pools) are exclud-
able from the partner's gross income if the
value of the tokens and farecards in any

month does not exceed the dollar amount
specified in §1.132-6(d)(1). However, if
the value of a pass provided in a month
exceeds the dollar amount specified in
§1.132-6(d)(1), the full value of the ben-
efit provided (not merely the amount in
excess of the dollar amount specified in
§1.132-6(d)(1)) is includible in gross
income.

(c) Parking. The working condition
fringe rules under section 132(d) do not
apply to commuter parking. See
§1.132-5(a)(1). However, the de minimis
fringe rules under section 132(e) are
available for parking provided to individ-
uals who are partners, 2-percent share-
holders, or independent contractors that
qualifies under the de minimis rules. See
§1.132-6(a) and (b).

(d) Example. The following example
illustrates the principles of this Q/A-24:

Example. (i) Individual G is a partner in partner-
ship P. Individual G commutes to and from G's
office every day and parks free of charge in P's lot.

(ii) In this Example, the value of the parking is
not excluded under section 132(f), but may be
excluded under section 132(e) if the parking is a de
minimis fringe under §1.132-6.

Q-25. What is the effective date of this
section?

A-25. (a) Except as provided in para-
graph (b) of this Q/A-25, this section is
applicable for taxable years beginning
after December 31, 2001.

(b) The last sentence of paragraph
(b)(5) of Q/A-16 of this section (relating
to whether transit system vouchers for
transit passes are readily available) is
effective for taxable years beginning after
December 31, 2003.

PART 602 - OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT

Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 6. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *

(b) * * *

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CFR part or section where
identified and described

** * * *

1.132-9(b)

* * * * *

<!-- PageHeader="Current OMB control no." -->

1545-1676

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

Approved December 29, 2000.

Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.

(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R.
2241)

## Section 280G .- Golden Parachute Payments

Federal short-term, mid-term, and long-term rates
are set forth for the month of March 2001. See Rev.
Rul. 2001-12, page 811.

## Section 367 .- Foreign Corporations

26 CFR 1.367(b)-12: Subsequent treatment of
amounts attributed or included in income.

T.D. 8937

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 7

Stock Transfer Rules: Transition
Rules

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains
final regulations addressing distributions
with respect to, or a disposition of, certain
stock that was subject to prior temporary
regulations under section 367(b). Section
367(b) addresses the application of non-
recognition exchange provisions in
Subchapter C of the Internal Revenue
Code to transactions that involve one or
more foreign corporations.

DATES: Effective Date. These regula-
tions are effective as of January 11, 2001.
Applicability Dates. These regulations
apply to distributions or dispositions that
occur on or after January 11, 2001.

FOR FURTHER INFORMATION CON-
TACT: Mark D. Harris, (202) 622-3860
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

### Background

On January 24, 2000, the IRS and
Treasury issued final regulations under
section 367(b) of the Internal Revenue
Code (Code). At the same time, the IRS
and Treasury also modified temporary
regulation §7.367(b)-12(a). The final
regulations and modified temporary regu-
lation were effective as of February 23,
2000.

As modified, §7.367(b)-12(a) address-
es distributions with respect to, or a dis-
position of, stock that was subject to cer-
tain provisions of the temporary section
367(b) regulations that were in effect
before February 23, 2000. This document
finalizes the rule stated in §7.367(b)
-12(a) in order to insure its continued
application. See section 7805(e)(2) (stat-
ing a "sunset rule" applicable to tempo-
rary regulations).

### Special Analyses

It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the notice of proposed
rulemaking preceding the regulations was
issued prior to March 29, 1996, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply.

Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these regulations was submitted to the
Chief Counsel for Advocacy of the Small

Business Administration for comment on
the impact of the proposed regulations on
small business.

## Drafting Information

The principal author of these regula-
tions is Mark Harris of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.

* * * * *

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 7 are
amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.367(b)-12 also issued under
26 U.S.C. 367(a) and (b). * * *

Par. 2. Section 1.367(b)-0 is amended
by revising the introductory text and
adding entries for §1.367(b)-12 to read as
follows:

§1.367(b)-0 Table of contents.

This section lists the paragraphs con-
tained in §§1.367(b)-1 through
1.367(b)-6 and 1.367(b)-12.
* * * * *

§1.367(b)-12 Subsequent treatment of
amounts attributed or included in income.

(a) In general.

(b) Applicable rules.

(c) Effective date.
Par. 3. Section 1.367(b)-12 is added to
read as follows:

§1.367(b)-12 Subsequent treatment of
amounts attributed or included in
income.

(a) In general. This section applies to
distributions with respect to, or a disposi-
tion of, stock-

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(1) To which, in connection with an
exchange occurring before February 23,
2000, an amount has been attributed pur-
suant to §7.367(b)-9 or 7.367(b)-10 of
this chapter (as in effect prior to February
23, 2000, see 26 CFR part 1 revised as of
April 1, 1999); or

(2) In respect of which, before
February 23, 2000, an amount has been
included in income or added to earnings
and profits pursuant to §7.367(b)-7 or
7.367(b)-10 of this chapter (as in effect
prior to February 23, 2000, see 26 CFR
part 1 revised as of April 1, 1999).

(b) Applicable rules. See §7.367(b)
-12(b) through (e) of this chapter (as in
effect prior to January 11, 2001, see 26
CFR part 1 revised as of April 1, 2000) for
purposes of applying paragraph (a) of this
section.

(c) Effective date. This section applies
to distributions or dispositions that occur
on or after January 11, 2001.

### PART 7-TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1976

Par. 4. The authority citation for part 7
is amended by removing the entry for
§7.367(b)-12 and continues to read in part
as follows:

Authority: 26 U.S.C. 7805

§7.367(b)-12 [Removed]

Par. 5. Section 7.367(b)-12 is
removed.

Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.

Approved December 28, 2000.

Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.

(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R.
2256)

Section 382 .- Limitation on
Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change

The adjusted applicable federal long-term rate is
set forth for the month of March 2001. See Rev. Rul.
2001-12, page 811.

## Section 467 .- Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

## Section 482 .- Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term
rates are set forth for the month of March 2001. See
Rev. Rul. 2001-12, page 811.

## Section 483 .- Interest on Certain Deferred Payments

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

## Section 642 .- Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term
rates are set forth for the month of March 2001. See
Rev. Rul. 2001-12, page 811.

## Section 807 .- Rules for Certain Reserves

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

## Section 846 .- Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12, page 811.

## Section 985 .- Functional Currency

26 CFR 1.985-8: Special rules applicable to the
European Monetary Union (conversion to euro).

T.D. 8927

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1

## Conversion to the Euro

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains
final Income Tax Regulations relating to
U.S. taxpayers operating, investing, or
otherwise conducting business in the cur-
rencies of certain European countries that
replace their national currencies with a
single, multinational currency called the
euro. These regulations provide rules
relating to adjustments required for quali-
fied business units operating in such cur-
rencies and rules relating to the tax effect
of holding such currencies, or financial
instruments or contracts denominated in
such currencies.

DATES: Effective Date: These regulations
are effective January 11, 2001.

Applicability Date: These regulations
are applicable for tax years ending after
July 29, 1998.

FOR FURTHER INFORMATION CON-
TACT: John W. Rogers III of the Office of
Associate Chief Counsel (International),
(202) 622-3870, regarding the change in
functional currency rules and Thomas
Preston of the Office of Assistant Chief
Counsel (Financial Institutions and
Products), (202) 622-3930, regarding sec-
tion 1001 (not toll free calls).

SUPPLEMENTARY INFORMATION:

## Background

On March 9, 1998, the IRS issued
Announcement 98-18 (1998-1 C.B. 676)
requesting comments relating to the tax
issues for U.S. taxpayers operating,
investing, or otherwise conducting busi-
ness in a currency that is converting to the
euro. Numerous comments were received.

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After consideration of the comments, and
in order to provide immediate guidance,
the Treasury and the IRS published in the
Federal Register temporary regulations
(63 FR 40366) and a notice of proposed
rulemaking by cross-reference to the tem-
porary regulations (63 F.R. 40383 [T.D.
8776, 1998-2 C.B. 200]) on July 29,
1998. No public hearing was held in con-
junction with the notice of proposed rule-
making because no taxpayers requested to
speak at the hearing.

In the notice of proposed rulemaking,
the Treasury and The IRS requested com-
ments with respect to certain additional
issues. Two comments were received in
connection with the request for comments
and are discussed in greater detail below.

## Explanation of Provisions and Discussion of Comments

The temporary regulations provide
rules relating to U.S. taxpayers operating,
investing, or otherwise conducting busi-
ness in the currencies of countries that
replace their national currencies (legacy
currencies) with a single, multinational
currency called the euro. Thus, a legacy
currency would include former currencies
of the eleven countries that adopted the
euro in 1999 as well as the currency of a
country after it adopts the euro at some
later date. The temporary regulations
generally provide guidance relating to the
circumstances under which the euro con-
version creates a realization event with
respect to instruments and contracts
denominated in a legacy currency, and the
circumstances under which the euro con-
version constitutes a change in functional
currency for a qualified business unit
(QBU or QBUs, as the case may be)
whose functional currency is a legacy cur-
rency, and certain consequences thereof.
The temporary regulations published in
the Federal Register on July 29, 1998,
are finalized substantially as proposed.
See the preamble to the temporary regula-
tions for an explanation of the provisions
of those regulations.

As noted above, two comments were
received in connection with the publica-
tion of the temporary regulations and the
notice of proposed rulemaking. One com-
ment addressed the effect of the euro con-
version to a corporation that has signifi-
cant numbers of legacy currency
transactions but has a non-legacy curren-

cy as its functional currency. For exam-
ple, a corporation may have a non-legacy
currency as its functional currency
because its economic environment reflect-
ed more significant activities denominat-
ed in such currency (e.g., the U.S. dollar
or the Swiss franc) relative to any single
legacy currency. However, given the
aggregation of the individual legacy cur-
rencies into the euro, the currency of the
corporation's economic environment in
which a significant part of its activities are
conducted is the euro. The commenter
suggested that, in such circumstances, the
corporation should be allowed to change
its functional currency to the euro auto-
matically.

In response to the comment, the regula-
tion provides a new rule in which a QBU
that uses a non-legacy currency as its
functional currency may change its func-
tional currency to the euro provided that
the euro is a currency of the economic
environment in which a significant part of
the QBU's activities are conducted, the
QBU maintains its books and records in
the euro after conversion, and the QBU is
not required to use the dollar as its func-
tional currency. The change is deemed to
be made with the consent of the
Commissioner if the change is made with-
in the period set forth in §1.985-8(b)(2).
A QBU changing its functional currency
under this new rule is required to make
the change in method of accounting
adjustments under §1.985-5. Treasury
and the IRS believe that the rules of
§1.985-5 appropriately apply to this cir-
cumstance because the change in func-
tional currency is not an involuntary
change of the same nature as a QBU
whose functional currency is a legacy cur-
rency.

The second comment suggested that the
temporary regulations do not provide
clear guidance in the case where, prior to
conversion, the functional currency of a
taxpayer and one of its QBU branches is
the same legacy currency, and either the
taxpayer or its QBU branch converts to
the euro as its functional currency in a
taxable year prior to the conversion of the
other. The comment noted that the tem-
porary regulations presume that the tax-
payer and its branch have a different func-
tional currency, but do not address
instances where they have the same func-
tional currency. The comment recom-

mended that the regulations provide rules
that require calculation of section 987
gain or loss during the period in which the
taxpayer and its branch have different
functional currencies. The recommenda-
tion is not adopted because section 987
currency gain or loss should not arise
when a taxpayer and its branch use the
same legacy currency as their functional
currencies even if each adopts the euro as
its functional currency in different years.

Finally, the notice of proposed rule-
making requested comments regarding
the treatment of section 988 transactions
that are held by euro functional currency
QBUs and that are denominated in a cur-
rency that is replaced by the euro in the
future. While no comments were
received, Treasury and the IRS believe
that rules relating to this issue should be
clarified. Accordingly, §1.985-8(d) pro-
vides that the principles of §1.985-8(c)(3)
apply in this context. Under this rule,
legacy currency transactions generally
continue to be treated as section 988
transactions and the principles of section
988 apply. Further, the principles provid-
ed in §1.985-8(c)(3)(iii) and (iv) continue
to apply to currency and accounts payable
and receivable, respectively.

## Special Analysis

It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedures Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the final rule does not
impose a collection of information on
small entities, the provisions of the
Regulatory Flexibility Act do not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.

DRAFTING INFORMATION: The
principal authors of these final regulations
are John W. Rogers III of the Office of the
Associate Chief Counsel (International)
and Thomas Preston of the Office of
Associate Chief Counsel (Financial
Institutions and Products). Other person-
nel from the IRS and Treasury

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Department also participated in their
development.
*
*
*

\*
\*

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended
as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

## §1.985-1 [Amended]

Par. 2. In §1.985-1, paragraph (c)(6), in
the last sentence, the reference
"§1.985-8T" is removed and "§1.985-8"
is added in its place.

## §1.985-4 [Amended]

Par. 3. In §1.985-4, paragraph (a), in
the last sentence, the reference
"§1.985-8T" is removed and "§1.985-8"
is added in its place.

Par. 4. Section 1.985-8 is added to read
as follows:

§1.985-8 Special rules applicable to the
European Monetary Union (conversion to
euro).

(a) Definitions-(1) Legacy currency.
A legacy currency is the former currency
of a Member State of the European
Community which is substituted for the
euro in accordance with the Treaty estab-
lishing the European Community signed
February 7, 1992. The term legacy curren-
cy shall also include the European
Currency Unit.

(2) Conversion rate. The conversion
rate is the rate at which the euro is substi-
tuted for a legacy currency.

(b) Operative rules-(1) Initial adop-
tion. A QBU (as defined in
§1.989(a)-1(b)) whose first taxable year
begins after the euro has been substituted
for a legacy currency may not adopt a
legacy currency as its functional currency.

(2) QBU with a legacy currency as its
functional currency-(i) Required
change. A QBU with a legacy currency as
its functional currency is required to
change its functional currency to the euro
beginning the first day of the first taxable
year-

(A) That begins on or after the day that
the euro is substituted for that legacy cur-
rency (in accordance with the Treaty on
European Union); and

(B) In which the QBU begins to main-
tain its books and records (as described in
§1.989(a)-1(d)) in the euro.

(ii) Notwithstanding paragraph (b)(2)(i)
of this section, a QBU with a legacy cur-
rency as its functional currency is
required to change its functional currency
to the euro no later than the last taxable
year beginning on or before the first day
such legacy currency is no longer valid
legal tender.

(3) QBU with a non-legacy currency as
its functional currency - (i) In general.
A QBU with a non-legacy currency as its
functional currency may change its func-
tional currency to the euro pursuant to this
§1.985-8 if-

(A) Under the rules set forth in
§1.985-1(c), the euro is the currency of
the economic environment in which a sig-
nificant part of the QBU's activities are
conducted;

(B) After conversion, the QBU main-
tains its books and records (as described
in §1.989(a)-1(d)) in the euro; and

(C) The QBU is not required to use the
dollar as its functional currency under
§1.985-1(b).

(ii) Time period for change. A QBU
with a non-legacy currency as its func-
tional currency may change its functional
currency to the euro under this section
only if it does so within the period set
forth in paragraph (b)(2) of this section as
if the functional currency of the QBU was
a legacy currency.

(4) Consent of Commissioner. A change
made pursuant to paragraph (b) of this
section shall be deemed to be made with
the consent of the Commissioner for pur-
poses of §1.985-4. A QBU changing its
functional currency to the euro pursuant
to paragraph (b)(2) of this section must
make adjustments as provided in para-
graph (c) of this section. A QBU chang-
ing its functional currency to the euro pur-
suant to paragraph (b)(3) must make
adjustments as provided in §1.985-5.

(5) Statement to file upon change. With
respect to a QBU that changes its func-
tional currency to the euro under para-
graph (b) of this section, an affected tax-
payer shall attach to its return for the
taxable year of change a statement that

includes the following: "TAXPAYER
CERTIFIES THAT A QBU OF THE
TAXPAYER HAS CHANGED ITS
FUNCTIONAL CURRENCY TO THE
EURO PURSUANT TO TREAS. REG.
§1.985-8." For purposes of this paragraph
(b)(5), an affected taxpayer shall be in the
case where the QBU is: a QBU of an indi-
vidual U.S. resident (as a result of the
activities of such individual), the individ-
ual; a QBU branch of a U.S. corporation,
the corporation; a controlled foreign cor-
poration (as described in section 957)(or
QBU branch thereof), each United States
shareholder (as described in section
951(b)); a partnership, each partner sepa-
rately; a noncontrolled section 902 corpo-
ration (as described in section
904(d)(2)(E)) (or branch thereof), each
domestic shareholder as described in
§1.902-1(a)(1); or a trust or estate, the
fiduciary of such trust or estate.

(c) Adjustments required when a QBU
changes its functional currency from a
legacy currency to the euro pursuant to
paragraph (b)(2) of this section-(1) In
general. A QBU that changes its function-
al currency from a legacy currency to the
euro pursuant to paragraph (b)(2) of this
section must make the adjustments
described in paragraphs (c)(2) through (5)
of this section. Section 1.985-5 shall not
apply.

(2) Determining the euro basis of prop-
erty and the euro amount of liabilities and
other relevant items. The euro basis in
property and the euro amount of liabilities
and other relevant items shall equal the
product of the legacy functional currency
adjusted basis or amount of liabilities
multiplied by the applicable conversion
rate.

(3) Taking into account exchange gain
or loss on legacy currency section 988
transactions-(i) In general. Except as
provided in paragraphs (c)(3)(iii) and
(iv) of this section, a legacy currency
denominated section 988 transaction
(determined after applying section
988(d)) outstanding on the last day of the
taxable year immediately prior to the
year of change shall continue to be treat-
ed as a section 988 transaction after the
change and the principles of section 988
shall apply.

(ii) Examples. The application of this
paragraph (c)(3) may be illustrated by the
following examples:

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Example 1. X, a calendar year QBU on the cash
method of accounting, uses the deutschmark as its
functional currency. X is not described in section
1281(b). On July 1, 1998, X converts 10,000
deutschmarks (DM) into Dutch guilders(fl) at the spot
rate of fl1 = DM1 and loans the 10,000 guilders to Y
(an unrelated party) for one year at a rate of 10% with
principal and interest to be paid on June 30, 1999. On
January 1, 1999, X changes its functional currency to
the euro pursuant to this section. Assume that the
euro/deutschmark conversion rate is set by the
European Council at €1= DM2. Assume further that
the euro/guilder conversion rate is set at €1 = f12.25.
Accordingly, under the terms of the note, on June 30,
1999, X will receive € 4444.44 (f110,000/2.25) of
principal and € 444.44 (f11,000/2.25) of interest.
Pursuant to this paragraph (c)(3), X will realize an
exchange loss on the principal computed under the
principles of §1.988-2(b)(5). For this purpose, the
exchange rate used under §1.988-2(b)(5)(i) shall be
the guilder/euro conversion rate. The amount under
§1.988-2(b)(5)(ii) is determined by translating the
fl10,000 at the guilder/deutschmark spot rate on July
1, 1998, and translating that deutschmark amount into
euros at the deutschmark/euro conversion rate. Thus,
X will compute an exchange loss for 1999 of €
555.56 determined as follows: [€ 4444.44
(f110,000/2.25) - €5000 ((f110,000/1)/2) =
-€555.56]. Pursuant to this paragraph (c)(3), the char-
acter and source of the loss are determined pursuant to
section 988 and regulations thereunder. Because X
uses the cash method of accounting for the interest on
this debt instrument, X does not realize exchange gain
or loss on the receipt of that interest.

Example 2. (i) X, a calendar year QBU on the
accrual method of accounting, uses the deutschmark
as its functional currency. On February 1, 1998, X
converts 12,000 deutschmarks into Dutch guilders at
the spot rate of fl1 = DM1 and loans the 12,000
guilders to Y (an unrelated party) for one year at a
rate of 10% with principal and interest to be paid on
January 31, 1999. In addition, assume the average
rate (deutschmark/guilder) for the period from
February 1, 1998, through December 31, 1998 is
fl1.07 = DM1. Pursuant to §1.988-2(b)(2)(ii)(C), X
will accrue eleven months of interest on the note and
recognize interest income of DM1028.04
(fl1100/1.07) in the 1998 taxable year.

(ii) On January 1, 1999, the euro will replace the
deutschmark as the national currency of Germany
pursuant to the Treaty on European Union signed
February 7, 1992. Assume that on January 1, 1999,
X changes its functional currency to the euro pur-
suant to this section. Assume that the
euro/deutschmark conversion rate is set by the
European Council at €1 = DM2. Assume further
that the euro/guilder conversion rate is set at €1 =
fl2.25. In 1999, X will accrue one month of interest
equal to € 44.44 (f1100/2.25). On January 31, 1999,
pursuant to the note, X will receive interest denomi-
nated in euros of € 533.33 (f11200/2.25). Pursuant
to this paragraph (c)(3), X will realize an exchange
loss in the 1999 taxable year with respect to accrued
interest computed under the principles of
§1.988-2(b)(3). For this purpose, the exchange rate
used under §1.988-2(b)(3)(i) is the guilder/euro con-
version rate and the exchange rate used under
§1.988-2(b)(3)(ii) is the deutschmark/euro conver-
sion rate. Thus, with respect to the interest accrued

in 1998, X will realize exchange loss of € 25.13
under §1.988-2(b)(3) as follows: [€ 488.89
(fl1100/2.25)- € 514.02 (DM1028.04/2) = - € 25.13].
With respect to the one month of interest accrued in
1999, X will realize no exchange gain or loss since the
exchange rate when the interest accrued and the spot
rate on the payment date are the same.

(iii) X will realize exchange loss of
€ 666.67 on repayment of the loan principal com-
puted in the same manner as in Example 1 [€
5333.33 (f112,000/2.25) - € 6000 f112,000/1)/2)].
The losses with respect to accrued interest and prin-
cipal are characterized and sourced under the rules
of section 988.

(iii) Special rule for legacy nonfunc-
tional currency. The QBU shall realize or
otherwise take into account for all purpos-
es of the Internal Revenue Code the
amount of any unrealized exchange gain
or loss attributable to nonfunctional cur-
rency (as described in section 988(c)(1)
(C)(ii)) that is denominated in a legacy
currency as if the currency were disposed
of on the last day of the taxable year
immediately prior to the year of change.
The character and source of the gain or
loss are determined under section 988.

(iv) Legacy currency denominated
accounts receivable and payable-(A) In
general. A QBU may elect to realize or
otherwise take into account for all purpos-
es of the Internal Revenue Code the
amount of any unrealized exchange gain
or loss attributable to a legacy currency
denominated item described in section
988(c)(1)(B)(ii) as if the item were termi-
nated on the last day of the taxable year
ending prior to the year of change.

(B) Time and manner of election. With
respect to a QBU that makes an election
described in paragraph (c)(3)(iv)(A) of
this section, an affected taxpayer (as
described in paragraph (b)(5) of this sec-
tion) shall attach a statement to its tax
return for the taxable year ending imme-
diately prior to the year of change which
includes the following: "TAXPAYER
CERTIFIES THAT A QBU OF THE
TAXPAYER HAS ELECTED TO REAL-
IZE CURRENCY GAIN OR LOSS ON
LEGACY CURRENCY DENOMINAT-
ED ACCOUNTS RECEIVABLE AND
PAYABLE UPON CHANGE OF FUNC-
TIONAL CURRENCY TO THE EURO."
A QBU making the election must do so
for all legacy currency denominated items
described in section 988(c)(1)(B)(ii).

(4) Adjustments when a branch changes
its functional currency to the euro-(i)

Branch changing from a legacy currency to
the euro in a taxable year during which
taxpayer's functional currency is other
than the euro. If a branch changes its func-
tional currency from a legacy currency to
the euro for a taxable year during which the
taxpayer's functional currency is other than
the euro, the branch's euro equity pool
shall equal the product of the legacy cur-
rency amount of the equity pool multiplied
by the applicable conversion rate. No
adjustment to the basis pool is required.

(ii) Branch changing from a legacy cur-
rency to the euro in a taxable year during
which taxpayer's functional currency is the
euro. If a branch changes its functional cur-
rency from a legacy currency to the euro
for a taxable year during which the taxpay-
er's functional currency is the euro, the tax-
payer shall realize gain or loss attributable
to the branch's equity pool under the prin-
ciples of section 987, computed as if the
branch terminated on the last day prior to
the year of change. Adjustments under this
paragraph (c)(4)(ii) shall be taken into
account by the taxpayer ratably over four
taxable years beginning with the taxable
year of change.

(5) Adjustments to a branch's accounts
when a taxpayer changes to the euro-(i)
Taxpayer changing from a legacy curren-
cy to the euro in a taxable year during
which a branch's functional currency is
other than the euro. If a taxpayer changes
its functional currency to the euro for a
taxable year during which the functional
currency of a branch of the taxpayer is
other than the euro, the basis pool shall
equal the product of the legacy currency
amount of the basis pool multiplied by the
applicable conversion rate. No adjustment
to the equity pool is required.

(ii) Taxpayer changing from a legacy
currency to the euro in a taxable year dur-
ing which a branch's functional currency is
the euro. If a taxpayer changes its func-
tional currency from a legacy currency to
the euro for a taxable year during which the
functional currency of a branch of the tax-
payer is the euro, the taxpayer shall take
into account gain or loss as determined
under paragraph (c)(4)(ii) of this section.

(6) Additional adjustments that are nec-
essary when a corporation changes its
functional currency to the euro. The
amount of a corporation's euro currency
earnings and profits and the amount of its

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<!-- PageBreak -->

euro paid-in capital shall equal the prod-
uct of the legacy currency amounts of
these items multiplied by the applicable
conversion rate. The foreign income taxes
and accumulated profits or deficits in
accumulated profits of a foreign corpora-
tion that were maintained in foreign cur-
rency for purposes of section 902 and that
are attributable to taxable years of the for-
eign corporation beginning before
January 1, 1987, also shall be translated
into the euro at the conversion rate.

(d) Treatment of legacy currency sec-
tion 988 transactions with respect to a
QBU that has the euro as its functional
currency-(1) In general. This
§1.985-8(d) applies to a QBU that has the
euro as its functional currency and that
holds a section 988 transaction denomi-
nated in, or determined by reference to, a
currency that is substituted by the euro.
For example, this paragraph (d) will apply
to a German QBU with the euro as its
functional currency if the QBU is holding
Country X currency or other section 988
transactions denominated in such curren-
cy on the day in the year 2005 when the
euro is substituted for the Country X cur-
rency.

(2) Principles of paragraph (c)(3) of
this section shall apply. With respect to a
QBU described in paragraph (d) of this
section, the principles of paragraph (c)(3)
of this section shall apply. For example, if
a German QBU with the euro as its func-
tional currency is holding a Country X
currency denominated debt instrument on
the day in the year 2005 when the euro is
substituted for the Country X currency,
the instrument shall continue to be treated
as a section 988 transaction pursuant to
the principles of paragraph (c)(3)(i) of this
section. However, if such QBU holds
Country X currency, the QBU shall take
into account any unrealized exchange
gain or loss pursuant to the principles of
paragraph (c)(3)(iii) of this section as if
the currency was disposed of on the day
prior to the day the euro is substituted for
the Country X currency. Similarly, if the
QBU makes an election under the princi-
ples of paragraph (c)(3)(iv) of this section,

the QBU shall take into account for all
purposes of the Internal Revenue Code
the amount of any unrealized exchange
gain or loss attributable to a legacy cur-
rency denominated item described in sec-
tion 988(c)(1)(B)(ii) as if the item were
terminated on the day prior to the day the
euro is substituted for the Country X cur-
rency.

(e) Effective date. This section applies
to tax years ending after July 29, 1998.

## §1.985-8T [Removed]

Par.5. Section 1.985-8T is removed.

Par.6. Section 1.1001-5 is added to
read as follows:

§1.1001-5 European Monetary Union
(conversion to the euro).

(a) Conversion of currencies. For pur-
poses of §1.1001-1(a), the conversion to
the euro of legacy currencies (as defined
in §1.985-8(a)(1)) is not the exchange of
property for other property differing
materially in kind or extent.

(b) Effect of currency conversion on
other rights and obligations. For purposes
of §1.1001-1(a), if, solely as the result of
the conversion of legacy currencies to the
euro, rights or obligations denominated in
a legacy currency become rights or oblig-
ations denominated in the euro, that event
is not the exchange of property for other
property differing materially in kind or
extent. Thus, for example, when a debt
instrument that requires payments of
amounts denominated in a legacy curren-
cy becomes a debt instrument requiring
payments of euros, that alteration is not a
modification within the meaning of
§1.1001-3(c).

(c) Effective date. This section applies
to tax years ending after July 29, 1998.

## §1.1001-5T [Removed]

Par. 7. Section 1.1001-5T is removed.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

Approved December 12, 2000.

Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.

(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R.
2215)

Section 1274 .- Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property

(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;
adjusted federal long-term rate; and
the long-term exempt rate. For purposes
of sections 382, 1274, 1288, and other
sections of the Code, tables set forth the
rates for March 2001.

## Rev. Rul. 2001-12

This revenue ruling provides various
prescribed rates for federal income tax
purposes for March 2001 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 con-
tains the short-term, mid-term, and long-
term adjusted applicable federal rates
(adjusted AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4 con-
tains the appropriate percentages for
determining the low-income housing
credit described in section 42(b)(2) for
buildings placed in service during the
current month. Finally, Table 5 contains
the federal rate for determining the pre-
sent value of an annuity, an interest for
life or for a term of years, or a remainder
or a reversionary interest for purposes of
section 7520.

<!-- PageFooter="2001-11 I.R.B." -->

<!-- PageFooter="March 12, 2001" -->
<!-- PageBreak -->

REV. RUL. 2001-12 TABLE 1 Applicable Federal Rates (AFR) for March 2001 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-Term

AFR

4.86%

4.80%

4.77%

4.75%

110% AFR

5.35%

5.28%

5.25%

5.22%

120% AFR

5.84%

5.76%

5.72%

5.69%

130% AFR

6.34%

6.24%

6.19%

6.16%

Mid-Term

AFR

5.07%

5.01%

4.98%

4.96%

110% AFR

5.59%

5.51%

5.47%

5.45%

120% AFR

6.10%

6.01%

5.97%

5.94%

130% AFR

6.62%

6.51%

6.46%

6.42%

150% AFR

7.66%

7.52%

7.45%

7.40%

175% AFR

8.96%

8.77%

8.68%

8.61%

Long-Term

AFR

5.58%

5.50%

5.46%

5.44%

110% AFR

6.14%

6.05%

6.00%

5.98%

120% AFR

6.71%

6.60%

6.55%

6.51%

130% AFR

7.28%

7.15%

7.09%

7.05%

REV. RUL. 2001-12 TABLE 2 Adjusted AFR for March 2001 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR Mid-term adjusted AFR Long-term adjusted AFR

3.44%

3.41%

3.40%

3.39%

3.98%

3.94%

3.92%

3.91%

4.87%

4.81%

4.78%

4.76%

REV. RUL. 2001-12 TABLE 3
Rates Under Section 382 for March 2001

### Adjusted federal long-term rate for the current month

4.87%

Long-term tax-exempt rate for ownership changes during
the current month (the highest of the adjusted federal long-term
rates for the current month and the prior two months.)

5.24%

#### REV. RUL. 2001-12 TABLE 4

#### Appropriate Percentages Under Section 42(b)(2) for March 2001

Appropriate percentage for the 70% present value low-income housing credit

8.24%

Appropriate percentage for the 30% present value low-income housing credit

3.53%

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<!-- PageFooter="2001-11 I.R.B." -->
<!-- PageBreak -->

<!-- PageHeader="REV. RUL. 2001-12 TABLE 5 Rate Under Section 7520 for March 2001" -->

Applicable federal rate for determining the present value of an annuity,
an interest for life or a term of years, or a remainder or reversionary interest

6.2%

##### Section 1288 .- Treatment of Original Issue Discounts on Tax- Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12 page 811.

###### Section 7502 .- Timely Mailing Treated as Timely Filing and Paying

26 CFR 301.7502-1: Timely mailing of documents
and payments treated as timely filing and paying.

T.D. 8932

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301

####### Timely Mailing Treated as Timely Filing/Electronic Postmark

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations; and removal
of temporary regulations.

SUMMARY: This document contains
regulations relating to timely mailing
treated as timely filing and paying under
section 7502 of the Internal Revenue
Code. The regulations generally reflect
changes to the law made since 1960. In
addition, the regulations provide that the
date of an electronic postmark will be the
filing date under certain circumstances.
The regulations affect taxpayers who file
documents or make payments or deposits.

DATES: Effective Date: These regulations
are effective January 11, 2001.

Applicability Date: For dates of applic-
ability, see §§301.7502-1(g) and
301.7502-2(e).

FOR FURTHER INFORMATION CON-
TACT: Charles A. Hall, (202) 622-4940
(not a toll-free number).

SUPPLEMENTARY INFORMATION:
Background

This document contains amendments to
the Regulations on Procedure and
Administration (26 CFR part 301) under
section 7502 relating to timely mailing
treated as timely filing and paying. A
notice of proposed rulemaking
(REG-115433-98, 1999-1 C.B. 651) was
published in the Federal Register (64
F.R. 2606) on January 15, 1999.
Temporary regulations (T.D. 8807,
1999-1 C.B. 630) relating to electronic
postmarks for electronically filed income
tax returns were published in the Federal
Register for the same day (64 F.R. 2568).
No public hearing was requested or held.
No comments were received from the
public in response to the notice of pro-
posed rulemaking. The proposed regula-
tions under section 7502 are adopted as
revised by this Treasury decision and the
corresponding temporary regulations are
removed. The revisions are discussed
below.

## Explanation of Revisions

In the notice of proposed rulemaking,
the IRS and the Treasury Department
requested comments regarding whether
section 7502 should apply to claims for
credit or refund made on late filed original
income tax returns. No comments were
received on this issue. However, the IRS
and the Treasury Department have deter-
mined that, in certain situations, a claim
for credit or refund made on a late filed
original income tax return should be treat-
ed under section 7502 as timely filed on
the postmark date for purposes of section
6511(b)(2)(A). This is consistent with the

opinion of the United States Court of
Appeals for the Second Circuit in
Weisbart v. United States Department of
Treasury and Internal Revenue Service,
222 F.3d 93 (2d Cir. 2000), rev'g 99-1
USTC (CCH) 1 50,549 (E.D.N.Y. 1999),
AOD-CC-2000-09 (Nov. 13, 2000).

The IRS and the Treasury Department
have further determined that claims for
credit or refund made on late filed original
tax returns other than income tax returns
should also be treated under section 7502
as timely filed on the postmark date for
purposes of section 6511(b)(2)(A). This
would include returns such as Form 720,
Quarterly Federal Excise Tax Return, and
Form 706, U.S. Estate Tax Return.
Moreover, the IRS and the Treasury
Department have determined that the late
filed original tax return, as well as the
claim for credit or refund, should also be
treated as filed on the postmark date.
These changes, which are reflected in
§301.7502-1(f), will assist taxpayers in
filing timely claims for credit or refund,
and will be applied retroactively to certain
previously disallowed claims for credit or
refund.

These changes are effective for any
claim for credit or refund on a late filed
tax return described in §301.7502-1(f)(1)
except for those claims for credit or
refund which (without regard to para-
graph (f) of this section) were barred by
the operation of section 6532(a) or any
other law or rule of law (including res
judicata) as of January 11, 2001. See
§301.7502-1(g)(2), which provides the
effective date rules for §301.7502-1(f).

Consistent with the effective date rules
for §301.7502-1(f), the IRS will attempt
to identify as many claims as possible that
were filed on untimely original individual
income tax returns and that were previ-
ously disallowed based on the
Government's position in Weisbart. In

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these cases, the IRS intends to issue a
refund, or credit the overpayment against
a liability as provided in section 6402,
without the need for the taxpayer to con-
tact the IRS. Such automatic reconsidera-
tion of the claim will generally occur if
the claim was filed on an individual
income tax return for 1995 or a subse-
quent calendar year. Claims filed on other
types of original returns will not receive
automatic reconsideration under this pro-
gram, e.g., individual returns for years
prior to 1995.

Because the IRS will be undertaking
the automatic reconsideration program
described above and intends to complete
the program by June 30, 2001, taxpayers
who have filed income tax refund claims
for tax year 1995 and later years that qual-
ify under §301.7502-1(f) need not contact
the IRS regarding their claims unless the
two-year period for filing a refund suit
under section 6532(a) for their denied
claim will expire prior to June 30, 2001.
In such cases, taxpayers are advised to file
a request for reconsideration with the
appropriate IRS Service Center. Such a
request should include a notation on the
top of the first page that it is a "Weisbart
Claim." Such taxpayers are also advised
to file a refund suit to protect their legal
rights with respect to the claim. The IRS
will respond to the requests for reconsid-
eration after the IRS has finished identify-
ing eligible claims under the automatic
reconsideration program and paying those
refunds. Taxpayers whose two-year peri-
od for filing a refund suit under section
6532(a) does not expire until after June
30, 2001, and who have not received a
refund by that date, are advised to file a
request for reconsideration with the
appropriate IRS Service Center at that
time.

## Special Analyses

It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the 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 Charles A. Hall of the Office of
Associate Chief Counsel, Procedure
and Administration (Administrative
Provisions and Judicial Practice
Division). However, other personnel
from the IRS and Treasury Department
participated in their development.

* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is
amended as follows:

PART 301-PROCEDURE AND
ADMINISTRATION

Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read as follows:

Authority: 26 U.S.C. 7805

Section 301.7502-1 also issued under
26 U.S.C. 7502.

Section 301.7502-2 also issued under
26 U.S.C. 7502. * * *

Par. 2. Section 301.7502-1 is revised
to read as follows:

§301.7502-1 Timely mailing of
documents and payments treated as
timely filing and paying.

(a) General rule. Section 7502 pro-
vides that, if the requirements of that sec-
tion are met, a document or payment is
deemed to be filed or paid on the date of
the postmark stamped on the envelope or
other appropriate wrapper (envelope) in
which the document or payment was
mailed. Thus, if the envelope that con-
tains the document or payment has a time-
ly postmark, the document or payment is
considered timely filed or paid even if it is
received after the last date, or the last day
of the period, prescribed for filing the
document or making the payment.
Section 7502 does not apply in determin-
ing whether a failure to file a return or pay
a tax has continued for an additional
month or fraction thereof for purposes of

computing the penalties and additions to
tax imposed by section 6651. Except as
provided in section 7502(e) and
§301.7502-2, relating to the timely mail-
ing of deposits, and paragraph (d) of this
section, relating to electronically filed
documents, section 7502 is applicable
only to those documents or payments as
defined in paragraph (b) of this section
and only if the document or payment is
mailed in accordance with paragraph (c)
of this section and is delivered in accor-
dance with paragraph (e) of this section.

(b) Definitions-(1) Document defined.
(i) The term document, as used in this sec-
tion, means any return, claim, statement,
or other document required to be filed
within a prescribed period or on or before
a prescribed date under authority of any
provision of the internal revenue laws,
except as provided in paragraph (b)(1)(ii),
(iii), or (iv) of this section.

(ii) The term does not include returns,
claims, statements, or other documents
that are required under any provision of
the internal revenue laws or the regula-
tions thereunder to be delivered by any
method other than mailing.

(iii) The term does not include any doc-
ument filed in any court other than the Tax
Court, but the term does include any doc-
ument filed with the Tax Court, including
a petition and a notice of appeal of a deci-
sion of the Tax Court.

(iv) The term does not include any doc-
ument that is mailed to an authorized
financial institution under section 6302.
However, see §301.7502-2 for special
rules relating to the timeliness of deposits
and documents required to be filed with
deposits.

(2) Claims for refund. In the case of cer-
tain taxes, a return may constitute a claim
for credit or refund. In such a case, section
7502 is applicable to the claim for credit or
refund if the conditions of such section are
met, irrespective of whether the claim is
also a return. For rules regarding claims
for refund on late filed tax returns, see
paragraph (f) of this section.

(3) Payment defined. (i) The term pay-
ment, as used in this section, means any
payment required to be made within a pre-
scribed period or on or before a prescribed
date under the authority of any provision
of the internal revenue laws, except as
provided in paragraph (b)(3)(ii), (iii), (iv),
or (v) of this section.

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(ii) The term does not include any pay-
ment that is required under any provision
of the internal revenue laws or the regula-
tions thereunder to be delivered by any
method other than mailing. See, for
example, section 6302(h) and the regula-
tions thereunder regarding electronic
funds transfer.

(iii) The term does not include any pay-
ment, whether it is made in the form of
currency or other medium of payment,
unless it is actually received and account-
ed for. For example, if a check is used as
the form of payment, this section does not
apply unless the check is honored upon
presentation.

(iv) The term does not include any pay-
ment to any court other than the Tax
Court.

(v) The term does not include any
deposit that is required to be made with an
authorized financial institution under sec-
tion 6302. However, see §301.7502-2 for
rules relating to the timeliness of deposits.

(4) Last date or last day prescribed. As
used in this section, the term the last date,
or the last day of the period, prescribed
for filing the document or making the pay-
ment includes any extension of time
granted for that action. When the last
date, or the last day of the period, pre-
scribed for filing the document or making
the payment falls on a Saturday, Sunday
or legal holiday, section 7503 applies.
Therefore, in applying the rules of this
paragraph (b)(4), the next succeeding day
that is not a Saturday, Sunday, or legal
holiday is treated as the last date, or the
last day of the period, prescribed for filing
the document or making the payment.
Also, when the last date, or the last day of
the period, prescribed for filing the docu-
ment or making the payment falls within a
period disregarded under section 7508 or
section 7508A, the next succeeding day
after the expiration of the section 7508
period or section 7508A period that is not
a Saturday, Sunday, or legal holiday is
treated as the last date, or the last day of
the period, prescribed for filing the docu-
ment or making the payment.

(c) Mailing requirements-(1) In gen-
eral. Section 7502 does not apply unless
the document or payment is mailed in
accordance with the following require-
ments:

(i) Envelope and address. The docu-
ment or payment must be contained in an

envelope, properly addressed to the
agency, officer, or office with which the
document is required to be filed or to
which the payment is required to be made.

(ii) Timely deposited in U.S. mail. The
document or payment must be deposited
within the prescribed time in the mail in
the United States with sufficient postage
prepaid. For this purpose, a document or
payment is deposited in the mail in the
United States when it is deposited with
the domestic mail service of the U.S.
Postal Service. The domestic mail service
of the U.S. Postal Service, as defined by
the Domestic Mail Manual as incorporat-
ed by reference in the postal regulations,
includes mail transmitted within, among,
and between the United States of
America, its territories and possessions,
and Army post offices (APO), fleet post
offices (FPO), and the United Nations,
NY. (See Domestic Mail Manual, section
G011.2.1, as incorporated by reference in
39 CFR 111.1.) Section 7502 does not
apply to any document or payment that is
deposited with the mail service of any
other country.

(iii) Postmark-(A) U.S. Postal
Service postmark. If the postmark on the
envelope is made by the U.S. Postal
Service, the postmark must bear a date on
or before the last date, or the last day of
the period, prescribed for filing the docu-
ment or making the payment. If the post-
mark does not bear a date on or before the
last date, or the last day of the period, pre-
scribed for filing the document or making
the payment, the document or payment is
considered not to be timely filed or paid,
regardless of when the document or pay-
ment is deposited in the mail.
Accordingly, the sender who relies upon
the applicability of section 7502 assumes
the risk that the postmark will bear a date
on or before the last date, or the last day
of the period, prescribed for filing the
document or making the payment. See,
however, paragraph (c)(2) of this section
with respect to the use of registered mail
or certified mail to avoid this risk. If the
postmark on the envelope is made by the
U.S. Postal Service but is not legible, the
person who is required to file the docu-
ment or make the payment has the burden
of proving the date that the postmark was
made. Furthermore, if the envelope that
contains a document or payment has a
timely postmark made by the U.S. Postal

Service, but it is received after the time
when a document or payment postmarked
and mailed at that time would ordinarily
be received, the sender may be required to
prove that it was timely mailed.

(B) Postmark made by other than U.S.
Postal Service-(1) In general. If the
postmark on the envelope is made other
than by the U.S. Postal Service-

(i) The postmark so made must bear a
legible date on or before the last date, or
the last day of the period, prescribed for
filing the document or making the pay-
ment; and

(ii) The document or payment must be
received by the agency, officer, or office
with which it is required to be filed not
later than the time when a document or
payment contained in an envelope that is
properly addressed, mailed, and sent by
the same class of mail would ordinarily be
received if it were postmarked at the same
point of origin by the U.S. Postal Service
on the last date, or the last day of the peri-
od, prescribed for filing the document or
making the payment.

(2) Document or payment received late.
If a document or payment described in
paragraph (c)(1)(iii)(B)(1) is received
after the time when a document or pay-
ment so mailed and so postmarked by the
U.S. Postal Service would ordinarily be
received, the document or payment is
treated as having been received at the time
when a document or payment so mailed
and so postmarked would ordinarily be
received if the person who is required to
file the document or make the payment
establishes-

(i) That it was actually deposited in the
U.S. mail before the last collection of mail
from the place of deposit that was post-
marked (except for the metered mail) by
the U.S. Postal Service on or before the
last date, or the last day of the period, pre-
scribed for filing the document or making
the payment;

(ii) That the delay in receiving the doc-
ument or payment was due to a delay in
the transmission of the U.S. mail; and

(iii) The cause of the delay.

(3) U.S. and non-U.S. postmarks. If the
envelope has a postmark made by the U.S.
Postal Service in addition to a postmark
not so made, the postmark that was not
made by the U.S. Postal Service is disre-
garded, and whether the envelope was
mailed in accordance with this paragraph

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(c)(1)(iii)(B) will be determined solely by
applying the rule of paragraph
(c)(1)(iii)(A) of this section.

(2) Registered or certified mail. If the
document or payment is sent by U.S. reg-
istered mail, the date of registration of the
document or payment is treated as the
postmark date. If the document or pay-
ment is sent by U.S. certified mail and the
sender's receipt is postmarked by the
postal employee to whom the document
or payment is presented, the date of the
U.S. postmark on the receipt is treated as
the postmark date of the document or pay-
ment. Accordingly, the risk that the docu-
ment or payment will not be postmarked
on the day that it is deposited in the mail
may be eliminated by the use of registered
or certified mail.

(d) Electronically filed documents-(1)
In general. A document filed electroni-
cally with an electronic return transmitter
(as defined in paragraph (d)(3)(i) of this
section and authorized pursuant to para-
graph (d)(2) of this section) in the manner
and time prescribed by the Commissioner
is deemed to be filed on the date of the
electronic postmark (as defined in para-
graph (d)(3)(ii) of this section) given by
the authorized electronic return transmit-
ter. Thus, if the electronic postmark is
timely, the document is considered filed
timely although it is received by the
agency, officer, or office after the last
date, or the last day of the period, pre-
scribed for filing such document.

(2) Authorized electronic return trans-
mitters. The Commissioner may enter into
an agreement with an electronic return
transmitter or prescribe in forms, instruc-
tions, or other appropriate guidance the
procedures under which the electronic
return transmitter is authorized to provide
taxpayers with an electronic postmark to
acknowledge the date and time that the
electronic return transmitter received the
electronically filed document.

(3) Definitions-(i) Electronic return
transmitter. For purposes of this para-
graph (d), the term electronic return
transmitter has the same meaning as con-
tained in section 3.01(4) of Rev. Proc.
2000-31 (2000-31 I.R.B. 146 (July 31,
2000))(see §601.601(d)(2) of this chapter)
or in procedures prescribed by the
Commissioner.

(ii) Electronic postmark. For purposes
of this paragraph (d), the term electronic

postmark means a record of the date and
time (in a particular time zone) that an
authorized electronic return transmitter
receives the transmission of a taxpayer's
electronically filed document on its host
system. However, if the taxpayer and the
electronic return transmitter are located in
different time zones, it is the taxpayer's
time zone that controls the timeliness of
the electronically filed document.

(e) Delivery-(1) Except as provided in
section 7502(f) and paragraph (d) of this
section, section 7502 is not applicable
unless the document or payment is deliv-
ered by U.S. mail to the agency, officer, or
office with which the document is
required to be filed or to which payment is
required to be made. However, in the case
of a document (but not a payment) sent by
registered or certified mail, proof that the
document was properly registered or that
a postmarked certified mail sender's
receipt was properly issued and that the
envelope was properly addressed to the
agency, officer, or office constitutes prima
facie evidence that the document was
delivered to the agency, officer, or office.

(2) Section 7502 is applicable to the
determination of whether a claim for cred-
it or refund is timely filed for purposes of
section 6511(a), assuming all the require-
ments of section 7502 are satisfied.
Section 7502 is also applicable when a
claim for credit or refund is delivered
after the last day of the period specified in
section 6511(b)(2)(A) or in any other cor-
responding provision of law relating to
the limit on the amount of credit or refund
that is allowable.

(3) Example. The rules of paragraph
(e)(2) of this section are illustrated by the
following example:

Example. (i) Taxpayer A, an individual, mailed
his 1998 Form 1040, "U.S. Individual Income Tax
Return," on May 10, 1999, but no tax was paid at
that time because the tax liability disclosed by the
return had been completely satisfied by the income
tax that had been withheld on A's wages. On April
15, 2002, A mails in accordance with the require-
ments of this section, a Form 1040X, "U.S.
Amended Individual Income Tax Return," claiming
a refund of a portion of the tax that had been paid
through withholding during 1998. The date of the
postmark on the envelope containing the claim for
refund is April 15, 2002. The claim is received by
the Internal Revenue Service (IRS) on April 18,
2002.

(ii) Under section 6511(a), A's claim for refund is
timely if filed within three years from May 10, 1999,
the date on which A's 1998 return was filed.
However, as a result of the limitations of section

6511(b)(2)(A), if his claim is not filed within three
years after April 15, 1999, the date on which he is
deemed under section 6513 to have paid his 1998
tax, he is not entitled to any refund. Thus, because
A's claim for refund is postmarked and mailed in
accordance with the requirements of this section and
is delivered after the last day of the period specified
in section 6511(b)(2)(A), section 7502 is applicable
and the claim is deemed to have been filed on April
15, 2002.

(f) Claim for credit or refund on late
filed tax return-(1) In general.
Generally, an original income tax return
may constitute a claim for credit or refund
of income tax. See §301.6402-3(a)(5).
Other original tax returns can also be con-
sidered claims for credit or refund if the
liability disclosed on the return is less
than the amount of tax that has been paid.
If section 7502 would not apply to a
return (but for the operation of paragraph
(f)(2) of this section) that is also consid-
ered a claim for credit or refund because
the envelope that contains the return does
not have a postmark dated on or before
the due date of the return, section 7502
will apply separately to the claim for cred-
it or refund if-

(i) The date of the postmark on the
envelope is within the period that is three
years (plus the period of any extension of
time to file) from the day the tax is paid or
considered paid (see section 6513), and
the claim for credit or refund is delivered
after this three-year period; and

(ii) The conditions of section 7502 are
otherwise met.

(2) Filing date of late filed return. If
the conditions of paragraph (f)(1) of this
section are met, the late filed return will
be deemed filed on the postmark date.

(3) Example. The rules of this para-
graph (f) are illustrated by the following
example:

Example. (i) Taxpayer A, an individual, mailed
his 2001 Form 1040, "U.S. Individual Income Tax
Return," on April 15, 2005, claiming a refund of
amounts paid through withholding during 2001. The
date of the postmark on the envelope containing the
return and claim for refund is April 15, 2005. The
return and claim for refund are received by the
Internal Revenue Service (IRS) on April 18, 2005.
Amounts withheld in 2001 exceeded A's tax liability
for 2001 and are treated as paid on April 15, 2002,
pursuant to section 6513.

(ii) Even though the date of the postmark on the
envelope is after the due date of the return, the claim
for refund and the late filed return are treated as filed
on the postmark date for purposes of this paragraph
(f). Accordingly, the return will be treated as filed on
April 15, 2005. In addition, the claim for refund will
be treated as timely filed on April 15, 2005. Further,
the entire amount of the refund attributable to with-

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holding is allowable as a refund under section
6511(b)(2)(A).

(g) Effective date-(1) In general.
Except as provided in paragraphs (g)(2)
and (3) of this section, the rules of this
section apply to any payment or document
mailed and delivered in accordance with
the requirements of this section in an
envelope bearing a postmark dated after
January 11, 2001.

(2) Claim for credit or refund on late
filed tax return. Paragraph (f) of this sec-
tion applies to any claim for credit or
refund on a late filed tax return described
in paragraph (f)(1) of this section except
for those claims for credit or refund which
(without regard to paragraph (f) of this
section) were barred by the operation of
section 6532(a) or any other law or rule of
law (including res judicata) as of January
11, 2001.

(3) Electronically filed documents.
This section applies to any electronically
filed return, claim, statement, or other
document transmitted to an electronic
return transmitter that is authorized to
provide an electronic postmark pursuant
to paragraph (d)(2) of this section after
January 11, 2001.

§301.7502-1T [Removed]

Par. 3. Section 301.7502-1T is
removed.

Par. 4. Section 301.7502-2 is added to
read as follows:

§301.7502-2 Timely mailing of deposits.

(a) General rule-(1) Two day rule.
Section 7502(e) provides that, if the
requirements of that section are met, a
deposit is deemed to be received on the
date the deposit was mailed even though it
is received after the date prescribed for
making the deposit. The requirements of
the section are met if the person required
to make the deposit establishes that the
date of mailing was on or before the sec-
ond day preceding the date prescribed for
making the deposit. If the date of mailing
was not established to be on or before the
second day preceding the date prescribed

for making the deposit, the deposit will
not be considered timely received unless
it is actually received on or before the date
prescribed for making the deposit.
Section 7502(e) only applies to a deposit
mailed to the financial institution autho-
rized to receive that deposit. Thus, sec-
tion 7502(e) does not apply to any remit-
tance mailed to an internal revenue
service center.

(2) Deposits of $20,000 or more.
Paragraph (a)(1) of this section does not
apply with respect to any deposit of
$20,000 or more by any person required
to deposit any tax more than once a
month. Any such deposit must be made
by the due date for such deposit, regard-
less of the method of delivery.

(b) Deposit defined. The term deposit,
as used in this section, means any deposit
of tax required to be made on or before a
prescribed date at an authorized financial
institution pursuant to regulations pre-
scribed under section 6302.

(c) Mailing requirements-(1) In gen-
eral. Section 7502(e) does not apply
unless the deposit is mailed in accordance
with the requirements of paragraph (c)(2)
of this section.

(2) Requirements. The date of mailing
must fall on or before the second day pre-
ceding the prescribed date for making a
deposit (including any extension of time
granted for making the deposit). For
example, if a deposit is due on or before
January 15, the date of mailing must fall
on or before January 13. The deposit
must be contained in an envelope or other
appropriate wrapper approved for use in
the mails by the U.S. Postal Service, prop-
erly addressed to the financial institution
authorized to receive the deposit. The
deposit must be deposited with sufficient
postage prepaid in the mail in the United
States within the meaning of §301.7502-1
on or before the second day preceding the
prescribed date for making a deposit.

(3) Registered and certified mail. The
provisions of §301.7502-1(c)(2) apply to
a deposit sent by U.S. registered mail or
U.S. certified mail as if the deposit were a

payment, except that the date of registra-
tion or the date of the postmark on the
sender's receipt is considered the date of
mailing of such deposit.

(d) Delivery. Section 7502(e) does not
apply unless a deposit is actually delivered
by U.S. mail to the authorized financial insti-
tution with which the deposit is required to
be made and is accepted by that financial
institution. For rules relating to the accep-
tance of deposits by authorized financial
institutions see 31 CFR 203.18. The fact that
a deposit is sent by U.S. registered or U.S.
certified mail does not constitute prima facie
evidence that the deposit was delivered to the
financial institution authorized to receive the
deposit. Section 7502(e) does not apply
unless the deposit is delivered after the date
prescribed for making the deposit.

(e) Effective date. This section applies
to all deposits required to be made after
January 11, 2001.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

Approved December 21, 2000.

Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.

(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R.
2257)

## Section 7520 .- Valuation Tables

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12 page 811.

## Section 7872 .- Treatment of Loans with Below-Market Interest Rates

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001-12 page 811.

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## Part III. Administrative, Procedural, and Miscellaneous

### Weighted Average Interest Rate Update

#### Notice 2001-20

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
Omnibus 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
Treasury Constant Maturities for January
2001 is 5.54 percent.

The following rates were determined
for the plan years beginning in the month
shown below.

Month

Year

Weighted Average

90% to 105% Permissible Range

90% to 110% Permissible Range

February

2001

5.89

5.30 to 6.19

5.30 to 6.48

#### Drafting Information

The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please call Mr. Newman at
(202) 283-9702 (not a toll-free number).

### Low-Income Housing Tax Credit-2001 Calendar Year Resident Population Estimates

#### Notice 2001-21

This notice informs (1) state and local
housing credit agencies that allocate low-
income housing tax credits under § 42 of
the Internal Revenue Code and (2) states

and other issuers of tax-exempt private
activity bonds under § 141, of the proper
population figures to be used for calculating
the 2001 calendar year population-based
component of the state housing credit ceil-
ing (Credit Ceiling) under § 42(h)(3)(C)(ii)
and the 2001 calendar year volume cap
(Volume Cap) under § 146.

The population figures both for the
population-based component of the Credit
Ceiling and for the Volume Cap are deter-
mined by reference to § 146(j). That sec-
tion provides generally that determina-
tions of population for any calendar year
are made on the basis of the most recent
census estimate of the resident population
of a state (or issuing authority) released
by the Bureau of the Census before the
beginning of such calendar year.

The proper population figures for cal-
culating the Credit Ceiling and the
Volume Cap for the 2001 calendar year
are the resident population of the 50
states, the District of Columbia, and
Puerto Rico, released by the Bureau of the
Census on December 28, 2000, in Press
Release CB00-CN.65. The proper popu-
lation figures for calculating the Credit
Ceiling and the Volume Cap for the 2001
calendar year for the insular areas
(American Samoa, Guam, Northern
Mariana Islands, and U.S. Virgin Islands)
are the estimates of the resident popula-
tion for July 1, 1999, released by the
Bureau of the Census on December 29,
1999, in Press Release CB99-254. For
convenience, the CB00-CN.65 and CB99-
254 figures are reprinted below.

Resident Population Figures

Alabama

4,447,100

Alaska

626,932

American Samoa

63,781

Arizona

5,130,632

Arkansas

2,673,400

California

33,871,648

Colorado

4,301,261

Connecticut

3,405,565

Delaware

783,600

D.C.

572,059

Florida

15,982,378

Georgia

8,186,453

Guam

151,968

Hawaii

1,211,537

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Idaho

1,293,953

Illinois

12,419,293

Indiana

6,080,485

Iowa

2,926,324

Kansas

2,688,418

Kentucky

4,041,769

Louisiana

4,468,976

Maine

1,274,923

Maryland

5,296,486

Massachusetts

6,349,097

Michigan

9,938,444

Minnesota

4,919,479

Mississippi

2,844,658

Missouri

5,595,211

Montana

902,195

Nebraska

1,711,263

Nevada

1,998,257

New Hampshire

1,235,786

New Jersey

8,414,350

New Mexico

1,819,046

New York

18,976,457

North Carolina

8,049,313

North Dakota

642,200

Northern Mariana Islands

69,216

Ohio

11,353,140

Oklahoma

3,450,654

Oregon

3,421,399

Pennsylvania

12,281,054

Puerto Rico

3,808,610

Rhode Island

1,048,319

South Carolina

4,012,012

South Dakota

754,844

Tennessee

5,689,283

Texas

20,851,820

U.S. Virgin Islands

119,615

Utah

2,233,169

Vermont

608,827

Virginia

7,078,515

Washington

5,894,121

West Virginia

1,808,344

Wisconsin

5,363,675

Wyoming

493,782

The principal authors of this notice are
Christopher J. Wilson of the Office of
Associate Chief Counsel (Passthroughs

and Special Industries) and Timothy L.
Jones of the Office of Associate Chief
Counsel (Tax Exempt and Government

Entities). For further information regard-
ing this notice contact Mr. Wilson at (202)
622-3040 (not a toll-free call).

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## Part IV. Items of General Interest

Notice of Proposed Rulemaking
and Notice of Public Hearing

Source of Income From Certain
Space and Ocean Activities;
Also, Source of
Communications Income

REG-106030-98

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing and notice of public hearing.

SUMMARY: This document contains
proposed regulations under section 863(d)
governing the source of income from cer-
tain space and ocean activities. It also
contains proposed regulations under sec-
tions 863(a), (d), and (e) governing the
source of income from certain communi-
cations activity. This document also con-
tains proposed regulations under sections
863(a) and (b), amending the regulations
in §1.863-3 to conform those regulations
with these proposed regulations. This
document affects persons who conduct
activities in space, or on or under water
not within the jurisdiction of a foreign
country, possession of the United States,
or the United States (collectively, in inter-
national water). This document also
affects persons who derive income from
transmission of communications. In addi-
tion, this document provides notice of a
public hearing on these proposed regula-
tions.

DATES: Comments and outlines of oral
comments to be presented at the public
hearing scheduled for March 28, 2001, at
10 a.m. must be received by March 7,
2001.

ADDRESSES: Send submissions to:
CC:M&SP:RU (Reg-106030-98), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 5 p.m. to: CC:M&SP:RU
(REG-106030-98), Courier's Desk,
Internal Revenue Service, 1111 Constitu-
tion Avenue NW., Washington, DC.
Alternatively, taxpayers may submit com-
ments electronically via the Internet by

selecting the "Tax Regs" option on the IRS
Home Page, or by submitting comments
directly to the IRS Internet site at:
http://www.irs.ustreas.gov/tax_regs/regslist.
html. The public hearing will be held in the
auditorium, seventh floor, Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC.

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Anne
Shelburne, (202) 874-1490; concerning
submissions and the hearing, and/or to be
placed on the building access list to attend
the hearing, La Nita Van Dyke, (202) 622-
7180 (not toll-free numbers).

## SUPPLEMENTARY INFORMATION:

### Paperwork Reduction Act

The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of
Management and Budget (OMB) for
review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)).

Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC
20224. Comments on the collection of
information should be received by April
17, 2001. Comments are specifically
requested concerning:

Whether the proposed collection of infor-
mation is necessary for the proper perfor-
mance of the functions of the IRS, includ-
ing whether the information will have
practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information (see below);

How the quality, utility, and clarity of the
information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs and
costs of operation, maintenance, and
purchase of services to provide informa-
tion.

The collection of information require-
ments are in proposed §1.863-8(g) and in
§1.863-9(g). This information is required
by the IRS to monitor compliance with
the federal tax rules for determining the
source of income from space or ocean
activities, or from transmission of com-
munications. The likely respondents are
taxpayers who conduct space or ocean
activities, or who derive communications
income. Responses to this collection of
information are required to properly
determine the source of a taxpayer's
income from such transactions.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

Estimated total annual reporting/record-
keeping burden: 1,200 hours. The esti-
mated annual burden per respondent
varies from 3 hours to 7 hours, depending
on individual circumstances, with an esti-
mated average of 5 hours.

Estimated number of respondents: 250
Estimated annual frequency of responses:
One time per year.

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.

### Background

This document contains proposed regu-
lations relating to the Income Tax
Regulations (CFR part 1) under sections
863(a), (b), (d), and (e) of the Internal
Revenue Code (Code). Congress enacted
section 863(d) and section 863(e) as part
of the Tax Reform Act of 1986 (Public
Law 99-514, 100 Stat. 2085) (the 1986
Act). Section 863(d) governs the source
of income derived from certain space and
ocean activities. Section 863(e) governs
the source of income derived from inter-
national communications activity.

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### Explanation of Provisions

These proposed regulations provide
two sets of rules, one in §1.863-8 for
determining the source of income from
space and ocean activities, the other in
§1.863-9 for determining the source of
income from communications activity.
Section 1.863-9 provides rules for both
international communications income
(ICI) and other communications income.
The IRS and Treasury believe it is appro-
priate to provide source rules for both ICI
and other communications income in a
single regulation.

The IRS and Treasury are fully aware
of the rapid technological evolution in the
space and communications industries
since Congress enacted sections 863(d)
and (e) in 1986, and have attempted to
take into account these changes as well as
changes in the space and communications
industries and business practices and busi-
ness models. The IRS and Treasury rec-
ognize that these regulations address
important issues for many different indus-
tries and have worked closely with the
industries in drafting these rules. The IRS
and Treasury are interested in receiving
comments from these industries on how to
accommodate issues arising from the use
of new technologies, consistent with the
language and purpose of the statutory pro-
visions.

#### A. Space and Ocean Activity Under Section 863(d)

##### 1. Scope of §1.863-8 of the proposed regulations

Section 1.863-8 of the proposed regu-
lations provides rules for sourcing income
derived from space and ocean activity,
notwithstanding other sections. Proposed
regulations §1.863-8(a) provides that a
taxpayer derives income from a space or
ocean activity only if the taxpayer con-
ducts such activity directly. This is con-
sistent with the approach that IRS and
Treasury adopted in the §1.863-3 regula-
tions sourcing income from inventory
sales.

##### 2. Source of gross income from space or ocean activity

a. General

Section 863(d)(1) states that, except as
provided in regulations, any income

derived from space or ocean activity by a
U.S. person will be U.S. source income,
and if derived by a foreign person, foreign
source income. Proposed regulations
§1.863-8(b)(1) provides that a U.S. per-
son's space or ocean income is U.S.
source. Proposed regulations §1.863-8
(b)(1) also states the general rule that
income derived by a foreign person from
a space or ocean activity is foreign source
income. However, the proposed regula-
tions contain several exceptions to that
general rule.

Proposed regulations §1.863-8(b)(2)
provides that if a foreign corporation is 50
percent or more owned by vote or value
(directly, indirectly, or constructively) by
U.S. persons and is not a controlled for-
eign corporation within the meaning of
section 957 (CFC), all income derived by
the corporation from space or ocean activ-
ity is U.S. source income. This rule
reflects IRS and Treasury's concern that
U.S. persons may use a foreign corpora-
tion (for example, by incorporating a
50/50 joint venture with a foreign person,
thereby avoiding CFC status) to obtain
results that are inconsistent with the pur-
poses of this section. The IRS and
Treasury believe Congress granted
Treasury broad regulatory authority in
section 863(d) to prevent taxpayers from
circumventing the purposes of this sec-
tion.

Proposed regulations §1.863-8(b)(3)
provides that if a foreign person is
engaged in a U.S. trade or business, the
foreign person's income derived from a
space or ocean activity is presumed to be
U.S. source income. The rule reflects IRS
and Treasury's concern that a foreign per-
son could engage in significant economic
activities in the United States and avoid
U.S. taxation of space or ocean income
derived from such activities. For exam-
ple, a foreign satellite company estab-
lished in a no-tax jurisdiction could
engage in substantial activity in the
United States through launch facilities,
yet pay no U.S. or foreign tax on income
arising from leasing the satellites it
launches. The IRS and Treasury believe
Congress intended that a foreign person
engaged in substantial U.S. business in
the United States be subject to U.S. tax on
related space or ocean activity.

The IRS and Treasury recognize that
the presumption may be over-inclusive in

certain cases. Therefore, the proposed
regulations provide that if the foreign per-
son can allocate gross space or ocean
income between income from sources
within the United States, space, or inter-
national water, and outside the United
States and space and international water,
to the satisfaction of the Commissioner,
based on the facts and circumstances,
which may include functions performed,
resources employed, risks assumed, or
other contributions to value, income from
outside the United States and space and
international water will be treated as for-
eign source income. When a foreign per-
son is entitled to the benefits of a tax
treaty with the United States, such person
may elect to be taxed under the rules of
that treaty, so that, for example, the
United States would tax only income
attributable to a permanent establishment
of that foreign person, regardless of the
amount of income considered effectively
connected with a U.S. trade or business.

###### b. Source Rules for Sales of Certain Property

Taxpayers must apply the rules of sec-
tion 863(d) and these proposed regula-
tions to determine the source of income
from sales of property purchased or pro-
duced by the taxpayer, either when pro-
duction occurs in whole or in part in space
or in international water, or when the sale
occurs in space or in international water.
The rules of sections 861, 862, 863(a) and
(b), and 865, and the regulations thereun-
der apply only to the extent provided in
proposed regulations §1.863-8(b)(4).

Proposed regulations §1.863-8(b)(4)(i)
provides that income derived from the
sale of purchased property in space or
international water is sourced under para-
graph (b)(1), (2), or (3) of this section.
Proposed regulations §1.863-8(d)(2)(iii)
provides that a sale occurs in space or
international water if either property is
located in space or international water at
the time the rights, title, and interests pass
to the purchaser, or the property sold is for
use in space or international water. This
rule for determining if a sale takes place
in space or in international water modifies
for space and ocean activity the rule in
§1.861-7(c) for otherwise determining
where a sale takes place. The IRS and
Treasury believe this rule for determining
the place of sale in the case of space or

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ocean activity is consistent with the leg-
islative history of section 863(d), indicat-
ing Congress intended that space and
ocean activity be broadly defined. See
S. Rept. No. 313, 99th Cong., 2d Sess. 357
(1986) (Senate Report). It is also consis-
tent with the language of the Senate
Report stating that the committee did not
intend to override the title passage rule for
sales of property on the high seas.
Consistent with this language, proposed
regulations §1.863-8(d)(1)(ii) excludes
from the definition of ocean activity the
sale of inventory on international water,
and the source of income from such sales
continues to be determined under
§1.861-7(c).

Proposed regulations §1.863-8(b)
(4)(ii) provides rules for income derived
from the sale of property produced by the
taxpayer. To determine the source of
income derived from the sale of property
produced by the taxpayer, proposed regu-
lations §1.863-8(b)(4)(ii)(A) provides
that the taxpayer must divide gross
income from such sale equally between
production activity and sales activity.
Thus, one-half of the taxpayer's gross
income is attributed to production activity,
and the other one-half of such gross
income is attributed to sales activity.

Proposed regulations §1.863-8(b)(4)
(ii)(A) provides that income attributable
to sales activity is sourced applying the
rules applicable to the sale of purchased
property. If the taxpayer sells such prop-
erty in space or international water, the
source of income attributable to sales
activity is determined under paragraph
(b)(1), (2), or (3). If the taxpayer sells
such property outside space and outside
international water, the source of income
attributable to sales activity is determined
under §1.863-3(c)(2). Proposed regula-
tions §1.863-8(b)(4)(ii)(B) provides that
income attributable to production activity,
when production occurs only in space or
in international water, is sourced under
paragraphs (b)(1), (2), or (3). When pro-
duction occurs only outside space and
international water, income attributable to
production activity is sourced under
§1.863-3(c)(1). When production activi-
ty occurs both in space or in international
water and outside space and international
water, proposed regulations §1.863-8(b)
(4)(ii)(C) splits the income attributed to
production activity between production

activities occurring in space or in interna-
tional water, and production activities
occurring outside space and international
water. Gross income must be allocated to
the satisfaction of the Commissioner,
based on all relevant facts and circum-
stances, which may include functions per-
formed, resources employed, risks
assumed, and any other contributions to
the value of the property. The source of
gross income attributable to production
activities in space or in international water
is sourced under paragraphs (b)(1), (2), or
(3). The source of gross income attribut-
able to production activities outside space
and international water is determined
under §1.863-3(c)(1).

#### c. Special Rule for Determining the Source of Income from Services

Proposed regulations §1.863-8(b)(5)
provides that income derived from the
performance of services in space or in
international water is sourced under para-
graph (b)(1), (2), or (3). Proposed regula-
tions §1.863-8(d)(2)(ii)(A) provides that
a performance of a service is a space or
ocean activity when a part of the service,
even if de minimis, is performed in space
or in international water. The IRS and
Treasury believe that Congress intended a
broad range of activities be treated as
space or ocean activities.

The IRS and Treasury recognize that this
rule may be over-inclusive in certain cases.
Therefore, proposed regulations §1.863-8
(b)(5) provides that the taxpayer can allo-
cate gross income derived from the perfor-
mance of the service between activities that
occur in space or international water and
activities that occur outside space and inter-
national water, to the satisfaction of the
Commissioner, based on facts and circum-
stances, which may include functions per-
formed, resources employed, risks
assumed, or other contributions to value.
Gross income allocated to activities occur-
ring outside space and international water
will be sourced under sections 861, 862,
863, and 865 of the Code.

#### d. Special Rule for Determining the Source of Communications Income

A communications activity, as defined
in proposed regulations §1.863-9(d), also
can be a space or ocean activity. Pursuant
to the authority granted in section

863(d)(1), proposed regulations §1.863-8
(b)(6) provides that income from commu-
nications activity that is also a space or
ocean activity is sourced under proposed
regulations §1.863-9(b).

#### 3. Taxable income

When a taxpayer allocates gross
income under paragraph (b)(3) (allocation
for certain foreign persons), paragraph
(b)(4)(ii)(C) (allocation between produc-
tion occurring in space or international
water and production occurring outside),
or paragraph (b)(5) (allocation between
services occurring in space or internation-
al water and those occurring outside) of
this section, the taxpayer must allocate or
apportion expenses, losses, and other
deductions under §§1.861-8 through
1.861-14T of the regulations to the class
of gross income, which must include the
total income so allocated in each case. A
taxpayer must then apply the rules of
§§1.861-8 through 1.861-14T to properly
allocate or apportion amounts of expens-
es, losses, and other deductions allocated
or apportioned to such class of gross
income between gross income from
sources within the United States and with-
out the United States.

When a taxpayer must allocate gross
income to the satisfaction of the
Commissioner based on the facts and cir-
cumstances, IRS and Treasury believe that
such allocations would be based generally
on section 482 principles. However, IRS
and Treasury solicit comments on this
approach, including specific comments
and examples on alternative methods that
could be used to make these allocations.

#### 4. Definition of space and ocean activity

#### a. General Rules

Section 863(d)(2) provides that space or
ocean activity means any activity conduct-
ed in space, and any activity conducted in
or under water not within the jurisdiction
of the United States or a foreign country.
Proposed regulations §1.863-8(d)(1)(i)
defines space as any area not within the
jurisdiction (as recognized by the United
States) of a foreign country, possession of
the United States, or the United States, and
not in international water.

Proposed regulations §1.863-8(d)(1)(i)
provides that space activity is any activity

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conducted in space, with certain excep-
tions. Space activity includes perfor-
mance and provision of services in space,
leasing of equipment or other property,
including spacecraft (e.g., satellites) or
transponders, located in space, licensing
of technology or other intangibles for use
in space, and the production, processing,
or creation of property in space. Space
activity includes the sale of property in
space. Space activity also includes under-
writing income from the insurance of
risks on activities that produce income
derived from space activity. The inclu-
sion of such underwriting income is con-
sistent with language in the Senate
Report. See Senate Report at 357.

Proposed regulations §1.863-8(d)(1)
(ii) provides that ocean activity is any ac-
tivity conducted in international water,
with certain exceptions. Ocean activity
includes performance and provision of
services in international water, leasing of
equipment or other property located in in-
ternational water, licensing of technology
or other intangibles for use in interna-
tional water, and the production, process-
ing, or creation of property in interna-
tional water. Ocean activity includes the
sale of property in international water,
and the sale of inventory under interna-
tional water, but does not include the sell-
ing of inventory if the sale takes place on
international water. Thus, if property sold
on international water is inventory prop-
erty, income attributable to sales activity
is sourced under §1.861-7(c).

Ocean activity also includes underwrit-
ing income from the insurance of risks on
activities that produce income derived
from ocean activity. The inclusion of
such underwriting income is consistent
with language in the Senate Report. See
Senate Report at 357.

Ocean activity also includes any activ-
ity performed in Antarctica. Ocean activ-
ity further includes the leasing of a vessel
if such vessel does not transport cargo or
persons for hire between ports-of-call.
Thus, for example, income earned by a
lessor of a vessel that is to engage only in
research activities in international water
is ocean income. Ocean activity also in-
cludes the leasing of drilling rigs, extrac-
tion of minerals, and performance and
provision of services related thereto, to
the extent the mines, oil and gas wells, or
other natural deposits are not within the

jurisdiction of the United States, U.S.
possessions, or any foreign country (as
defined in section 638).

Based on legislative history, the IRS
and Treasury believe space and ocean ac-
tivity should be broadly defined based on
legislative history. The legislative history
clearly indicates that Congress intended
to characterize certain land based activity
as space or ocean activity. See Senate
Report at 357. Consistent with that deter-
mination, the proposed regulations pro-
vide that when activities occur both in
space or in international water and out-
side space and international water, and
constitute parts of a single transaction de-
scribed in §1.863-8(d)(1), the transaction
will be characterized as space or ocean
activity. Thus, for example, income from
the lease of equipment located in space
will be sourced in its entirety under sec-
tion 863(d), even though certain functions
associated with the transaction may be
performed outside space and international
water. The rules of this section for defin-
ing space or ocean activity by combining
activities occurring both in space or in in-
ternational water and outside space and
international water simply reflect existing
principles for characterizing a transac-
tion, and are fully consistent with rules
for characterizing income for purposes of
other source rules. Taxpayers enjoy flexi-
bility in structuring their transactions that
will be characterized under existing prin-
ciples. To ensure the statutory purpose is
not circumvented, the Commissioner may
treat parts of a transaction as separate
transactions, or combine separate transac-
tions as a single transaction.

Certain activities occurring in space or
international water are not considered ei-
ther space or ocean activity. Proposed
regulations §1.863-8(d)(3)(i) provides
that space or ocean activity does not in-
clude any activity giving rise to trans-
portation income as defined in section
863(c). Proposed regulations §1.863-8
(d)(3)(ii) provides that space or ocean ac-
tivity also does not include any activity
with respect to mines, oil and gas wells,
or other natural deposits to the extent the
mines or wells are located within the ju-
risdiction (as recognized by the United
States) of any country, including the
United States and its possessions (as de-
fined in section 638). Proposed regula-
tions §1.863-8(d)(3)(iii) provides that

space or ocean activity does not include
any activity giving rise to international
communications income as defined in
proposed regulations §1.863-9(d)(3)(ii).
These exceptions are consistent with sec-
tion 863(d)(2)(B) of the Code.

#### b. Special Rules in Determining Space or Ocean Activity

Proposed regulations §1.863-8(d)
(2)(ii)(A) provides that services are per-
formed in space or in international water
if functions are performed, resources
employed, risks assumed, or other contri-
butions to the value of the transaction
occur in space or international water,
whether such contributions are per-
formed by personnel, or equipment, or
otherwise. The IRS and Treasury believe
that all contributions to a transaction's
value, whether contributed by personnel,
equipment, or otherwise, should be con-
sidered in determining whether services
are performed in space or international
water.

Proposed regulations §1.863-8(d)
(2)(ii)(A) provides that the performance
of a service is treated as a space or ocean
activity if a part of the service is per-
formed in space or international water.
The IRS and Treasury recognize that this
rule may be over-inclusive in certain
cases. Therefore, proposed regulations
§1.863-8(d)(2)(ii)(B) provides that the
performance of a service will not be a
space or ocean activity if the only activi-
ty of the taxpayer in space or in interna-
tional water is to facilitate the taxpayer's
own communications, as part of provi-
sion or delivery of a service by the tax-
payer, and that service would not other-
wise be in whole or in part a space or
ocean activity. Several examples in the
regulations illustrate this facilitation
exception. The IRS and Treasury recog-
nize that taxpayers may use communica-
tions services in conducting a business,
and the fact that such communications
may be routed through space or interna-
tional water instead of by way of land
should not produce differences in the
source of the taxpayer's income derived
from such service.

#### 5. Treatment of partnerships

Proposed regulations §1.863-8(e) pro-
vides that for U.S. partnerships, section

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863(d) and the regulations thereunder will
be applied at the partnership level. The
IRS and Treasury believe this rule is con-
sistent with section 7701(a)(30)(B),
which defines a U.S. person as a domestic
partnership. For foreign partnerships,
section 863(d) and the regulations there-
under will be applied at the partner level.
The proposed regulations provide a differ-
ent rule for foreign partnerships because
IRS and Treasury are concerned that U.S.
persons may use a foreign partnership to
circumvent the purposes of this section.
For example, two U.S. persons by the
simple expediency of forming a foreign
partnership can change significantly the
U.S. tax consequences under section
863(d).

#### 6. Reporting and documentation requirements

When a taxpayer allocates gross
income to the satisfaction of the
Commissioner under §1.863-8(b)(3)
(income of certain foreign persons),
§1.863-8(b)(4)(ii)(C) (certain production
activity), or under §1.863-8(b)(5) (ser-
vices) of the proposed regulations, the
taxpayer must do so by making the allo-
cation on a timely filed original return
(including extensions). An amended
return does not qualify, and section 9100
relief will not be available. In all cases, a
taxpayer must maintain contemporaneous
documentation regarding the allocation of
gross income, and allocation of expenses,
losses, and other deductions, the method-
ology used, and the circumstances justify-
ing use of that methodology. The taxpay-
er must produce such documentation
within 30 days upon request.

#### B. Communications Activity Under Sections 863(a), (d), and (e)

##### 1. Scope

Section 1.863-9 of the proposed regu-
lations provides rules for sourcing income
derived from communications activity,
notwithstanding any other section.
Pursuant to proposed regulations §1.863
-8, these source rules apply to communi-
cations activity that is also space or ocean
activity.

2\. Source of gross income derived from
communications activity

#### a. International Communications Income

Section 863(e)(1)(A) states that any in-
ternational communications income of a
U.S. person will be sourced 50 percent to
the United States and 50 percent to for-
eign sources. Proposed regulations
§1.863-9(b)(2)(i) provides that interna-
tional communications income of a U.S.
person will be sourced 50 percent to the
United States and 50 percent to foreign
sources.

Section 863(e)(1)(B)(i) provides that
any international communications income
of a foreign person will be foreign source
income except as provided in regulations
or in section 863(e)(1)(B)(ii). Proposed
regulations §1.863-9(b)(2)(ii)(A) states
the general rule that international commu-
nications income of a foreign person is
foreign source income. However, the pro-
posed regulations contain several excep-
tions to the general rule.

Proposed regulations §1.863-9(b)(2)
(ii)(B) states that if a foreign corporation
is 50 percent or more owned by vote or
value (directly, indirectly, or construc-
tively) by U.S. persons, or is a controlled
foreign corporation within the meaning
of section 957, all international commu-
nications income is U.S. source income.
This rule reflects IRS and Treasury's con-
cern that U.S. persons may use a foreign
corporation to obtain benefits that are
inconsistent with the purposes of this sec-
tion.

Section 863(e)(1)(B)(ii) provides that if
a foreign person has a U.S. fixed place of
business, international communications
income attributable to the fixed place of
business is U.S. source income.
Consistent with section 863(e)(1)(B)(ii),
proposed regulations §1.863-9(b)(2)
(ii)(C) states that if a foreign person, other
than a foreign person described in para-
graph (b)(2)(ii)(A), maintains an office or
other fixed place of business in the United
States, any international communications
income attributable to the office or other
fixed place of business is U.S. source
income. The principles of section
864(c)(5) will apply to determine whether

a foreign person has an office or fixed
place of business in the United States.
This rule does not apply if the foreign per-
son is engaged in a U.S. trade or business.

Proposed regulations §1.863-9(b)
(2)(ii)(D) provides that if a foreign person
is engaged in a U.S. trade or business, the
foreign person's international communi-
cations income is presumed to be U.S.
source income. The rule reflects IRS and
Treasury's concern that a foreign person
could avoid a U.S. fixed place of business
under section 863(e)(1)(B)(ii), yet engage
in significant communications activity in
the United States. The IRS and Treasury
believe Congress intended that a foreign
person engaged in substantial U.S. busi-
ness in the United States be subject to
U.S. tax on that communications activity.

The IRS and Treasury recognize that
this rule may be over-inclusive in certain
cases. Therefore, the proposed regula-
tions provide that if the foreign person
can allocate income to international
communications activity outside the
United States and space and internation-
al water, to the satisfaction of the
Commissioner, based on the facts and
circumstances, which may include func-
tions performed, resources employed,
risks assumed, or other contributions to
value, then the income allocated to such
communications activity outside the
United States and space and internation-
al water will be foreign source income.
When a foreign person is entitled to the
benefits of a tax treaty with the United
States, such person may elect to be taxed
under the rules of that treaty, so that, for
example, the United States would tax
only income attributable to a permanent
establishment of that foreign person,
regardless of the amount of income con-
sidered effectively connected with a
U.S. trade or business.

#### b. Other Communications Income

The proposed regulations also provide
rules, for both U.S. and foreign persons,
for determining the source of income
from communications activity that does
not qualify as international communica-
tions activity. The IRS and Treasury
believe rules that address income from

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other communications activities are nec-
essary based on the legislative history.
See Senate Report at 357.

Proposed regulations §1.863-9(b)(3)
states that the source of income derived
by either a U.S. or foreign person from
U.S. communications activity is U.S.
source income. Proposed regulations
§1.863-9(b)(4) states that the source of
income derived by either a U.S. or foreign
person from foreign communications ac-
tivity is foreign source income. Proposed
regulations §1.863-9(b)(5) states that the
source of income derived from
space/ocean communications activity is
determined under section 863(d) and the
regulations thereunder.

##### 3. Taxable income

When a taxpayer allocates gross in-
come under paragraph (b)(2)(ii)(D) (cer-
tain foreign persons), or (d)(1)(ii) (deter-
mining a communications activity), the
taxpayer must allocate or apportion ex-
penses, losses, and other deductions as
prescribed in §§1.861-8 through
1.861-14T of the regulations to the class
of gross income, which must include the
total income so allocated in each case. A
taxpayer must then apply the rules of
§§1.861-8 through 1.861-14T of the reg-
ulations to properly allocate or apportion
amounts of expenses, losses, and other
deductions allocated or apportioned to
such gross income between gross income
from sources within the United States and
without the United States. For amounts
of expenses, losses, and other deductions
allocated or apportioned to gross income
derived from international communica-
tions activity, when the source of income
is determined under the 50/50 method of
paragraph (b)(2)(i), taxpayers must ap-
portion expenses and other deductions be-
tween U.S. and foreign sources pro rata
based on the relative amounts of U.S. and
foreign source gross income. Research
and experimental expenditures qualifying
under §1.861-17 are allocated under that
section.

When a taxpayer must allocate gross
income to the satisfaction of the
Commissioner based on the facts and cir-
cumstances, IRS and Treasury believe
that such allocations would be based gen-
erally on section 482 principles.
However, IRS and Treasury solicit com-

ments on this approach, including specif-
ic comments and examples on alternative
methods that could be used to make these
allocations.

4\. Definition of communications activity
and income derived from
communications activity

##### a. Communications Activity

Proposed regulations §1.863-9(d)(1)
defines a communications activity as an
activity consisting solely in the delivery
by transmission of communications or
data (communications). The definition of
a communications activity is limited to
the function of transmitting a particular
communication from point A to point B.
The delivery of communications by
means other than transmission, for exam-
ple, delivery of a letter is not a communi-
cations activity. The IRS and Treasury
believe that this narrow definition of com-
munications activity is consistent with the
legislative history of section 863(e). See
Senate Report at 357.

The provision of capacity to transmit
communications or data is considered to be a
communications activity. For example, the
provision of satellite transponder capacity
can qualify as a communications activity.

The provision of content or any other
additional service will not be treated as a
communications activity unless de min-
imis. For example, changes in the form of
a voice communication when switching
from analog technology to digital data for
Internet telephony would be disregarded
in determining whether there has been a
transmission of communications within
the meaning of proposed regulations
§1.863-9(d). However, payment for
information from a data base sent elec-
tronically, or for income attributable to an
entertainment event transmitted electroni-
cally, would not be income derived from a
communications activity.

When the provision of content or any
other services is de minimis, such content
or services are ignored, and the transac-
tion will be treated solely as the transmis-
sion of communications within the mean-
ing of proposed regulations §1.863-9
(d)(1). The determination of whether the
provision of content or other services is de
minimis should be based on all the facts
and circumstances. The IRS and Treasury

believe the exclusion of content and other
services is consistent with the legislative
history of section 863(e). No evidence
exists in the Congressional testimony or
in the legislative history that content pro-
vided by transmission was to be consid-
ered a communications activity.

Proposed regulations §1.863-9(d)(1)
(ii) requires that a transaction encompass-
ing non-de minimis communications ac-
tivities and non-de minimis non-commu-
nications activities must be broken into
parts and each part treated as a separate
transaction. Proposed regulations
§1.863-9(d)(1)(ii) states that gross income
derived from the activities must be allo-
cated to each separate transaction, to the
satisfaction of the Commissioner, based
on all relevant facts and circumstances,
which may include functions performed,
resources employed, risks assumed, and
any other contributions to the value of the
respective transactions. For example, a
payment by an advertiser to a TV broad-
cast station may be in part a payment for
transmission of the advertisement, but
could also be a payment for other property
or services, for example the transmitter's
ability to reach a particular market or audi-
ence. Such activities, if not de minimis,
must be treated as non-communications
activities under §1.863-9(d)(1)(ii) of the
proposed regulations.

To ensure the statutory purposes are not
circumvented, the Commissioner may
treat parts of a transaction as separate
transactions, or construe separate transac-
tions as a single transaction.

#### b. Income Derived from Communications Activity

Income derived from communications
activity is defined in proposed regulations
§1.863-9(d)(2) as income derived from
the transmission of communications,
including income derived from the provi-
sion of capacity to transmit communica-
tions. There is no requirement that the
income recipient perform the transmission
function. This rule reflects IRS and
Treasury's understanding that those pro-
viding communications services often use
capacity owned or operated by others.
However, income is derived from com-
munications activity only if the taxpayer
is paid to transmit, and bears the risk of
transmitting, the communications.

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#### c. Character of Communications Activity

Proposed regulations §1.863-9(d)(3)
provides rules for characterizing income
derived from a communications activity
for purposes of sourcing the income
derived from such activity. The character
of income derived from communications
activity is determined by establishing the
two points between which the taxpayer is
paid to transmit, and bears the risk of
transmitting, the communication. Under
the paid-to-do rule, the path the communi-
cation takes between the two points is not
relevant in determining the character of
the transmission. If a taxpayer is paid to
take a communication from one point to
another point, income derived from the
transmission is characterized based on the
transmission between those two points,
even though the taxpayer contracts out
part of the transmission to another. This
rule reflects IRS and Treasury's recogni-
tion that those providing communications
often use the network owned or operated
by others. Several examples in the pro-
posed regulations illustrate the paid-to-do
rule.

Proposed regulations §1.863-9(d)(3)
(ii) defines income derived from interna-
tional communications activity as the
transmission from a point in the United
States and a point in a foreign country (or
a possession of the United States).
Proposed regulations §1.863-9(d)(3)(iii)
defines income derived from U.S. com-
munications activity as the transmission
between two points in the United States or
a point in the United States and a point in
space or international water.

Proposed regulations §1.863-9(d)(3)
(iv) defines income derived from foreign
communications activity as the transmis-
sion between two points either in a for-
eign country or in foreign countries or a
point in a foreign country and a point in
space or international water. Proposed
regulations §1.863-9(d)(3)(v) defines
income derived from space/ocean com-
munications activity as the transmission
between a point in space or international
water and another point in space or inter-
national water. The IRS and Treasury
believe these rules are consistent with the
legislative history. See Senate Report at
357.

When the taxpayer cannot establish the
two points between which the taxpayer is
paid to transmit, the source of income de-

rived from such activity, for either a U.S.
or foreign person, is U.S. source income.
Thus, for example, when a provider of
communications services provides both
local and international long distance
along with cable services in one-price
bundles for a set amount each month,
tracing each transmission may not be pos-
sible or practical. In such cases, the
source of income derived from communi-
cations activity is U.S. source income.
The IRS and Treasury understand that
many in the communications industry
may not consider it practical or possible
to prove the end points of the communica-
tions the taxpayer transmits. The IRS
and Treasury solicit comments as to pro-
posals for those situations when taxpayers
cannot establish the points between which
the taxpayer is paid to transmit the com-
munications.

#### 5. Treatment of partnerships

Proposed regulations §1.863-9(e) pro-
vides, in general, that for U.S. partner-
ships, section 863(e) and the regulations
thereunder will be applied at the partner-
ship level. The IRS and Treasury believe
this rule is consistent with section
7701(a)(30)(B), which defines a U.S. per-
son as a domestic partnership. For foreign
partnerships, and in the case of a U.S.
partnership in which 50 percent or more
of the partnership interests are owned by
foreign persons, section 863(e) and the
regulations thereunder will be applied at
the partner level. The proposed regula-
tions provide a different rule for foreign
partnerships and for U.S. partnerships
with substantial foreign ownership
because the IRS and Treasury are con-
cerned that U.S. persons may use such
partnerships to circumvent the purposes
of this section.

#### 6. Reporting rules and documentation requirements

When a taxpayer allocates gross in-
come to the satisfaction of the Commis-
sioner under proposed regulations
§1.863-9(b)(2)(ii)(D) (certain foreign
persons) or -(d)(1)(ii) (determining a
communications activity), it does so by
making the allocation on a timely filed
original return (including extensions). An
amended return does not qualify, and sec-
tion 9100 relief will not be available. In
all cases, a taxpayer must maintain con-

temporaneous documentation regarding
the allocation of gross income, and allo-
cation of expenses, losses and other de-
ductions, the methodology used, and the
circumstances justifying use of that
methodology. The taxpayer must produce
such documentation within 30 days upon
request.

#### C. Amendment to the §1.863-3 Regulations

These proposed regulations amend the
regulations under §1.863-3 for determin-
ing the source of income in certain inven-
tory sales.

The regulations provide that in deter-
mining the source of income from sales of
property when the property is either (i)
produced in whole or in part in space or in
international water, or (ii) sold in space or
in international water, the rules of
§1.863-8 of the proposed regulations
apply. The rules of sections 863(a) and
(b), and the regulations under those sec-
tions, do not apply to determine the
source of income in such cases, except to
the extent provided in §1.863-8 of the
proposed regulations. The proposed regu-
lations in §1.863-8(b)(4)(ii)(A) provide,
however, that the source of income from
sales of inventory on international water
continues to be sourced under §1.863-
3(c)(2). The regulations in §1.863-
3(a)(1) and-3(c)(1)(i)(A) are amended to
reflect these provisions.

The proposed regulations also amend
§1.863-3(c)(2) to provide that the place
of sale will be presumed to be the United
States, for purposes of that section,
when property is produced in the United
States and the property is sold to a U.S.
resident for use, consumption, or dispo-
sition in space. See §1.864-6(b)(3) for
determining whether property is used in
space and whether the sale is to a U.S.
resident.

These rules reflect the views of Treasury
and the IRS that sales of satellites or
transponders by a U.S. resident in space
should produce U.S. source income. These
rules also reflect the view that sales of such
property by a U.S. resident to a U.S. pur-
chaser should produce U.S. source income.
Treasury and the IRS believe that these
provisions are consistent with Congress'
intent in enacting section 863(d) to tax U.S.
persons on a residency basis on income
that is not likely to be subject to foreign tax

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by a foreign country. It is also consistent
with the tax policy of the foreign tax cred-
it that income not likely to be subject to
foreign tax should not be treated as foreign
source income, which would inappropri-
ately allow taxpayers with excess foreign
tax credits to shelter this income from U.S.
tax.

### Proposed Effective Dates

These regulations are proposed to apply
for taxable years beginning on or after the
date that is 30 days after the date of pub-
lication of final regulations in the Federal
Register.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that
the rules of this section principally impact
large multinationals who pay foreign
taxes on substantial foreign operations
and therefore the rules will impact very
few small entities. Moreover, in those
few instances where the rules of this sec-
tion impact small entities, the economic
impact on such entities is not likely to be
significant. Accordingly, a regulatory
flexibility analysis is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.

### Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely (in the manner described
under the ADDRESSES caption) to the
IRS. The IRS and Treasury specifically
request comments on the clarity of the
proposed regulations and how they may
be made easier to understand. All com-
ments will be available for public inspec-
tion and copying.

A public hearing has been scheduled
for March 28, 2001, at 10 a.m., in the

auditorium, seventh floor, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the 10th Street entrance,
located between Constitution and
Pennsylvania Avenues, NW. In addition,
all visitors must present photo identifica-
tion to enter the building. Because of
access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building
access list to attend the hearing, see the
"FOR FURTHER INFORMATION
CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit comments and an outline of topics
to be discussed and the time to be devoted
to each topic (in the manner described
under the ADDRESSES caption of this
preamble) by March 7, 2001.

A period of 10 minutes will be allotted
to each person for making comments.

An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.

### Drafting Information

The principal author of these regula-
tions is Anne Shelburne, Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed
to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:

Authority: 26 U.S.C. 7805 * *
Section 1.863-8 also issued under 26
U.S.C. 863(a), (b) and (d).
Section 1.863-9 also issued under 26
U.S.C. 863(a), (d) and (e). * * *

Par. 2 Section 1.863-3 is amended by:

1\. Adding a sentence after the first sen-
tence in paragraph (a)(1).

2\. Adding a sentence at the end of para-
graph (c)(1)(i)(A).

3\. Adding three sentences, one after the
current first sentence of paragraph (c)(2),
and the other two sentences after the cur-
rent second sentence of paragraph (c)(2).

The additions read as follows:

§1.863-3 Allocation and apportionment
of income from certain sales of inventory.

(a) * * * (1) * * * To determine the
source of income from sales of property
produced by the taxpayer, when the prop-
erty is either produced in whole or in part
in space or on or under water not within
the jurisdiction (as recognized by the
United States) of a foreign country, pos-
session of the United States, or the United
States (in international water), or is sold in
space or in international water, the rules
of §1.863-8 apply, and the rules of this
section do not apply, except to the extent
provided in §1.863-8. * *

* * * * *

(c) * * * (1) * * * (i) * * * (A) * * * For
rules regarding the source of income
when production takes place, in whole or
in part, in space or in international water,
the rules of §1.863-8 apply, and the rules
of this section do not apply except to the
extent provided in §1.863-8.

* * * * *

(c)(2) * * * Notwithstanding any other
provision, for rules regarding the source
of income when a sale takes place in
space or in international water, the rules
of §1.863-8 apply, and the rules of this
section do not apply except to the extent
provided in §1.863-8. * * * The place of
sale will be presumed to be the United
States under this rule when property is
produced in the United States and the
property is sold to a U.S. resident, who
uses the property in space or in interna-
tional water. In such cases, the property
will be treated as sold for use, consump-
tion, or disposition in the United States.
* * * * *

Par. 3 Section 1.863-8 and 1.863-9 are
added to read as follows:

§1.863-8 Source of income from space
and ocean activity under section 863(d).

(a) In general. Income of a U.S. or a
foreign person derived from space or

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ocean activity (space or ocean income) is
sourced under the rules of this section,
notwithstanding any other provision,
including sections 861, 862, 863, and 865.
A taxpayer will not be considered to
derive income from space or ocean activ-
ity, as defined in paragraph (d) of this sec-
tion, if such activity is performed by
another person, subject to the rules for the
treatment of consolidated groups in sec-
tion §1.1502-13.

(b) Source of gross income from space
or ocean activity-(1) In general. Income
derived by a U.S. person from space or
ocean activity is income from sources
within the United States, except as other-
wise provided in this paragraph (b).
Income derived by a person other than a
United States person from space or ocean
activity is income from sources without
the United States, except as otherwise
provided in this paragraph (b).

(2) Income derived by certain foreign
corporations. If a U.S. person or U.S.
persons own 50 percent or more of the
vote or value of the stock of a foreign cor-
poration (directly, indirectly or construc-
tively) that is not a controlled foreign cor-
poration within the meaning of section
957, all income derived by that foreign
corporation from space or ocean activity
is U.S. source income.

(3) Income derived by foreign persons
engaged in a U.S. trade or business. If a
foreign person, other than a controlled
foreign corporation within the meaning of
section 957 or a foreign person described
in paragraph (b)(2) of this section, is
engaged in a U.S. trade or business, all
income derived by that person from space
or ocean activity is presumed to be U.S.
source income. However, if the foreign
person can allocate income between
sources within the United States, or space,
or international water, and sources outside
the United States and space and interna-
tional water, to the satisfaction of the
Commissioner, based on the facts and cir-
cumstances, which may include functions
performed, resources employed, risks
assumed, or other contributions to value,
then space or ocean income allocated to
sources outside the United States and
space and international water shall be
treated as from sources outside the United
States.

(4) Source rules for income from cer-
tain sales of property-(i) Sales of pur-

chased property. When a taxpayer sells
property in space or in international water,
the source of gross income shall be deter-
mined under paragraph (b)(1), (2), or (3)
of this section as applicable. However, if
inventory, within the meaning of section
1221(1), is sold on international water, the
source of income shall be determined
under §1.863-3(c)(2).

(ii) Sales of property produced by the
taxpayer-(A) General. If the taxpayer
both produces property and also sells such
property, the taxpayer must divide gross
income from such sales between produc-
tion activity and sales activity under the
50/50 method as described in this para-
graph (b)(4)(ii)(A). Under the 50/50
method, one-half of the taxpayer's gross
income will be considered income attrib-
utable to production activity, and the
source of that income will be determined
under paragraphs (b)(4)(ii)(B) or (C) of
this section. The remaining one-half of
such gross income will be considered
income attributable to sales activity and
the source of that income will be deter-
mined under paragraph (b)(4)(i) of this
section. However, if the taxpayer sells
such property outside space and outside
international water, the source of gross
income attributable to sales activity will
be determined under §1.863-3(c)(2).

(B) Production only in space or in
international water, or only outside space
and international water. When produc-
tion occurs only in space or in interna-
tional water, income attributable to pro-
duction activity is sourced under
paragraph (b)(1), (2), or (3) of this section
as space or ocean income. When produc-
tion occurs only outside space and inter-
national water, income attributable to pro-
duction activity is sourced under
§1.863-3(c)(1).

(C) Production both in space or in
international water and outside space and
international water. When property is
produced in space or in international
water and outside space and international
water, gross income must be allocated to
production occurring in space or in inter-
national water and production occurring
outside space and international water, to
the satisfaction of the Commissioner,
based on all the facts and circumstances,
which may include functions performed,
resources employed, risks assumed, and
any other contributions to value. The

source of gross income allocated to space
or international water is determined under
paragraph (b)(1), (2), or (3) of this sec-
tion. The source of gross income allocat-
ed outside space and international water is
determined under §1.863-3(c)(1).

(5) Special rule for determining the
source of gross income from services. If a
transaction characterized as the per-
formance of services constitutes a space
or ocean activity by reason of the perfor-
mance of part of the service in space or in
international water, as determined under
paragraph (d)(2)(ii)(A) of this section, the
source of all gross income derived from
such transaction of which such per-
formance is a part is determined under
paragraph (b)(1), (2), or (3) of this sec-
tion. However, if the taxpayer can allo-
cate gross income between performance
occurring outside space and international
water, and performance occurring in
space or international water, to the satis-
faction of the Commissioner, based on the
facts and circumstances, including func-
tions performed, resources employed,
risks assumed, or other contributions to
value, then the source of income allocated
to performance occurring outside space
and international water shall be deter-
mined under sections 861, 862, 863, and
865.

(6) Special rule for determining source
of income from communications activity
(other than income from international
communications activity). Space and
ocean activity, as defined in paragraphs
(d)(1) and (2) of this section, includes
activity occurring in space or in interna-
tional water that is characterized as a
communications activity as defined in
§1.863-9(d). The source of gross income
from space or ocean activity that is also a
communications activity as defined in
§1.863-9(d) is determined under the rules
of §1.863-9(b), rather than under para-
graph (b) of this section.

(c) Taxable income. When a taxpayer
allocates gross income under paragraph
(b)(3), (b)(4)(ii)(C), or(b)(5) of this sec-
tion, to the satisfaction of the Commis-
sioner, based on all the facts and circum-
stances, the taxpayer must allocate or
apportion expenses, losses, and other de-
ductions as prescribed in §§1.861-8
through 1.861-14T to the class of gross
income, which must include the total in-
come so allocated in each case. A tax-

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payer must then apply the rules of
§§1.861-8 through 1.861-14T to properly
allocate or apportion amounts of ex-
penses, losses, and other deductions allo-
cated or apportioned to such gross income
between gross income from sources
within the United States and without the
United States.

(d) Space and Ocean activity-(1) De-
finition-(i) Space activity. In general,
space activity is any activity conducted in
space. Space activity includes perfor-
mance and provision of services in space,
as defined in paragraph (d)(2)(ii)(A) of
this section, leasing of equipment located
in space, including spacecraft (e.g., satel-
lites) or transponders located in space, li-
censing of technology or other intangi-
bles for use in space, and the production,
processing, or creation of property in
space, as defined in paragraph (d)(2)(i) of
this section. Space activity includes ac-
tivity occurring in space that is character-
ized as communications activity (other
than international communications activ-
ity) under §1.863-9(d). Space activity
also includes underwriting income from
the insurance of risks on activities that
produce space income. Space activity in-
cludes the sale in space of property, as
defined in paragraph (d)(2)(iii) of this
section. For purposes of this section,
space means any area not within the ju-
risdiction (as recognized by the United
States) of a foreign country, possession of
the United States, or the United States,
and not in international water. For pur-
poses of determining space activity, the
Commissioner may separate parts of a
single transaction into separate transac-
tions or combine separate transactions as
parts of a single transaction. Paragraph
(d)(3) of this section lists exceptions to
the general rule.

(ii) Ocean activity. In general, ocean
activity is any activity conducted on or
under water not within the jurisdiction (as
recognized by the United States) of a for-
eign country, possession of the United
States, or the United States (collectively,
in international water). Ocean activity in-
cludes performance and provision of ser-
vices in international water, as defined in
paragraph (d)(2)(ii)(A) of this section,
leasing of equipment located in interna-
tional water, including underwater cables,
licensing of technology or other intangi-
bles for use in international water, and the

production, processing, or creation of
property in international water, as defined
in paragraph (d)(2)(i) of this section.
Ocean activity includes sales of property
in international water, as defined in para-
graph (d)(2)(iii) of this section, but ocean
activity does not include the selling of in-
ventory as defined in section 1221(1) on
international water. Ocean activity in-
cludes activity occurring in international
water that is characterized as communica-
tions activity (other than international
communications activity) under
§1.863-9(d). Ocean activity also includes
underwriting income from the insurance
of risks on activities that produce ocean
income. Ocean activity also includes any
activity performed in Antarctica. Ocean
activity further includes the leasing of a
vessel if such vessel does not transport
cargo or persons for hire between ports-
of-call. Thus, for example, the leasing of
a vessel that is to engage only in research
activities in international water is an
ocean activity. Except as provided in
paragraph (d)(3)(ii) of this section, ocean
activity also includes the leasing of
drilling rigs, extraction of minerals, and
performance and provision of services re-
lated thereto. For purposes of determin-
ing ocean activity, the Commissioner may
separate parts of a single transaction into
separate transactions or combine separate
transactions as parts of a single transac-
tion. Paragraph (d)(3) of this section lists
exceptions to the general rule.

(2) Determining a space or ocean
activity-(i) Production of property in
space or in international water. For pur-
poses of this section, production activity
means an activity that creates, fabricates,
manufactures, extracts, processes, cures,
or ages property within the meaning of
sections 864(a) and §1.864-1.

(ii) Special rule for performance of
services-(A) General. If a transaction is
characterized as the performance of a ser-
vice, then such service will be treated as a
space or ocean activity when a part of the
service, even if de minimis, is performed
in space or in international water.
Services are performed in space or in
international water if functions are per-
formed, resources employed, risks
assumed, or other contributions to value
occur in space or in international water,
regardless of whether performed by per-
sonnel, or equipment, or otherwise.

(B) Exception to the general
rule-facilitating the taxpayer's own com-
munications. If a taxpayer's only activity
in space or in international water is to
facilitate the taxpayer's own communica-
tions as part of the provision or delivery
of a service provided by the taxpayer, and
that service would not otherwise be in
whole or in part a space or ocean activity,
such service will not be treated as either
space or ocean activity because of such
facilitation.

(iii) Sale in space or in international
water. In applying §1.861-7(c) to deter-
mine where a sale takes place, property
will be sold in space or in international
water if the property is located in space or
in international water when rights, title
and interest pass to the buyer (or when
bare legal title is retained, at the time and
place of passage of beneficial ownership
and risk of loss), or if property is sold for
use in space or in international water.

(3) Exceptions to space or ocean activ-
ity. Space or ocean activity does not in-
clude the following types of activities-

(i) Any activity giving rise to trans-
portation income as defined in section
863(c); or

(ii) Any activity with respect to mines,
oil and gas wells, or other natural deposits
to the extent the mines or wells are locat-
ed within the jurisdiction (as recognized
by the United States) of any country,
including the United States and its posses-
sions; or

(iii) Any activity giving rise to interna-
tional communications income as defined
in §1.863-9(d)(3)(ii).

(e) Treatment of partnerships. In the
case of a U.S. partnership, this section
will be applied at the partnership level. In
the case of a foreign partnership, this sec-
tion will be applied at the partner level.

(f) Examples. The following examples
illustrate the rules of this section:

Example 1. Space activity-activity occurring on
land and in space. (i) Facts. S owns satellites, and
leases one of its satellites to A. S, as lessor, will not
operate the satellite. Part of S's performance as
lessor in this transaction occurs on land.

(ii) Analysis. The combination of S's activities
is characterized as the lease of equipment. Since the
equipment is located in space, the transaction is
defined as space activity under paragraph (d)(1)(i) of
this section. Income derived from the lease will be
sourced in its entirety under paragraph (b) of this
section.

Example 2. Space activity. (i) Facts. X is an
Internet service provider, offering a service to per-

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sonal computer users accessing the Internet. This
service permits a customer, C, to make a call, initiat-
ed by a modem, routed to a control center, for con-
nection to the World Wide Web. X transmits the
requested information over its satellite capacity
leased from S to C's personal computer. X charges
its customers a flat monthly fee. Assume neither X
nor S derive international communications income
within the meaning of §1.863-9(d)(3)(ii).

(ii) Analysis. In this case, X performs a service,
and X's activity in space is not simply facilitation
within the meaning of paragraph (d)(2)(ii)(B) of this
section, because X's activity is not simply the facili-
tation of X's own communications and because X's
activity is not just part of another service provided
by X. Thus, X's activity constitutes space activity in
its entirety under paragraph (d)(2)(ii)(A) of this sec-
tion, and the source of X's income is determined
under paragraph (b) of this section. To the extent X
derives income from communications activity, with-
in the meaning of §1.863-9(d), the source of X's
income is determined under §1.863-9(b), as provid-
ed in paragraph (b)(6) of this section. S derives
communications income within the meaning of
§1.863-9(d), and therefore the source of S's income
is determined under §1.863-9(b), as provided in
paragraph (b)(6) of this section.

Example 3. Services as space activity-facilitation
of communications. (i) Facts. R owns a retail outlet
in the United States. R employs S to provide a secu-
rity system for R's premises. S operates its security
system by transmitting images from R's premises to
a satellite, and from there to a group of S employees
located in Country B, who then monitor the premis-
es by viewing the transmitted images. O provides S
with transponder capacity on O's satellite, which S
uses to transmit those images.

(ii) Analysis. S derives income for providing
monitoring services. Because, in this case, S uses
O's satellite transponder to transmit images to facil-
itate S's own communications in space as part of its
provision of a security service, S's activity in space
is limited to facilitating communications as
described in paragraph (d)(2)(ii)(B) of this section.
Thus, S is not engaged in a space activity, and none
of S's income is space income. Assuming O's pro-
vision of capacity is viewed as the provision of a ser-
vice, O's activity in space is not simply the facilita-
tion of communications as provided in paragraph
(d)(2)(ii)(B) of this section, because O is not just
facilitating its own communications. Thus, O's
activity is characterized as space activity in its
entirety under paragraph (d)(2)(ii)(A) of this section
(unless O's activity in space qualifies as internation-
al communications activity). To the extent O derives
income from communications activity, within the
meaning of §1.863-9(d), the source of O's income is
determined under §1.863-9(b), as provided in para-
graph (b)(6) of this section. On these facts, R does
not derive any income from space activity.

Example 4. Space activity. (i) Facts. L, a U.S.
company, offers programming and also certain ser-
vices to customers located both in the United States
and in foreign countries. Assume L's provision of
programming and services in this case was viewed
as the provision of a service, with no part of that ser-
vice occurring in space. L uses satellite capacity
acquired from S to deliver the service directly to cus-
tomers' television sets, so that the delivery of the ser-
vice occurs in space. Assume the delivery in this

case is not considered de minimis. L also acquires
programming from H, and L pays H a royalty for use
of copyrighted material in the United States and in
foreign countries. Customer, C, pays L for delivery
of the service to C's residence in the United States.
Assume S's provision of capacity in this case was
viewed as the provision of a service, and also that S
does not derive international communications
income within the meaning of §1.863-9(d)(3)(ii).

(ii) Analysis. On these facts, S's activity in space
is not just the facilitation of its own communications
within the meaning of paragraph (d)(2)(ii)(B) of this
section, because S is facilitating the communications
of others. To the extent S derives income from a
space activity that is also a communications activity
under §1.863-9(d), the source of S's income is deter-
mined under §1.863-9(b), as provided in paragraph
(b)(6) of this section. On these facts, L is treated as
providing a service and is paid to deliver that service
to its customers, and each transaction, i.e., the provi-
sion of the service and the delivery of the service,
constitutes a separate transaction. L's income
derived from provision of the service is not income
derived from space activity. L's income derived
from delivery of the service is space activity. L's
delivery of the service is not just the facilitation of
L's own communications within the meaning of
paragraph (d)(2)(ii)(B) of this section, because it is
not just a part of the provision of a service, but
instead the entire service. Since L derives commu-
nications income within the meaning of
§1.863-9(d), the source of L's income is determined
under §1.863-9(b), as provided in paragraph (b)(6)
of this section. If on other facts, L provides a service
and delivers that service, and L treats the provision
of the service and the delivery of the service as one
separate transaction, then L performs services in
space under paragraph (d)(2)(ii)(A) of this section,
because the delivery of the service occurs in space.
However, L's activity in space would be limited to
facilitating its own communications within the
meaning of paragraph (d)(2)(ii)(B) of this section,
because it is part of another service that would not
otherwise be a space activity. As a result, L's provi-
sion of the service would not be a space activity
under paragraph (d)(2)(ii)(A) of this section.

Example 5. Space activity-treatment of land
activity. (i) Facts. S, a U.S. person, offers remote
imaging products and services to its customers. In
year 1, S uses its satellite's remote sensors to gather
data on certain geographical terrain. In year 3, C, a
construction development company, contracts with S
to obtain a satellite image of an area for site devel-
opment work. S pulls data from its archives and
transfers to C the images gathered in year 1, in a
transaction that is characterized as a sale of the data.
Title to the data passes to C in the United States.
Before transferring the images to C, S uses comput-
er software to enhance the images so that the images
can be used.

(ii) Analysis. The collection of data and creation
of images in space is characterized as the creation of
property in space. S's income is derived from pro-
duction of property in part in space, and is, therefore,
derived in part from space activity. The source of
S's income from production and sale of property is,
therefore, determined under paragraph (b)(4) of this
section. Since production activity occurs both in
space and on land, the source of S's production
income is determined under paragraphs (b)(4)(ii)(A)

and (C) of this section. The source of S's income
attributable to sales activity is determined under
paragraph (b)(4)(ii)(A) of this section and
§1.863-3(c)(2) as U.S. source income.

Example 6. Use of intangible property in space.
(i) Facts. X acquires a license to use a particular
satellite slot or orbit, which X sublicenses to C. C
pays X a royalty.

(ii) Analysis. Since the royalty is paid for the
right to use intangible property in space, the source
of X's royalty is determined under paragraph (b) of
this section.

Example 7. Performance of services. (i) Facts.
E, a U.S. company, operates satellites with sensing
equipment that can determine how much heat and
light particular plants emit and reflect. Based on the
data, E will provide F, a U.S. farmer, a report ana-
lyzing the data, which F will use in growing crops.
E analyzes the data from U.S. offices.

(ii) Analysis. Assume E's combined activities are
characterized as the performance of services.
Because part of the service is performed in space, all
income E derives from the transaction will be treat-
ed as derived from space activity under paragraph
(d)(2)(ii)(A) of this section. The source of such
income will be determined under paragraph (b)(5) of
this section. If, however, E can allocate gross
income, to the satisfaction of the Commissioner, as
prescribed in paragraph (b)(5) of this section, then
the source of gross income attributable to services
performed outside space may be determined as pro-
vided in paragraph (b)(5) of this section.

Example 8. Separate transactions. (i) Facts.
The same facts as Example 7, except that E provides
the raw data to F in a transaction characterized as a
sale of a copyrighted article, and in addition also
provides an analysis in the form of a report to F, a
U.S. farmer who uses the information in growing
crops. The price F pays E for the raw data is sepa-
rately stated.

(ii) Analysis. To the extent the provision of raw
data and the analysis of the data are each treated as
separate transactions, the source of income from the
production and sale of data is determined under
paragraph (b)(4) of this section. The provision of
services would be analyzed in the same manner as in
Example 7.

Example 9. Sale of property under international
water. (i) Facts. T owns transatlantic cable lying
under the ocean, which it purchased. T sells the
cable to B.

(ii) Analysis. Because the property is sold under
international water as provided in paragraph
(d)(2)(iii) of this section, the transaction is ocean
activity under paragraph (d)(1)(ii) of this section,
and the source of income is determined under para-
graph (b)(4)(i) of this section, by reference to para-
graph (b)(1), (2), or (3) of this section.

Example 10. Sales of property in space. (i)
Facts. S manufactures a satellite in the United States
and sells it to a U.S. customer, with the rights, title,
and interest passing to the customer when the satel-
lite is located in space.

(ii) Analysis. The source of income derived from
the sale of the satellite in space is determined under
paragraph (b)(4) of this section, with the source of
income attributable to production activity deter-
mined under paragraphs (b)(4)(ii)(A) and (B) of this
section, and the source of income attributable to
sales activity determined under paragraphs

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(b)(4)(ii)(A) and (b)(4)(i) of this section, by refer-
ence to paragraph (b)(1), (2), or (3) of this section.

Example 11. Sale of property located in space.
(i) Facts. S has a right to operate from a particular
position in space. S sells the right to operate from
that satellite slot or orbit to P.

(ii) Analysis. Because the sale takes place in
space, as provided in paragraph (d)(2)(iii) of this
section, gain on the sale of the satellite slot or orbit
is income derived from space activity under para-
graph (d)(1)(i) of this section, and income from the
sale is sourced under paragraph (b)(4)(i) of this sec-
tion, by reference to paragraph (b)(1), (2), or (3) of
this section.

Example 12. Source of income of a foreign per-
son. (i) Facts. FP, a foreign company, not a con-
trolled foreign corporation within the meaning of
section 957, derives income from the operation of
satellites. FP operates a ground station in the United
States and in foreign country, FC.

(ii) Analysis. In this case, FP is engaged in a U.S.
trade or business of operating the ground station.
Thus, under paragraph (b)(3) of this section, all FP's
income derived from space activity is presumed to
be U.S. source income. However, if FP can allocate
space income to contributions occurring outside the
United States, space, and international water, as pro-
vided in paragraph (b)(3) of this section, for exam-
ple, to the ground station located in FC, then such
space income so allocated will be from sources out-
side the United States.

Example 13. Source of income of a foreign per-
son. (i) Facts. FP, a foreign company, not a con-
trolled foreign corporation within the meaning of
Section 957, operates remote sensing satellites, col-
lecting data and images in space for its customers.
FP uses an independent agent, A, in the United
States who provides marketing, order taking, and
other customer service functions.

(ii) Analysis. In this case, FP is engaged in a U.S.
trade or business on the basis of A's activities on its
behalf in the United States. Therefore, under para-
graph (b)(3) of this section, all of FP's income
derived from space activity is presumed to be space
income. However, if FP can allocate income to con-
tributions occurring outside the United States, space,
and international water, as provided in paragraph
(b)(3) of this section, then such income so allocated
will be from sources outside the United States.

(g) Reporting and documentation re-
quirements. When a taxpayer allocates
gross income, to the satisfaction of the
Commissioner, under paragraph (b)(3),
(b)(4)(ii)(C) , or (b)(5) of this section, it
does so by making the allocation on a
timely filed original return (including ex-
tensions). An amended return does not
qualify for this purpose, nor shall the pro-
visions of §301.9100-1 of this chapter
and any guidance promulgated thereunder
apply. In all cases, a taxpayer must main-
tain contemporaneous documentation in
existence when such return is filed re-

garding the allocation of gross income
and allocation or apportionment of ex-
penses, losses and other deductions, the
methodology used, and the circumstances
justifying use of that methodology. The
taxpayer must produce such documenta-
tion within 30 days upon request.

(h) Effective date. This section applies
to taxable years beginning on or after the
date that is 30 days after the date of pub-
lication of final regulations in the Federal
Register.

§1.863-9 Source of income derived from
communications activity under sections
863(a), (d), and (e).

(a) In general. Income of a U.S. or for-
eign person derived from communications
activity is sourced under the rules of this
section, notwithstanding any other provi-
sion including sections 861, 862, 863, and
865.

(b) Source of gross income derived
from communications activity-(1) In
general. The source of gross income de-
rived from each type of communications
activity, as defined in paragraph (d)(3) of
this section, is determined under this
paragraph (b). If a communications activ-
ity would qualify as space or ocean activ-
ity under section 863(d) and the regula-
tions thereunder, the source of income
derived from such communications activ-
ity is determined under this section, and
not under section 863(d) and the regula-
tions thereunder. See §1.863-8(b)(6).

(2) Source of international communi-
cations income-(i) Income derived by a
U.S. person. Under the 50/50 method of
this paragraph (b)(2)(i), income derived
by a U.S. person from international com-
munications activity is one-half from
sources within the United States and one-
half from sources without the United
States.

(ii) Income derived by foreign
persons-(A) General rule. Income de-
rived by a person other than a U.S. person
from international communications activ-
ity is, except as otherwise provided in this
paragraph (b), wholly from sources with-
out the United States.

(B) Income derived by certain foreign
corporations. If a foreign corporation, in-

cluding a controlled foreign corporation
within the meaning of section 957, is 50
percent or more owned by vote or value
(directly, indirectly, or constructively) by
U.S. persons, all income derived by that
corporation from international communi-
cations activity is from sources within the
United States.

(C) Income derived by foreign persons
with a U.S. fixed place of business. If a
foreign person (other than a foreign per-
son described in paragraph (b)(2)(ii)(B) of
this section) maintains an office or other
fixed place of business in the United
States, the foreign person's international
communications income, as determined to
the satisfaction of the Commissioner,
attributable to the office or other fixed
place of business is from sources within
the United States. The principles of sec-
tion 864(c)(5) apply in determining
whether a foreign person has an office or
fixed place of business in the United
States. See §1.864-6 and -7. This para-
graph does not apply if the foreign person
is engaged in a U.S. trade or business.

(D) Income derived by foreign persons
engaged in a U.S. trade or business. If a
foreign person (other than a foreign per-
son described in paragraph (b)(2)(ii)(B) of
this section) is engaged in a U.S. trade or
business, all of the foreign person's inter-
national communications income is pre-
sumed to be from sources within the
United States. However, if the foreign
person can allocate income between
sources within the United States, or space,
or international water and sources outside
the United States and space and interna-
tional water, to the satisfaction of the
Commissioner, based on the facts and cir-
cumstances, which may include functions
performed, resources employed, risks
assumed, or other contributions to value,
then the income allocated to sources out-
side the United States and space and inter-
national water shall be treated as from
sources without the United States.

(3) Source of U.S. communications
income. The source of income derived by
a U.S. or a foreign person from U.S. com-
munications activity is from sources with-
in the United States.

(4) Source of foreign communications
income. The source of income derived by

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a U.S. or a foreign person from foreign
communications activity is from sources
without the United States.

(5) Source of space/ocean communica-
tions income. The source of income de-
rived by a U.S. or a foreign person from
space/ocean communications activity is
determined under section 863(d) and the
regulations thereunder, without regard to
§1.863-8(b)(6).

(6) Source of communications income
when taxpayer cannot establish the two
points between which the taxpayer is paid
to transmit the communication. The
income derived by a U.S. person or for-
eign person from communications activi-
ty, when the taxpayer cannot establish the
two points between which the taxpayer is
paid to transmit the communication as
required in paragraph (d)(3)(i) of this sec-
tion, is from sources within the United
States.

(c) Taxable income. When a taxpayer
allocates gross income under paragraph
(b)(2)(ii)(D) or (d)(1)(ii) of this section, to
the satisfaction of the Commissioner,
based on all the facts and circumstances,
the taxpayer must allocate or apportion
expenses, losses, and other deductions as
prescribed in §§1.861-8 through
1.861-14T to the class of gross income,
which must include the total income so
allocated in each case. A taxpayer must
then apply the rules of §§1.861-8 through
1.861-14T to properly allocate or appor-
tion amounts of expenses, losses, and
other deductions allocated or apportioned
to such gross income between gross
income from sources within the United
States and without the United States. For
amounts of expenses, losses, and other
deductions allocated or apportioned to
gross income derived from international
communications activity, when the source
of income is determined under the 50/50
method of paragraph (b)(2)(i) of this sec-
tion, taxpayers must apportion expenses,
losses, and other deductions between
sources within and sources without pro
rata based on the relative amounts of
gross income from sources within the
United States and without the United
States. Research and experimental expen-
ditures qualifying under §1.861-17 are
allocated under that section, and are not
allocated and apportioned pro rata under
the method of paragraph (b)(2)(i) of this
section.

(d) Communications activity and
income derived from communications
activity-(1) Communications activity-
(i) General rule. For purposes of this
part, communications activity consists
solely of the delivery by transmission of
communications or data (communica-
tions). Delivery of communications other
than by transmission, for example, by
delivery of physical packages and letters,
is not communications activity within the
meaning of this section. Communications
activity also includes the provision of
capacity to transmit communications.
Provision of content or any other addi-
tional service provided along with, or in
connection with, a non-de minimis com-
munications activity must be treated as a
separate non-communications activity
unless de minimis.

(ii) Separate transaction. To the extent
a taxpayer's transaction consists in part of
non-de minimis communications activity
and in part of non-de minimis non-com-
munications activity, such parts of the
transaction must be treated as separate
transactions. Gross income must be allo-
cated to each such transaction involving
the communications activity and the non-
communications activity to the satisfac-
tion of the Commissioner, based on all
relevant facts and circumstances, which
may include functions performed,
resources employed, risks assumed, and
any other contributions to the value of the
respective transactions. For purposes of
determining whether income is derived
from communications activity, the
Commissioner may treat communications
activity and non-communications activity,
treated as a single transaction, as separate
transactions, or combine separate commu-
nications activity and non-communica-
tions activity transactions into a single
transaction.

(2) Income derived from communica-
tions activity. Income derived from com-
munications activity (communications
income) is income derived from the deliv-
ery by transmission of communications,
including income derived from the provi-
sion of capacity to transmit communica-
tions. Income may be considered derived
from a communications activity even if
the taxpayer itself does not perform the
transmission function, but in all cases, the
taxpayer derives communications income
only if the taxpayer is paid to transmit,

and bears the risk of transmitting, the
communications.

(3) Determining the type of communi-
cations activity-(i) In general. Whether
income is derived from international com-
munications activity, U.S. communica-
tions activity, foreign communications
activity, or space/ocean communications
activity is determined by identifying the
two points between which the taxpayer is
paid to transmit the communication. The
taxpayer must establish to the satisfaction
of the Commissioner the two points
between which the taxpayer is paid to
transmit, and bears the risk of transmit-
ting, the communication. Whether the
taxpayer contracts out part or all of the
transmission function is not relevant.

(ii) Income derived from international
communications activity. Income derived
by a taxpayer from international commu-
nications activity (international communi-
cations income) is income derived from
communications activity, as defined in
paragraph (d)(1) of this section, when the
taxpayer is paid to transmit between a
point in the United States and a point in a
foreign country (or a possession of the
United States).

(iii) Income derived from U.S. commu-
nications activity. Income derived by a
taxpayer from U.S. communications
activity (U.S. communications income) is
income derived from communications
activity, as defined in paragraph (d)(1) of
this section, when the taxpayer is paid to
transmit-

(A) Between two points in the United
States; or

(B) Between the United States and a
point in space or in international water.

(iv) Income derived from foreign com-
munications activity. Income derived by a
taxpayer from foreign communications
activity (foreign communications income)
is income derived from communications
activity, as defined in paragraph (d)(1) of
this section, when the taxpayer is paid to
transmit-

(A) Between two points in a foreign
country or countries (or possession or
possessions of the United States); or

(B) Between a foreign country (or a
possession of the United States) and a
point in space or in international water.

(v) Income derived from space/ocean
communications activity. Income derived
by a taxpayer from space/ocean commu-

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nications activity (space/ocean communi-
cations income) is income derived from a
communications activity, as defined in
paragraph (d)(1) of this section, when the
taxpayer is paid to transmit between a
point in space or in international water
and another point in space or in interna-
tional water.

(e) Treatment of partnerships-(1)
General. In the case of a U.S. partner-
ship, this section will be applied at the
partnership level. In the case of a foreign
partnership, this section will be applied at
the partner level.

(2) Exception. In the case of a U.S.
partnership in which 50 percent or more
of the partnership interests are owned by
foreign persons, this section will be
applied at the partner level.

(f) Examples. The following examples
illustrate the rules of this section:

Example 1. Income derived from communica-
tions activity. (i) Facts. D provides its customers in
various foreign countries with access to its data base.
A customer, C, places a toll call to D's telephone
number, and can then access D's data base to obtain
certain information, such as C's customers' health
care coverage.

(ii) Analysis. D is not paid to transmit communi-
cations and does not derive income solely from
transmission of communications within the meaning
of paragraph (d) of this section. D instead derives
income from provision of content or provision of
services to its customers.

Example 2. Income derived from U.S. communi-
cations activity. (i) Facts. Local telephone compa-
ny (TC) receives access fees from an international
carrier for picking up calls from a local telephone
customer and delivering the call to a U.S. point of
presence (POP) of the international carrier. The
international carrier picks up the call from its U.S.
POP and delivers the call to a foreign country.

(ii) Analysis. TC is not paid to carry the trans-
mission between the United States and a foreign
country. It is paid to transmit communications
between two points in the United States. TC derives
income from U.S. communications activity as
defined in paragraph (d)(3)(iii) of this section, which
is sourced under paragraph (b)(3) of this section as
U.S. source income.

Example 3. Income derived from international
communications activity. (i) Facts. TC, a U.S. com-
pany, owns an underwater fiber optic cable.
Pursuant to three year contracts, TC makes capacity
to transmit communications via the cable available
to its customers. Such customers then solicit tele-
phone customers and arrange for transmitting their
calls. The cable runs in part through U.S. waters,
through international waters, and in part through for-
eign country waters.

(ii) Analysis. TC derives income from communi-
cations activity under paragraph (d)(2) of this sec-
tion. The income is derived from international com-
munications activity as provided in paragraph
(d)(3)(ii) of this section, since TC is paid to make
available capacity to transmit between the United

States and a foreign country, and vice versa. Since
TC is a U.S. person, TC's international communica-
tions income is sourced under paragraph (b)(2)(i) of
this section as one-half from sources within the
United States and one-half from sources without the
United States.

Example 4. Character of communications activ-
ity: the paid-to-do rule. (i) Facts. TC is paid to
transmit communications from Toronto, Canada, to
Paris, France. TC transmits the communication to
New York. TC pays another communications com-
pany, IC, to transmit the communications from New
York to Paris.

(ii) Analysis. Under the paid-to-do rule of para-
graph (d)(3)(i) of this section, TC derives income
from foreign communications activity under para-
graph (d)(3)(iv) of this section, since it is paid to
transmit communications between two foreign
points, Toronto and Paris. Under paragraph (d)(3)(i)
of this section, the character of TC's activity is deter-
mined without regard to the fact that TC pays IC to
transmit the communication for some portion of the
delivery path. IC has international communications
income under paragraph (d)(3)(ii) of this section,
because it is paid to transmit the communication
between a point in the United States and a point in a
foreign country.

Example 5. Income derived from international
communications activity. (i) Facts. S, a U.S. satel-
lite operator, owns satellites and the uplink facilities
in Country X, a foreign country. B, a resident of
Country X, pays S to deliver its programming from
Country X to its downlink facility in the United
States, owned by C, a customer of B.

(ii) Analysis. S derives communications income
under paragraph (d) of this section. S's income is
characterized as international communications
income under paragraph (d)(3)(ii) of this section,
because S is paid to transmit the communication
between the beginning point in a foreign country to
an end point in the United States. The source of S's
international communications income is determined
under paragraph (b)(2)(i) of this section as one-half
from sources within the United States and one-half
from sources without the United States.

Example 6. Character of income derived from
communications activity: the paid-to-do rule. (i)
Facts. TC is paid to take a call from North Carolina
to Iowa, two points in the United States, but routes
the call through Canada.

(ii) Analysis. Under paragraph (d)(3)(i) of this
section, the character of the income derived from
communications activity is determined by the two
points between which the taxpayer is paid to trans-
mit, and bears the risk of transmitting, the communi-
cations, without regard to the path of the transmis-
sion between those two points. Thus, under
paragraph (d)(3)(iii) of this section, TC derives
income from U.S. communications activity because
it is paid to transmit between two U.S. points.

Example 7. Source of income derived from com-
munications activity. (i) Facts. A, a U.S. company,
is an Internet access provider. A charges C a lump
sum, paid monthly, for Internet access. A transmits
a call made by C in France to a recipient in England,
over the public Internet. A does not maintain records
as to the beginning and end points of the transmis-
sion.

(ii) Analysis. Although A derives income from
communications activity as defined in paragraph

(d)(1) of this section, the source of income is deter-
mined under paragraph (b)(6) of this section as
income from sources within the United States,
because A cannot establish the two points between
which it is paid to transmit the communications.

Example 8. Income derived from communica-
tions and non-communications activity. (i) Facts.
A, a U.S. company, offers customers local and long
distance phone service, video, and Internet services.
Customers pay one monthly fee, and in addition 10
cents a minute for all long-distance calls, including
international calls.

(ii) Analysis. To the extent A derives income
from communications activity, A must allocate
income to its communications activity as provided in
paragraph (d)(1)(ii) of this section. To the extent A
can establish that it derives international communi-
cations income as defined in paragraph (d)(3)(ii) of
this section, A would determine the source of such
income under paragraph (b)(2)(i) of this section. If
A cannot establish the points between which it is
paid to transmit communications, as required in
paragraph (d)(3)(i) of this section, the source of A's
income must be determined under paragraph (b)(6)
of this section as from within the United States.

Example 9. Income derived from communica-
tions activity. (i) Facts. T purchases capacity from
TC to transmit telephone calls. T sells prepaid tele-
phone calling cards, giving customers access to TC's
lines, for a certain number of minutes.

(ii) Analysis. T derives income from communi-
cations activity, under paragraph (d)(2) of this sec-
tion, because T makes capacity to transmit available
to its customers. In this case, T cannot establish the
points between which communications are transmit-
ted. Therefore, the source of its income must be
determined under paragraph (b)(6) of this section as
U.S. source income.

Example 10. Income derived from communica-
tions and non-communications activity. (i) Facts.
B, a U.S. company, transmits television programs
using its satellite transponder, from the United States
to downlink facilities in foreign country Y, owned by
D, a cable system operator in Country Y. D receives
the transmission, unscrambles the signals, and dis-
tributes the broadcast to customers in Country Y.

(ii) Analysis. B derives income both from com-
munications activity as defined under paragraph
(d)(1)(i) of this section, and from non-communica-
tions activity. Gross income must be allocated to the
communications activity as required in paragraph
(d)(1)(ii) of this section. Income derived by B for
transmission to D is international communications
income within paragraph (d)(3)(ii) of this section,
because B is paid to transmit communications from
the United States to a foreign country.

Example 11. Income derived from communica-
tions activity. (i) Facts. TC is paid for Internet
access. TC replicates frequently requested sites on
its servers, solely to speed up response time.

(ii) Analysis. On these facts, the replication ser-
vice would be treated as de minimis under paragraph
(d)(1)(i) of this section, so that TC derives income
from communications activity. The type and source
of TC's communications income depends on demon-
strating the points between which TC is paid by its
customer to transmit the communications, under
paragraph (d)(3)(i) of this section.

Example 12. Income derived from foreign com-
munications activity. (i) Facts. S leases capacity to

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B, a broadcaster located in Australia. B beams pro-
gramming to the satellite, and S's satellite picks the
communications up in space, and beams the pro-
gramming over Southeast Asia.

(ii) Analysis. S derives income from communi-
cations activity under paragraph (d)(2) of this sec-
tion. S's income is characterized as income derived
from foreign communications activity under para-
graph (d)(3)(iv) of this section, because S picks up
the communication in space, and beams it to a foot-
print entirely covering a foreign area. The source of
S's income is determined under paragraph (b)(4) of
this section as from sources without the United
States. If S were beaming the programming over a
satellite footprint that covered area both in the
United States and outside the United States, S would
be required to allocate the income derived from the
different types of communications activity.

(g) Reporting rules and disclosure on
tax return. When a taxpayer allocates gross
income to the satisfaction of the Commis-
sioner under paragraph (b)(2) (ii)(D), or
(d)(1)(ii) of this section, it does so by mak-
ing the allocation on a timely filed original
return (including extensions). An amended
return does not qualify for this purpose, nor
shall the provisions of §301.9100-1 of this
chapter and any guidance promulgated
thereunder apply. In all cases, a taxpayer
must maintain contemporaneous documen-
tation in existence when such return is filed
regarding the allocation of gross income,
and allocation and apportionment of ex-
penses, losses, and other deductions, the
methodology used, and the circumstances
justifying use of that methodology. The
taxpayer must produce such documentation
within 30 days of a request.

(h) Effective date. This section applies
to taxable years beginning on or after the
date that is 30 days after the date of pub-
lication of final regulations in the Federal
Register.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

(Filed by the Office of the Federal Register on Janu-
ary 16, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 17, 2001, 66 F.R.
3903)

## Notice of Proposed Rulemaking and Notice of Public Hearing

Regulations Governing Practice
Before the Internal Revenue
Service

REG-111835-99

AGENCY: Office of the Secretary,
Treasury.

ACTION: Notice of proposed rulemak-
ing and notice of public hearing.

SUMMARY: This notice proposes modi-
fications of the regulations governing
practice before the Internal Revenue
Service (Circular 230). These regulations
would affect individuals who are eligible
to practice before the Internal Revenue
Service. The proposed modifications
would clarify the general standards of
practice before the Internal Revenue
Service and would modify the standards
for providing advice regarding tax shel-
ters. This document also provides notice
of a public hearing on the proposed regu-
lations.

DATES: Comments and requests to speak
and outlines of topics to be discussed
from persons wishing to speak at the pub-
lic hearing scheduled for May 2, 2001, in
the auditorium of the Internal Revenue
Building at 1111 Constitution Avenue,
NW., Washington, DC 20224, must be
received by April 12, 2001.

ADDRESSES: Send submissions to:
CC:M&SP:RU (REG-111835-99), room
5226, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday be-
tween the hours of 8 am. and 5 pm. to:
CC:M&SP:RU (REG-111835-99),
Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW.,
Washington, DC. Submit comments and
data via electronic mail (email) to
http://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CON-
TACT: Concerning issues for comment,
Richard Goldstein at (202) 622-7820 or
Brinton Warren at (202) 622-4940; con-
cerning submissions of comments and
delivering comments, Guy Traynor at
(202) 622-7180; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

## Paperwork Reduction Act

The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507). Comments on the col-

lection of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Regu-
latory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC
20224. Comments on the collection of in-
formation should be received by March 13,
2001. Comments are specifically requested
concerning:

Whether the proposed collection of
information is necessary for the proper
performance of the Office of the Director
of Practice, including whether the infor-
mation will have practical utility;

The accuracy of the estimated burden
associated with the proper collection of
information (see below);

How the quality, utility, and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.

The collection of information in these
proposed regulations is in §§10.6, 10.29,
and 10.30. Section 10.6 requires an en-
rolled agent to maintain records and edu-
cational materials regarding his or her sat-
isfaction of the qualifying continuing
professional education credit. Section
10.6 also requires sponsors of qualifying
continuing professional education pro-
grams to maintain records and educa-
tional material concerning these programs
and those who attended them. The collec-
tion of this material helps to ensure that
individuals enrolled to practice before the
Internal Revenue Service are informed of
the newest developments in Federal tax
practice.

Section 10.29 requires a practitioner to
obtain and retain for a reasonable period
written consents to representation when-
ever such representation directly conflicts
with the interests of the practitioner or the
interests of another client of the practi-
tioner. The consents are to be obtained
after full disclosure of the conflict is pro-

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vided to each party. Section 10.30 re-
quires a practitioner to retain for a reason-
able period any communication and the
list of persons to whom that communica-
tion was provided with respect to public
dissemination of fee information. The
collection of consents to representation
and communications concerning practi-
tioner fees protects the practitioner
against claims of impropriety and ensures
the integrity of the tax administration sys-
tem.

Estimated total annual recordkeeping
burden is 50,000 hours.

Estimated annual burden per record-
keeper varies from 30 minutes to 1 hour,
depending on individual circumstances,
with an estimated average of 54 minutes.

Estimated number of recordkeepers is
56,000.

An agency may not conduct or sponsor,
and a person is not required to respond to
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Internal
Revenue Code.

### Background

Section 330 of title 31 of the United
States Code authorizes the Secretary of
the Treasury to regulate the practice of
representatives before the Treasury De-
partment. The Secretary of the Treasury
is authorized, after notice and an oppor-
tunity for a proceeding, to suspend or
disbar from practice before the Depart-
ment those representatives who are in-
competent, disreputable, or who violate
regulations prescribed under section 330
of title 31. Pursuant to section 330 of
title 31, the Secretary has published the
regulations in Circular 230 (31 CFR part
10). These regulations authorize the Di-
rector of Practice to act upon applica-
tions for enrollment to practice before
the Internal Revenue Service, to make
inquiries with respect to matters under
the Director's jurisdiction, to institute
proceedings for suspension or disbar-
ment from practice before the Internal
Revenue Service, and to perform such

other duties as are necessary to carry out
these functions.

The regulations have been amended
from time to time to address various spe-
cific issues in need of resolution. For
example, on February 23, 1984, the reg-
ulations were amended to provide stan-
dards for providing opinions used in tax
shelter offerings (49 FR 6719). On Oc-
tober 17, 1985, the regulations were
amended to conform to legislative
changes requiring the disqualification of
an appraiser who is assessed a penalty
under section 6701 of the Internal Rev-
enue Code for aiding and abetting the
understatement of a tax liability (50 FR
42014). The regulations were most re-
cently amended on June 20, 1994 (59 FR
31523), to provide standards for tax re-
turn preparation, to limit the use of con-
tingent fees in tax return or refund claim
preparation, to provide expedited rules
for suspension, and to clarify or amend
certain other items.

On June 15, 1999, an advance notice
of proposed rulemaking was published
(64 FR 31994) requesting comments on
amendments to the regulations that
would take into account legal develop-
ments, professional integrity and fairness
to practitioners, taxpayer service, and
sound tax administration. On May 5,
2000, an advance notice of proposed
rulemaking was published (65 FR 30375)
requesting comments on amendments to
the regulations relating to standards of
practice governing tax shelters and other
general matters.

## Summary of Comments

Twenty-seven written comments have
been submitted concerning the revision of
Circular 230. All comments received have
been considered and are available for pub-
lic inspection upon request. The follow-
ing paragraphs provide a summary of sig-
nificant comments.

A few commentators expressed con-
cern that, under the current regulations, a
practitioner may be in violation of the
regulations if the practitioner fails to fur-
nish information or documents subject to
a lawful request for documents made by
an officer or employee of the Internal
Revenue Service where neither the practi-
tioner nor the practitioner's client pos-
sesses or controls the documents. These
commentators suggested that §10.20 of

the regulations be clarified to provide that
there is no violation of the regulations if
the information or documents are not in
the possession or control of the practi-
tioner or the practitioner's client.

Some commentators expressed con-
cern about a practitioner's obligation
when notifying a client of any noncom-
pliance with the revenue laws. The com-
mentators recommended that a practi-
tioner be required to advise the client of
the action necessary to correct the error
or omission and the consequences of not
taking such action when notifying a
client of any noncompliance with the
revenue laws. Some commentators ex-
pressed concern about the current prac-
tice used by some practitioners to obtain
oral consents to represent parties where
there is a direct conflict of interest. They
recommended that a practitioner be re-
quired to obtain written consents to rep-
resent parties where there is a direct con-
flict of interest.

Some commentators suggested that
§10.22 be amended specifically to permit
a practitioner to demonstrate due dili-
gence for purposes of these regulations
based on the practitioner's reliance on the
work product of an associate or partner. It
also was suggested that §10.24 be
amended to permit a practitioner to share
fees with a suspended or disbarred person
during the period of suspension or disbar-
ment, respectively.

Several commentators noted that the
regulations regarding solicitation are not
consistent with recent court decisions
concerning in-person contacts of potential
clients by certified public accountants.
They suggested that the restrictions on in-
person contacts be liberalized for all prac-
titioners. It also was suggested that the
prohibition of deceptive public solicita-
tions be extended to deceptive private so-
licitations and that practitioners be pro-
hibited from associating with an
individual who uses deceptive solicitation
practices, regardless of whether the de-
ceptive practices related to business con-
nected with the practitioner.

One commentator suggested that the
regulations be modified to require the Di-
rector of Practice to notify a practitioner
whenever a complaint has been filed
against the practitioner, whether or not
any action is taken against the practitioner
as a result of the complaint.

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Several comments were received rec-
ommending changes to the regulation of
opinion writing by practitioners. Com-
mentators recommended that new opinion
standards be promulgated with respect to
tax shelter opinions that are rendered for
the purpose of establishing a reasonable
cause and good faith defense to the accu-
racy-related penalties under section 6662
of the Internal Revenue Code ("reason-
able cause opinions"). These commenta-
tors suggested that standards for such
opinions impose factual due diligence re-
quirements that, in particular, restrict the
reliance on hypothetical facts or factual
assumptions as the basis for such opin-
ions. Some commentators suggested that
reliance on factual assumptions regarding
the business purpose or noneconomic
consequences of a transaction be treated
as inherently unreasonable. Comments
also were received on whether and to
what extent reliance in an opinion on tax-
payer representations or certifications
should be permitted and the conditions
under which a practitioner may rely on
the opinions of other practitioners.

Several commentators recommended
that the new standards impose require-
ments with respect to the legal analysis
contained in reasonable cause opinions,
particularly that such opinions contain no
unreasonable legal assumptions, address
all material tax issues, evaluate relevant
legal authorities and consider applicable
judicial doctrines and statutory and regu-
latory anti-abuse rules. One commenta-
tor, however, thought it was unnecessary
to impose an explicit requirement in
Circular 230 that reasonable cause opin-
ions address the applicability of relevant
judicial doctrines. Another commentator
considered it sufficient for Circular 230
merely to require that reasonable cause
opinions consider the substance and pur-
pose of the transaction under scrutiny.

Comments also were received as to
whether a reasonable cause opinion
should unambiguously opine on a comfort
level of "more likely than not" or higher,
should state that it is issued to establish
reasonable cause, and other matters. A
few commentators expressed concern that
the definition of a tax shelter utilized in
any opinion standards not be overly broad
and that opinion standards under Circular
230 be coordinated with opinion-related
requirements under the accuracy-related

penalties. One commentator suggested
that the opinion standards provide that
satisfaction of the standards would meet a
practitioner's obligations under Circular
230, but would not determine the persua-
siveness of, and the taxpayer's good faith
reliance on, the opinion. Two commenta-
tors also suggested that standards be pro-
mulgated for written advice used for mar-
keting purposes.

Commentators generally did not oppose
the expansion of sanctions to encompass
lesser sanctions such as censure. Com-
mentators did not support attribution of
practitioner misconduct to other members
of the practitioner's firm. Several com-
mentators, however, stated that in in-
stances where there has been a knowing
participation or acquiescence in such mis-
conduct by other members of a firm or a
pattern of abuse by members of a firm,
sanctions extending beyond the individual
practitioner may be appropriate.

The majority of commentators sup-
ported a contingent fee limitation with re-
spect to original tax returns if the fee
arrangement was contingent on the return
position being sustained. Such fee
arrangements may indicate an inappropri-
ate reliance on the "audit lottery." The
commentators believed that the same con-
siderations were not as persuasive with
respect to amended tax returns.

Commentators generally did not favor
the imposition of restrictions in Circular
230 on confidentiality imposed on practi-
tioners by clients or on clients by practi-
tioners.

## Explanation of Provisions

### Who May Practice

Paragraph (d)(2) of §10.3 of the regula-
tions provides a list of issues with respect
to which an enrolled actuary is authorized
to represent a taxpayer in limited practice
before the Internal Revenue Service. This
list of issues would be expanded under the
proposed regulations to include issues
involving 26 U.S.C. 419 (treatment of
funded welfare benefits), 419A (qualified
asset accounts), 420 (transfers of excess
pension assets to retiree health accounts),
4972 (tax on nondeductible contributions
to qualified employer plans), 4976 (taxes
with respect to funded welfare benefit
plans), and 4980 (tax on reversion of qual-
ified plan assets to employer).

Enrollment

Section 10.6 of the regulations sets
forth the conditions for renewal of enroll-
ment to practice before the Internal
Revenue Service. One condition for
renewal of enrollment is that the enrolled
agent complete a minimum number of
hours of continuing professional educa-
tion. Paragraph (f) of §10.6 of the regula-
tions requires that there be a written out-
line and/or textbook for each course.
Under the proposed regulations, a contin-
uing education program may qualify for
purposes of this part if the course requires
suitable electronic educational materials,
a written outline, or a textbook.

The regulations permit any individual
who is enrolled as an actuary by the Joint
Board for the Enrollment of Actuaries to
enroll and qualify to practice before the
Internal Revenue Service by filing with
the Service a written declaration that such
individual is currently qualified as an
enrolled actuary. New paragraph 10.6(o)
would be added to clarify that the renew-
al of enrollment of actuaries also is gov-
erned by the regulations concerning the
Joint Board for the Enrollment of
Actuaries at 20 C.F.R. 901.1 et seq.

Information to be Furnished

Section 10.20 of the regulations
requires a practitioner to submit docu-
ments or information whenever a lawful
request for such documents or informa-
tion is made by a duly authorized officer
or employee of the Internal Revenue
Service. The provision does not provide
an exception if the practitioner or the
practitioner's client does not possess or
control the requested documents or infor-
mation. Under the proposed regulations,
paragraph (a) of §10.20 would be modi-
fied to clarify that a practitioner is
required to promptly respond to a lawful
and proper request for documents by
either submitting the requested informa-
tion or advising the requesting officer or
employee why the information cannot be
provided (e.g., the documents requested
are privileged, or the documents are not
controlled by either the practitioner or the
practitioner's client). If the documents
are not controlled by either the practition-
er or the practitioner's client, the provi-
sion would require the practitioner, to the
extent possible, to identify any persons

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who may have the requested documents in
their control.

Knowledge of Client's Omission

Section 10.21 of the regulations re-
quires a practitioner to advise a client
promptly of any noncompliance by the
client with the revenue laws. Under the
proposed regulations, a practitioner also
would be required to advise the client of
the manner in which the error or omission
may be corrected and the possible conse-
quences of not taking such corrective ac-
tion.

### Diligence as to Accuracy

Section 10.22 of the regulations re-
quires a practitioner to exercise due dili-
gence in preparing or assisting in the
preparation, approving, and filing of doc-
uments relating to Internal Revenue Ser-
vice matters. Section 10.22 also requires
a practitioner to exercise due diligence in
determining the correctness of oral or
written representations made to the De-
partment of Treasury or with reference to
any matter administered by the Internal
Revenue Service. The proposed regula-
tions would clarify that a practitioner is
presumed to have exercised due diligence
if the practitioner relies on the work prod-
uct of another person and the practitioner
used reasonable care in engaging, super-
vising, training and evaluating such per-
son.

### Assistance from Disbarred or Suspended Persons

Section 10.24 of the regulations pro-
hibits a practitioner, in practice before the
Internal Revenue Service, from employ-
ing, accepting assistance from, accepting
employment from, or becoming a sub-
agent for, a disbarred or suspended per-
son. Section 10.24 also precludes a prac-
titioner from accepting assistance from
any former government employee where
the provisions of §10.26 of the current
regulations (§10.25 of the proposed regu-
lations) or any Federal law would be vio-
lated. Section 10.24 of the proposed reg-
ulations clarifies that a practitioner is
prohibited from accepting assistance from
or assisting a disbarred or suspended prac-
titioner if the assistance relates to matters
constituting practice before the Internal
Revenue Service. The proposed regula-

tions, however, would not require practi-
tioners to disassociate themselves from a
suspended or disbarred person as long as
the other proscriptions regarding dis-
barred or suspended persons are observed.
Practitioners who are partners of a law or
accountancy partnership, for example,
would not be required to expel another
partner who was subject to discipline sim-
ply because the disciplined partner might
otherwise share in fees derived from ser-
vices rendered by others before the
Internal Revenue Service.

### Practice by Partners of Government Employees

Section 10.25 of the regulations pre-
cludes partners of former Government
employees from practice with respect to
matters in which the employee personally
and substantially participated. This provi-
sion would be removed under the pro-
posed regulations because the statutory
prohibition implemented by this provision
(18 U.S.C. 207(c)) has been repealed.

Practice by Former Government
Employees, Their Partners and Their
Associates

Section 10.26 of the current regulations
places restrictions on the practice of for-
mer Government employees, their part-
ners, and their associates with respect to
certain matters that the former
Government employees participated in
during the course of their Government
employment. This section would be
renumbered as §10.25 under the proposed
regulations and would be amended to
reflect changes to the Federal statutes
governing post-employment restrictions
applicable to former Government employ-
ees.

### Fees and Confidentiality

Paragraph (b) of §10.28 of the current
regulations precludes a practitioner from
charging his or her client a contingent fee
for the preparation of an original tax
return, but permits the practitioner to
charge a contingent fee for the preparation
of an amended tax return or a claim for
refund (other than a claim for refund
made on an original tax return). Section
10.28 would be renumbered as §10.27 and
paragraph (b) would be clarified to pro-
vide that a practitioner is prohibited from

charging a contingent fee not only for
preparation of an original tax return, but
also for advice rendered in connection
with a position taken or to be taken on an
original tax return. A practitioner would
be permitted, however, to charge a contin-
gent fee both for the preparation of, and
for advice rendered in connection with a
position taken, or to be taken on, an
amended tax return or a claim for refund
if the practitioner reasonably anticipates
that the amended tax return or refund
claim will receive substantive review by
the Internal Revenue Service. In addition,
a contingent fee would be defined to
include any fee that is based, in whole or
in part, on whether or not a position taken
on a tax return or in a refund claim is sus-
tained, an indemnity agreement, a guaran-
tee, recission rights, insurance or any
other arrangement by which the practi-
tioner will compensate or reimburse the
taxpayer or another person if a position
taken on a tax return or in a refund claim
is not sustained.

The proposed regulations would not
prohibit confidentiality agreements. Con-
fidentiality restrictions imposed by clients
may raise an ethical inquiry as to the ef-
fects of such arrangements on a practi-
tioner's ability to represent his or her
clients. See Illinois State Bar Association
Advisory Opinion on Professional Con-
duct 00-01 (October 2000)(a conflict of
interest arises with respect to other similar
clients when a lawyer agrees not to dis-
close ideas of a third party to reduce a
client's tax obligations). Commentators
asserted that such confidentiality restric-
tions were not an issue appropriate for
regulation under Circular 230. Commen-
tators also asserted that confidentiality re-
strictions imposed by practitioners on
clients were an appropriate contractual
arrangement for the benefit of practition-
ers. The Treasury Department remains
concerned, however, about confidentiality
restrictions and specifically invites com-
ments on whether the final regulations
should address such restrictions, and, if
so, in what manner.

Return of Client's Records

Section 10.28 of the proposed regula-
tions would specifically require a practi-
tioner to return a client's records when the
client makes a request for such records,
whether or not a dispute regarding fees

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exists. The practitioner may retain a copy
of those records.

### Conflicting Interests

Section 10.29 of the regulations pro-
hibits a practitioner from representing
conflicting interests before the Internal
Revenue Service, except with the express
consent of all directly interested parties
after full disclosure. Under the proposed
regulations, a practitioner would be re-
quired to obtain the written consents of
the clients before representing clients
with conflicting interests. The practi-
tioner would be required to retain the
written consents for at least 36 months
after the conclusion of the representation
of the clients and to present copies of such
consents to the Internal Revenue Service,
if requested to do so.

In addition, the proposed regulations
would provide that a practitioner may not
represent a party in his or her practice be-
fore the Internal Revenue Service if that
representation may be materially limited
by the practitioner's own interests, unless
practitioner reasonably believes the repre-
sentation will not be adversely affected
and the client consents after full disclo-
sure, including disclosure of the implica-
tions of the potential conflict and the risks
involved.

### Solicitation

Section 10.30 of the regulations gov-
erns the manner in which practitioners
may contact potential business clients.
The proposed regulations would update
the solicitation rules to reflect recent court
decisions and to respond to comments
received in connection with this rulemak-
ing. Under the proposed regulations, a
practitioner would be permitted to contact
potential business clients using any medi-
um that is not prohibited by Federal or
state statutes or other rules applicable to
the practitioner regarding the uninvited
solicitation of prospective clients. The
proposed regulations also would expand
the prohibition of deceptive solicitation
practices to cover private, as well as pub-
lic, solicitations, expand the prohibition
against providing assistance to or accept-
ing assistance from an individual who
uses deceptive solicitation practices,
whether or not such practices are in con-
nection with the relationship the individ-

ual has with the practitioner, and include
electronic mail, facsimile, and hand-deliv-
ered flyers in the definition of communi-
cation.

### Negotiation of Taxpayer Checks

Section 10.31 of the regulations pro-
hibits a practitioner who prepares income
tax returns from negotiating a check with
respect to income tax issued to a taxpayer
other than the practitioner. The proposed
regulations would clarify that this prohibi-
tion is not limited to checks issued for
income taxes, but applies to all checks
issued to the practitioner's clients by the
Government with respect to matters
before the Internal Revenue Service. The
proposed regulations also would clarify
that practitioners are not prohibited from
negotiating checks issued to their own
partnerships, corporations, etc.

### Tax Shelter Opinions

Two sections of the proposed regula-
tions would provide standards governing
tax shelter opinions. New §10.35 would
apply to all tax shelter opinions that con-
clude that the Federal tax treatment of a tax
shelter item or items is more likely than not
(or at a higher level of confidence) the
proper treatment. Section 10.33 would be
revised in scope to apply to all tax shelter
opinions not governed by §10.35 that a
practitioner knows or has reason to believe
will be used or referred to by persons other
than the practitioner to promote, market or
recommend a tax shelter. For purposes of
§§10.33 and 10.35 of the proposed regula-
tions, the definition of a tax shelter would
conform to the definition found in section
6662(d)(2)(C)(iii) of the Internal Revenue
Code.

The Treasury Department and the Inter-
nal Revenue Service recognize that the
proposed rules in §§10.33 and 10.35 of
the proposed regulations may regulate
opinion standards with respect to transac-
tions that had not previously been subject
to the rules governing tax shelter opin-
ions. The proposed regulations would ex-
clude opinions relating to municipal
bonds and qualified retirement plans. The
Treasury Department and the Internal
Revenue Service specifically request
comment on whether the regulations
should exempt other transactions from the
requirements for tax shelter opinions and,

if so, the types of other transactions that
should be exempted.

Tax Shelter Opinions Used by Third Par-
ties to Market Tax Shelters

Section 10.33 currently governs advice
by a practitioner concerning the Federal
tax aspects of a tax shelter either appear-
ing or referred to in offering materials, or
used or referred to in connection with
sales promotion efforts, and directed to
persons other than the client who engaged
the practitioner to give the advice. The
proposed regulations would revise the
scope of §10.33 to govern a tax shelter
opinion that does not conclude that the
Federal tax treatment of an item or items
is more likely than not the proper treat-
ment and that a practitioner knows or has
reason to believe will be used or referred
to by persons other than the practitioner to
promote, market or recommend the tax
shelter to one or more taxpayers. The pro-
posed regulations would clarify that
§10.33 governs tax shelter opinions pre-
pared for use by third parties that are pro-
moting the tax shelter, irrespective of
whether such promotional efforts are con-
ducted publicly or privately. The pro-
posed regulations also would modify the
definition of a material Federal tax issue
and define a tax shelter item as an item of
income, gain, loss, deduction or credit if
the item is directly or indirectly attribut-
able to a tax shelter.

Section 10.33 would require a practi-
tioner who provides a written opinion
with respect to a tax shelter item or items
to comply with a series of requirements
with respect to each such item. A practi-
tioner would be required to make inquiry
as to all relevant facts, be satisfied that the
opinion takes account of all relevant facts,
and that the material facts are accurately
and completely described in the opinion.
Furthermore, the opinion could not be
based, directly or indirectly, on any unrea-
sonable factual assumptions. An unrea-
sonable factual assumption would include
a factual assumption that the practitioner
knows or has reason to believe is incor-
rect, incomplete, inconsistent or implausi-
ble. An unreasonable factual assumption
also would include a factual assumption
regarding a fact or facts that the practi-
tioner could reasonably request to be pro-
vided or to be represented.

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The proposed regulations would permit
a practitioner, where it would be reason-
able based on all the facts and circum-
stances, to rely upon factual representa-
tions, statements, findings or agreements.
The proposed regulations would further
provide that a practitioner need not con-
duct an audit or independent verification
of a factual representation, but that re-
liance would not be permitted on factual
representations that the practitioner
knows or has reason to believe are unrea-
sonable, incorrect, incomplete, inconsis-
tent or implausible (e.g., a representation
that there are business reasons for a trans-
action without describing those reasons, a
representation that a transaction is poten-
tially profitable apart from tax benefits
without providing adequate factual sup-
port, or a valuation that is inconsistent
with the facts of the transaction).

The proposed regulations would provide
that the opinion must clearly identify the
facts upon which the opinion's conclusions
are based, contain a reasoned analysis of the
pertinent facts and legal authorities and not
assume the favorable resolution of any
Federal tax issue material to the analysis or
otherwise rely on unreasonable legal
assumptions. The proposed regulations
also would require that the opinion not con-
tain legal analyses or conclusions that are
inconsistent with each other.

The practitioner would be required to
ascertain that all material Federal tax
issues with respect to the tax shelter item
or items have been considered and that all
of those material Federal tax issues
involving the reasonable possibility of a
challenge by the Internal Revenue Service
are fully and fairly addressed. The opin-
ion would be required to state that the
practitioner has considered the possible
application to the facts of all potentially
relevant judicial doctrines, including the
step transaction, business purpose, eco-
nomic substance, substance over form,
and sham transaction doctrines, as well as
potentially relevant statutory and regula-
tory anti-abuse rules, and the opinion
must analyze whether the tax shelter item
or items is (are) vulnerable to challenge
under all such potentially relevant doc-
trines and anti-abuse rules.

The proposed regulations would
require that the opinion clearly provide
the practitioner's conclusion as to the
likelihood that a typical investor of the

type to whom the tax shelter is or will be
marketed will prevail with respect to the
merits of each material Federal tax issue
that involves the reasonable possibility of
a challenge by the Internal Revenue
Service or clearly state that the practition-
er is unable to reach a conclusion with
respect to one or more issues. Further, the
opinion would be required to fully
describe the reasons for the practitioner's
conclusions or fully describe the reasons
for the inability to reach a conclusion.

The practitioner would be required to
reach an overall conclusion as to the like-
lihood that the Federal tax treatment of
the tax shelter item or items is the proper
treatment or, where the practitioner is
unable to reach such a conclusion, clearly
state that the practitioner is unable to
reach such an overall conclusion. Where
an overall conclusion cannot be reached,
the opinion would be required to fully
describe the reasons for the practitioner's
inability to reach an overall conclusion.
Moreover, the fact that the practitioner's
opinion does not reach a conclusion that
the Federal tax treatment of a tax shelter
item or items is more likely than not the
proper treatment, or that the practitioner is
unable to reach an overall conclusion,
would be required to be clearly and
prominently disclosed on the first page of
the opinion. The opinion also would be
required to clearly and prominently dis-
close that it was not written for the pur-
pose of establishing reasonable belief or
reasonable cause and good faith under
sections 6662 and 6664, respectively, of
the Internal Revenue Code. The proposed
regulations also would clarify that in
ascertaining that all material Federal tax
issues have been considered, evaluating
the merits of those issues and evaluating
whether the Federal tax treatment of the
tax shelter item or items is the proper
treatment, the possibility that a return will
not be audited, that an issue will not be
raised on audit, or that an issue will be set-
tled may not be taken into account.

The proposed regulations would
require the practitioner to take reasonable
steps to assure that any written materials
or promotional efforts that distribute,
reflect or refer to the tax shelter opinion
correctly and fairly represent the nature
and extent of the opinion.

The proposed regulations also would
address reliance on the opinions of others.

The proposed regulations would require
that the practitioner be knowledgeable in
all of the aspects of Federal tax law rele-
vant to the opinion being rendered. A
practitioner would not be permitted to
provide a tax shelter opinion that does not
reach a conclusion on all the material
Federal tax issues that involve a reason-
able possibility of challenge by the
Internal Revenue Service or does not
reach an overall conclusion (or, alterna-
tively, fails to clearly state that such con-
clusions cannot be reached), unless at
least one other competent practitioner
provides an opinion with respect to all of
the other material Federal tax issues
which involve a reasonable possibility of
challenge by the Internal Revenue
Service, and with respect to the tax shelter
item or items. The practitioner also would
be required, upon reviewing such other
opinion and any written materials that dis-
tribute, reflect or refer to such opinion, to
have no reason to believe that the other
practitioner has not complied with §10.33
or that the overall conclusion reached by
such practitioner is incorrect on its face.

"More Likely Than Not" Tax Shelter
Opinions

Under the proposed regulations, new
standards would be applicable to practi-
tioners who provide tax shelter opinions
that conclude that the Federal tax treat-
ment of a tax shelter item or items is more
likely than not (or at a higher level of con-
fidence) the proper treatment. Such opin-
ions potentially provide a basis for estab-
lishing reasonable belief and reasonable
cause and good faith under the provisions
of sections 6662 and 6664 of the Internal
Revenue Code, respectively. These pro-
posed rules would apply to all tax shelter
opinions that reach a more likely or not, or
higher, overall conclusion, regardless of
whether they were rendered in connection
with promotional efforts conducted by a
third party or directly to a potential tax
shelter investor. The proposed regulations
also would define a material Federal tax
issue. A tax shelter item would be defined
in the same manner as in §10.33.

Section 10.35 would require a practi-
tioner who provides a written opinion
with respect to a tax shelter item or items
to comply with a series of requirements
with respect to each such item. A practi-
tioner would be required to make inquiry

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as to all relevant facts, be satisfied that the
opinion takes account of all relevant facts,
and be satisfied that the material facts are
accurately and completely described in
the opinion. Furthermore, the opinion
could not be based, directly or indirectly,
on any unreasonable factual assumptions.
An unreasonable factual assumption
would include a factual assumption that
the practitioner knows or has reason to
believe is incorrect, incomplete, inconsis-
tent or implausible. An unreasonable fac-
tual assumption also would include a fac-
tual assumption regarding a fact or facts
that the practitioner could reasonably re-
quest to be provided or to be represented.
Furthermore, an unreasonable factual as-
sumption would include a factual assump-
tion that the transaction has a business
reason, an assumption with respect to the
potential profitability of the transaction
apart from tax benefits, or an assumption
with respect to a material valuation issue.

The proposed regulations would permit
a practitioner, where it would be reason-
able based on all the facts and circum-
stances, to rely on factual representations,
statements, findings, or agreements of the
taxpayer or other persons. The proposed
regulations would further provide that a
practitioner need not conduct an audit or
independent verification of a factual repre-
sentation, but that reliance would not be
permitted on factual representations that
the practitioner knows or has reason to be-
lieve are unreasonable, incorrect, incom-
plete, inconsistent or implausible (e.g., a
representation that there are business rea-
sons for a transaction without describing
those reasons, a representation that a trans-
action is potentially profitable apart from
tax benefits without providing adequate
factual support, or a valuation that is in-
consistent with the facts of the transac-
tion).

The proposed regulations would pro-
vide that the opinion must clearly identify
the facts upon which the opinion's con-
clusions are based, contain a reasoned
analysis of the pertinent facts and legal
authorities and not assume the favorable
resolution of any Federal tax issue mater-
ial to the analysis or otherwise rely on un-
reasonable factual assumptions. The pro-
posed regulations also would require that
the opinion not contain legal analysis or
conclusions that are inconsistent with
each other.

The practitioner would be required to
ascertain that all material Federal tax is-
sues with respect to the tax shelter item or
items have been considered and that all of
those material Federal tax issues involv-
ing the reasonable possibility of a chal-
lenge by the Internal Revenue Service are
fully and fairly addressed. The opinion
would be required to state that the practi-
tioner has considered the possible appli-
cation to the facts of all potentially rele-
vant judicial doctrines, including the step
transaction, business purpose, economic
substance, substance over form, and sham
transaction doctrines, as well as poten-
tially relevant statutory and regulatory
anti-abuse rules, and the opinion must an-
alyze whether the tax shelter item or items
is (are) vulnerable to challenge under all
such potentially relevant doctrines and
anti-abuse rules.

The proposed regulations would re-
quire that the opinion clearly provide the
practitioner's conclusion as to the likeli-
hood that the taxpayer will prevail with
respect to the merits of each material
Federal tax issue that involves a reason-
able possibility of challenge by the Inter-
nal Revenue Service and must unambigu-
ously conclude that the Federal tax
treatment of the tax shelter item or items
more likely than not (or at a higher level
of confidence) is the proper treatment.
The proposed regulations also would
clarify that in ascertaining that all mater-
ial Federal tax issues have been consid-
ered, evaluating the merits of those issues
and evaluating whether the Federal tax
treatment of the tax shelter item or items
is the proper treatment, the possibility
that a tax return will not be audited, that
an issue will not be raised on audit, or
that an issue will be settled may not be
taken into account.

The proposed regulations would re-
quire the practitioner to take reasonable
steps to assure that any written materials
or promotional efforts that distribute, re-
flect or refer to the tax shelter opinion
correctly and fairly represent the nature
and extent of the opinion. The proposed
regulations also would require that the
practitioner be knowledgeable in all of the
relevant aspects of Federal tax law at the
time the opinion is rendered. The practi-
tioner who is providing an overall conclu-
sion that the Federal tax treatment of a tax
shelter item or items more likely than not

(or at a higher level of confidence) is the
proper treatment may rely on the opinion
of another practitioner with respect to cer-
tain issues only if the practitioner is satis-
fied that the other practitioner is suffi-
ciently knowledgeable regarding such
issues and the practitioner has no reason
to believe that such opinion should not be
relied upon. To the extent the practitioner
relies on such opinion, the opinion ren-
dered by the practitioner must identify the
other practitioner, state the date on which
the opinion was rendered, and set forth
the conclusions reached in such opinion.
Furthermore, the practitioner must be sat-
isfied that the combined analysis, taken as
a whole, satisfies the requirements of this
§10.35.

The Treasury Department and the Inter-
nal Revenue Service intend to modify the
advice standards in the regulations under
section 6662 of the Internal Revenue
Code (pertaining to whether a taxpayer
other than a corporation reasonably be-
lieved at the time a tax return was filed
that the tax treatment of a tax shelter item
was more likely than not the proper treat-
ment of that item) and under section 6664
of the Internal Revenue Code (pertaining
to whether a taxpayer acted with reason-
able cause and in good faith with respect
to a tax shelter item) to provide that opin-
ions can satisfy those standards only if
such opinions satisfy the standards of Cir-
cular 230.

### Procedures to Ensure Compliance

Section 10.36 of the proposed regula-
tions provides that a practitioner who is a
member of, associated with, or employed
by a firm must take reasonable steps, con-
sistent with his or her authority and re-
sponsibility for the firm's practice advis-
ing clients regarding matters arising under
the Federal tax laws, to make certain that
the firm has adequate procedures in effect
for purposes of ensuring compliance with
§§10.33, 10.34 and 10.35. The Director
of Practice would be authorized to take
disciplinary action against any practi-
tioner for failing to comply with this re-
quirement if the practitioner through will-
fulness, recklessness, or gross
incompetence does not take such reason-
able steps and one or more persons who
are members of, associated with, or em-
ployed by the firm have, while they were
members of, associated with, or employed

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by the firm, engaged in a pattern or prac-
tice of failing to comply with §§10.33,
10.34 or 10.35. The Director of Practice
also would be authorized to take discipli-
nary action against any practitioner who
takes such steps but has actual knowledge
that one or more persons who are mem-
bers of, associated with, or employed by
the firm have, while they were members
of, associated with, or employed by the
firm, engaged in a pattern or practice of
failing to comply with §§10.33, 10.34 or
10.35 and the practitioner through willful-
ness, recklessness, or gross incompetence
fails to take prompt action, consistent
with his or her authority and responsibil-
ity for the firm's practice advising clients
regarding matters under the Federal tax
law, to correct such pattern or practice.

### Sanctions

Section 10.50 of the regulations autho-
rizes the Secretary of the Treasury to dis-
bar or suspend any practitioner from prac-
tice before the Internal Revenue Service
after notice and an opportunity for a pro-
ceeding. Under the proposed regulations,
the Secretary also would be permitted to
censure the practitioner after notice and
an opportunity for a proceeding. Censure
is a public reprimand. Additionally, the
authority to disqualify an appraiser would
be relocated to paragraph (b) of §10.50 of
the regulations.

### Disreputable Conduct

Section 10.51 of the regulations defines
disreputable conduct for which a practi-
tioner may be disbarred or suspended.
The proposed regulations would provide
that a practitioner who engages in disrep-
utable conduct also may be censured.
The definition of disreputable conduct
also would be modified to include convic-
tion of any felony involving conduct that
renders the practitioner unfit to practice
before the Internal Revenue Service.

### Institution of Proceeding

Section 10.54 authorizes the Director
of Practice to institute a proceeding to
suspend or disbar a practitioner if the Di-
rector believes the practitioner has vio-
lated any provisions of the laws or regula-
tions governing practice before the
Internal Revenue Service. The section
would be renumbered as §10.60 under the
proposed regulations and would specify

that the Director of Practice also may in-
stitute a proceeding to censure the practi-
tioner if the Director believes the practi-
tioner has violated any provisions of the
laws or regulations governing practice be-
fore the Internal Revenue Service. Under
the proposed regulations, the procedures
set forth in §10.60 would apply to pro-
ceedings to disqualify an appraiser.

### Conferences

Section 10.55 authorizes the Director
of Practice to confer with a practitioner
regarding allegations of misconduct. The
provision permits a practitioner to offer
his or her consent to voluntary suspension
to prevent the institution or conclusion of
a disbarment proceeding. The provision
would be renumbered as §10.61 and
would be changed to permit a practitioner
to also offer his or her consent to censure
to prevent the institution or conclusion of
a disbarment proceeding. The provision
also would apply to conferences with an
appraiser regarding allegations of miscon-
duct and would permit the appraiser to
offer his or her voluntary consent to dis-
qualification.

### Service of Complaint and Other Papers

Sections 10.57 and 10.80 of the regula-
tions permit the Director of Practice to
serve a complaint or any other paper upon
a practitioner or appraiser by certified
mail. If the certified mail is not claimed,
the Director of Practice may serve the
complaint by first class mail. The pro-
posed regulations would consolidate these
provisions under §10.63 and would spec-
ify that service by first class mail is com-
plete if the complaint is mailed to the
practitioner or appraiser at his or her last
known address as determined under sec-
tion 6212 of the Internal Revenue Code.

### Answer

Sections 10.58 and 10.81 of the regula-
tions require a practitioner or an ap-
praiser to file an Answer whenever the
Director of Practice files a complaint
against him or her under the regulations.
These provisions also establish the time
for filing an Answer and prescribe certain
requirements as to the content of an An-
swer. The proposed regulations would
consolidate these provisions under
§10.64, which section would require that
the Answer to the complaint be signed by

the respondent or the respondent's autho-
rized representative and include an ac-
knowledgment that knowing and willful
false statements may be punishable under
18 U.S.C. 1001.

### Reply to Answer

Sections 10.60 and 10.83 permit the
Director of Practice to file a reply to the
respondent's answer at the Director's dis-
cretion or at the request of the Adminis-
trative Law Judge. Under the proposed
regulations, these provisions would be
consolidated under §10.66 and that sec-
tion would require the Director of Prac-
tice to file a reply to the respondent's an-
swer if the Administrative Law Judge
orders that a reply be filed.

### Motions and Requests

Sections 10.62 and 10.85 of the regula-
tions permit the Director of Practice and
the respondent to file motions and re-
quests in hearings before an Administra-
tive Law Judge with the Director or the
Administrative Law Judge. Under the
proposed regulations, these provisions
would be consolidated under §10.68 and
would clarify that the Administrative Law
Judge may direct that motions or requests
be filed at a place specified by the Admin-
istrative Law Judge.

### Effect of Disbarment, Suspension, or Censure

Section 10.73 of the regulations pro-
hibits a disbarred practitioner from prac-
ticing before the Internal Revenue Service
unless and until authorized to do so by the
Director of Practice. The regulations also
prohibit a suspended practitioner from
practicing before the Internal Revenue
Service during the period of suspension.
Under the proposed regulations, this sec-
tion would be renumbered as §10.79 and
would also provide that the Director of
Practice may make a practitioner's future
right to practice before the Internal Rev-
enue Service subject to his or her meeting
certain conditions designed to promote
high standards of conduct.

### Expedited Suspension Upon Criminal Conviction or Loss of License for Cause

Paragraph (b)(2) of §10.76 of the regu-
lations permits the Director of Practice to
institute a proceeding to suspend any

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2001-11 I.R.B.

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practitioner who has, within 5 years of the
date on which the complaint instituting
the proceeding is served, been convicted
of any crime under title 26 of the United
States Code or a felony under title 18 of
the United States Code involving dishon-
esty or breach of trust. Under the pro-
posed regulations this provision would be
renumbered as §10.82 and would permit
the Director of Practice to institute a pro-
ceeding to suspend any practitioner who
has been convicted of any crime under the
Internal Revenue Code, any crime involv-
ing dishonesty or breach of trust (regard-
less of whether such crime constituted a
felony under title 18 of the United States
Code), or any felony that involved con-
duct that renders the practitioner unfit to
practice before the Internal Revenue Ser-
vice (regardless of whether such felony
was pursuant to title 18 of the United
States Code or involved dishonesty or
breach of trust).

Consolidation of Appraiser Disqualifica-
tion Rules

The current regulations contain, in sep-
arate provisions, virtually identical rules
applicable to disciplinary proceedings
against practitioners and appraisers. The
proposed rules would consolidate the
rules regarding sanctions of practitioners
and appraisers under subpart C and the
rules regarding the conduct of discipli-
nary proceedings under subpart D.

## Proposed Effective Date

These regulations are proposed to
apply on the date that final regulations are
published in the Federal Register.

## Special Analyses

It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It is hereby certified that these
regulations will not have a significant
economic impact on a substantial number
of small entities because the general re-
quirements, including the collection of in-
formation requirements, of these regula-
tions are substantially the same as the
requirements of the regulations that these
regulations will replace. Persons autho-
rized to practice have long been required
to comply with certain standards of con-

duct when practicing before the Internal
Revenue Service. These regulations do
not alter the basic nature of the obliga-
tions and responsibilities of these practi-
tioners. These regulations clarify those
obligations in response to public com-
ments and judicial decisions, and make
other modifications to reflect the develop-
ment of electronic media. In addition, the
added requirements for tax shelter opin-
ions imposed by these regulations will
have no impact on the substantial number
of small entities who have been satisfying
these requirements when they provide
such opinions. Therefore, a regulatory
flexibility analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small businesses.

## Comments and Public Hearing

Before the regulations are adopted as
final regulations, consideration will be
given to any written comments and elec-
tronic comments that are submitted timely
to the Internal Revenue Service. The In-
ternal Revenue Service and Treasury De-
partment specifically request comments
on the clarity of the proposed regulations
and how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.

The public hearing is scheduled for
May 2, 2001, from 8 am. to 11 am., and
will be held in the auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the 10th Street entrance, lo-
cated between Constitution and Pennsyl-
vania Avenues, NW. All visitors must
present photo identification to enter the
building. Visitors will not be admitted be-
yond the immediate entrance area more
than 15 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT section of this
preamble.

The rules of 26 CFR 601.601(a)(3) apply
to the hearing. Persons who wish to present
oral comments at the hearing must submit
written or electronic comments and an out-

line of the topics to be discussed and the
time to be devoted to each topic by April 12,
2001. A period of 10 minutes will be allo-
cated to each person for making comments.

An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.

## Drafting Information

The principal authors of these regula-
tions are Richard S. Goldstein and Brin-
ton Warren, Office of Associate Chief
Counsel (Procedure & Administration),
Administrative Provisions and Judicial
Practice Division, but other personnel
from the Internal Revenue Service and
Treasury Department participated in their
development.

\*
\*

\*
\*
\*

## Proposed Amendments to the Regula- tions

Accordingly, 31 CFR part 10 is pro-
posed to be revised to read as follows:

PART 10 - PRACTICE BEFORE THE
INTERNAL REVENUE SERVICE
Sec.

10.0 Scope of part.

Subpart A-Rules Governing
Authority to Practice

10.1 Director of Practice.

10.2 Definitions.

10.3 Who may practice.

10.4 Eligibility for enrollment.

10.5 Application for enrollment.

10.6 Enrollment.

10.7 Representing oneself; participating
in rulemaking; limited practice; spe-
cial appearances; and return prepa-
ration.

10.8 Customhouse brokers.

Subpart B-Duties and Restric-
tions Relating to Practice Before
the Internal Revenue Service

10.20 Information to be furnished.

10.21 Knowledge of client's omission.

10.22 Diligence as to accuracy.

10.23 Prompt disposition of pending
matters.

10.24 Assistance from or to disbarred or
suspended persons and former

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Internal Revenue Service employ-
ees.

10.25 Practice by former Government
employees, their partners and their
associates.

10.26 Notaries.

10.27 Fees.

10.28 Return of client's records.

10.29 Conflicting interests.

10.30 Solicitation.

10.31 Negotiation of taxpayer checks.

10.32 Practice of law.

10.33 Tax shelter opinions used by third
parties to market tax shelters.

10.34 Standards for advising with respect
to tax return positions and for
preparing or signing returns.

10.35 More likely than not tax shelter
opinions.

10.36 Procedures to ensure compliance.

## Subpart C-Sanctions for Viola- tion of the Regulations

10.50 Sanctions.

10.51 Incompetence and disreputable
conduct.

10.52 Violation of regulations.

10.53 Receipt of information concerning
practitioner.

## Subpart D-Rules Applicable to Disciplinary Proceedings

10.60 Institution of proceeding.

10.61 Conferences.

10.62 Contents of complaint.

10.63 Service of complaint and other
papers.

10.64 Answer.

10.65 Supplemental charges.

10.66 Reply to answer.

10.67 Proof; variance; amendment of
pleadings.

10.68 Motions and requests.

10.69 Representation.

10.70 Administrative Law Judge.

10.71 Hearings.

10.72 Evidence.

10.73 Depositions.

10.74 Transcript.

10.75 Proposed findings and conclusions.

10.76 Decision of the Administrative
Law Judge.

10.77 Appeal to the Secretary.

10.78 Decision of the Secretary.

10.79 Effect of disbarment, suspension,
or censure.

10.80 Notice of disbarment, suspension,
censure, or disqualification.

10.81 Petition for reinstatement.

10.82 Expedited suspension upon crimi-
nal conviction or loss of license for
cause.

## Subpart E-General Provisions

10.90 Records.

10.91 Saving clause.

10.92 Special orders.

10.93 Effective date.

Authority: Sec. 3, 23 Stat. 258, secs.
2-12, 60 Stat. 237 et.seq .; 5 U.S.C. 301,
500, 551-559; 31 U.S.C. 330; Reorg. Plan
No. 26 of 1950, 15 FR 4935, 64 Stat.
1280, 3 CFR, 1949-1953 Comp., P. 1017.

§10.0 Scope of part.

This part contains rules governing the
recognition of attorneys, certified public
accountants, enrolled agents, and other
persons representing taxpayers before the
Internal Revenue Service. Subpart A of
this part sets forth rules relating to author-
ity to practice before the Internal Revenue
Service; subpart B of this part prescribes
the duties and restrictions relating to such
practice; subpart C of this part prescribes
the sanctions for violating the regulations;
subpart D of this part contains the rules
applicable to disciplinary proceedings;
and subpart E of this part contains gener-
al provisions including provisions relating
to the availability of official records.

## Subpart A - Rules Governing Authority to Practice

§10.1 Director of Practice.

(a) Establishment of office. The office
of the Director of Practice is established
in the Office of the Secretary of the
Treasury. The Director of Practice is
appointed by the Secretary of the
Treasury, or his or her designate.

(b) Duties. The Director of Practice acts
on applications for enrollment to practice
before the Internal Revenue Service;
makes inquires with respect to matters
under his or her jurisdiction; institutes and
provides for the conduct of disciplinary
proceedings relating to attorneys, certified
public accountants, enrolled agents,
enrolled actuaries and appraisers; and per-
forms other duties as are necessary or
appropriate to carry out his or her func-
tions under this part or as are prescribed
by the Secretary of the Treasury, or his or
her designate.

(c) Acting Director of Practice. The
Secretary of the Treasury, or his or her
designate, will designate an officer or
employee of the Treasury Department to
act as Director of Practice in the absence
of the Director or a vacancy in that office.

§10.2 Definitions.

As used in this part, except where the
context clearly indicates otherwise:

(a) Attorney means any person who is a
member in good standing of the bar of the
highest court of any State, possession, ter-
ritory, Commonwealth, or the District of
Columbia.

(b) Certified public accountant means
any person who is duly qualified to prac-
tice as a certified public accountant in any
State, possession, territory, Common-
wealth, or the District of Columbia.

(c) Commissioner refers to the
Commissioner of Internal Revenue.

(d) Director refers to the Director of
Practice.

(e) Practice before the Internal
Revenue Service comprehends all matters
connected with a presentation to the
Internal Revenue Service or any of its
officers or employees relating to a taxpay-
er's rights, privileges, or liabilities under
laws or regulations administered by the
Internal Revenue Service. Such presenta-
tions include, but are not limited to,
preparing and filing documents, corre-
sponding and communicating with the
Internal Revenue Service, and represent-
ing a client at conferences, hearings, and
meetings.

(f) Practitioner means any individual
described in paragraphs (a), (b), (c), or (d)
of section 10.3 of this part.

(g) A tax return includes an amended
tax return and a claim for refund.

(h) Service means the Internal Revenue
Service.

§10.3 Who may practice.

(a) Attorneys. Any attorney who is not
currently under suspension or disbarment
from practice before the Internal Revenue
Service may practice before the Service
by filing with the Service a written decla-
ration that he or she is currently qualified
as an attorney and is authorized to repre-
sent the party(ies) on whose behalf he or
she acts.

(b) Certified public accountants. Any
certified public accountant who is not cur-
rently under suspension or disbarment

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from practice before the Internal Revenue
Service may practice before the Service
by filing with the Service a written decla-
ration that he or she is currently qualified
as a certified public accountant and is
authorized to represent the party(ies) on
whose behalf he or she acts.

(c) Enrolled agents. Any individual
enrolled as an agent pursuant to this part
who is not currently under suspension or
disbarment from practice before the
Internal Revenue Service may practice
before the Service.

(d) Enrolled actuaries. (1) Any indi-
vidual who is enrolled as an actuary by
the Joint Board for the Enrollment of
Actuaries pursuant to 29 U.S.C. 1242 who
is not currently under suspension or dis-
barment from practice before the Internal
Revenue Service may practice before the
Service by filing with the Service a writ-
ten declaration stating that he or she is
currently qualified as an enrolled actuary
and is authorized to represent the
party(ies) on whose behalf he or she acts.

(2) Practice as an enrolled actuary is
limited to representation with respect to
issues involving the following statutory
provisions in title 26 of the United States
Code: sections 401 (relating to qualifica-
tion of employee plans), 403(a) (relating
to whether an annuity plan meets the
requirements of section 404(a)(2)), 404
(relating to deductibility of employer con-
tributions), 405 (relating to qualification
of bond purchase plans), 412 (relating to
funding requirements for certain employ-
ee plans), 413 (relating to application of
qualification requirements to collectively
bargained plans and to plans maintained
by more than one employer), 414 (relating
to definitions and special rules with
respect to the employee plan area), 419
(relating to treatment of funded welfare
benefits), 419A (relating to qualified asset
accounts), 420 (relating to transfers of
excess pension assets to retiree health
accounts), 4971 (relating to excise taxes
payable as a result of an accumulated
funding deficiency under section 412),
4972 (relating to tax on nondeductible
contributions to qualified employer
plans), 4976 (relating to taxes with respect
to funded welfare benefit plans), 4980
(relating to tax on reversion of qualified
plan assets to employer), 6057 (relating to
annual registration of plans), 6058 (relat-
ing to information required in connection

with certain plans of deferred compensa-
tion), 6059 (relating to periodic report of
actuary), 6652(e) (relating to the failure to
file annual registration and other notifica-
tions by pension plan), 6652(f) (relating to
the failure to file information required in
connection with certain plans of deferred
compensation), 6692 (relating to the fail-
ure to file actuarial report), and 7805(b)
(relating to the extent to which a Internal
Revenue Service ruling or determination
letter coming under the statutory provi-
sions listed here will be applied without
retroactive effect); and 29 U.S.C. 1083
(relating to the waiver of funding for non-
qualified plans).

(3) An individual who practices before
the Internal Revenue Service pursuant to
paragraph (d)(1) of this section is subject
to the provisions of this part in the same
manner as attorneys, certified public
accountants and enrolled agents.

(e) Others. Any individual qualifying
under paragraph (c) of §10.5 or §10.7 is
eligible to practice before the Internal
Revenue Service to the extent provided in
those sections.

(f) Government officers and employees,
and others. An individual, who is an offi-
cer or employee of the executive, legisla-
tive, or judicial branch of the United
States Government; an officer or employ-
ee of the District of Columbia; a Member
of Congress; or a Resident Commissioner
may not practice before the Internal
Revenue Service if such practice violates
18 U.S.C. 203 or 205.

(g) State officers and employees. No
officer or employee of any State, or sub-
division of any State, whose duties require
him or her to pass upon, investigate, or
deal with tax matters for such State or
subdivision, may practice before the
Internal Revenue Service, if such employ-
ment may disclose facts or information
applicable to Federal tax matters.

### §10.4 Eligibility for enrollment.

(a) Enrollment upon examination. The
Director of Practice may grant enrollment
to an applicant who demonstrates special
competence in tax matters by written
examination administered by, or adminis-
tered under the oversight of, the Director
and who has not engaged in any conduct
that would justify the censure, suspension,
or disbarment of any practitioner under
the provisions of this part.

(b) Enrollment of former Internal
Revenue Service employees. The Director
of Practice may grant enrollment to an
applicant who, by virtue of his or her past
service and technical experience in the
Internal Revenue Service, has qualified
for such enrollment and who has not
engaged in any conduct that would justify
the censure, suspension, or disbarment of
any practitioner under the provisions of
this part, under the following circum-
stances-

(1) The former employee applies for
enrollment to the Director of Practice on a
form supplied by the Director and sup-
plies the information requested on the
form and such other information regard-
ing the experience and training of the
applicant as may be relevant.

(2) An appropriate office of the Internal
Revenue Service, at the request of the
Director of Practice, will provide the
Director with a detailed report of the
nature and rating of the applicant's work
while employed by the Service and a rec-
ommendation whether such employment
qualifies the applicant technically or oth-
erwise for the desired authorization.

(3) Enrollment based on an applicant's
former employment with the Internal
Revenue Service may be of unlimited
scope or it may be limited to permit the
presentation of matters only of the partic-
ular class or only before the particular unit
or division of the Service for which the
applicant's former employment has quali-
fied the applicant.

(4) Application for enrollment based on
an applicant's former employment with
the Internal Revenue Service must be
made within 3 years from the date of sep-
aration from such employment.

(5) An applicant for enrollment who is
requesting such enrollment based on his
or her former employment with the
Internal Revenue Service must have had a
minimum of 5 years continuous employ-
ment with the Service during which he or
she must have been regularly engaged in
applying and interpreting the provisions
of the Internal Revenue Code and the reg-
ulations thereunder relating to income,
estate, gift, employment, or excise taxes.

(6) For the purposes of paragraph (b)(5)
of this section, an aggregate of 10 or more
years of employment in positions involv-
ing the application and interpretation of
the provisions of the Internal Revenue

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Code, at least 3 of which occurred within
the 5 years preceding the date of applica-
tion, is the equivalent of 5 years continu-
ous employment.

(c) Natural persons. Enrollment to
practice may be granted only to natural
persons.

§10.5 Application for enrollment.

(a) Form; address. An applicant for
enrollment must file an application on
Form 23, "Application for Enrollment to
Practice Before the Internal Revenue
Service", properly executed under oath or
affirmation, with the Director of Practice.
The address of the applicant entered on
Form 23 will be the address under which
a successful applicant is enrolled and is
the address to which the Director will
send correspondence concerning enroll-
ment. An enrolled agent must send notifi-
cation of any change to his or her enroll-
ment address to the Director of Practice,
Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20224, or at such other address spec-
ified by the Director. This notification
must include the enrolled agent's name,
old address, new address, social security
number, signature, and the date.

(b) Fee. The application for enrollment
must be accompanied by a check or
money order in the amount set forth on
Form 23, payable to the Internal Revenue
Service, which amount constitutes a fee
charged to each applicant for enrollment.
This fee will be retained by the United
States whether or not the applicant is
granted enrollment.

(c) Additional information; examina-
tion. The Director of Practice, as a condi-
tion to consideration of an application for
enrollment, may require the applicant to
file additional information and to submit
to any written or oral examination under
oath or otherwise. The Director will, on
written request filed by an applicant,
afford such applicant the opportunity to
be heard with respect to his or her appli-
cation for enrollment.

(d) Temporary recognition. On
receipt of a properly executed applica-
tion, the Director of Practice may grant
the applicant temporary recognition to
practice pending a determination as to
whether enrollment to practice should be
granted. Temporary recognition will be
granted only in unusual circumstances

and it will not be granted, in any cir-
cumstance, if the application is not reg-
ular on its face, if the information stated
in the application, if true, is not suffi-
cient to warrant enrollment to practice,
or if there is any information before the
Director indicating that the statements in
the application are untrue or that the
applicant would not otherwise qualify
for enrollment. Issuance of temporary
recognition does not constitute enroll-
ment to practice or a finding of eligibili-
ty for enrollment, and the temporary
recognition may be withdrawn at any
time by the Director.

(e) Appeal from denial of application.
The Director of Practice must inform the
applicant as to the reason(s) for any
denial of an application for enrollment.
The applicant may, within 30 days after
receipt of the notice of denial of enroll-
ment, file a written appeal of the denial of
enrollment with the Secretary of the
Treasury. A decision on the appeal will
be rendered by the Secretary of the
Treasury, or his or her designate, as soon
as practicable.

§10.6 Enrollment.

(a) Roster. The Director of Practice
will maintain rosters of all individuals-

(1) Who have been granted active
enrollment to practice before the Internal
Revenue Service;

(2) Whose enrollment has been placed
in inactive status for failure to meet the
requirements for renewal of enrollment;

(3) Whose enrollment has been placed
in inactive retirement status;

(4) Who have been censured, suspend-
ed, or disbarred from practice before the
Internal Revenue Service;

(5) Whose offer of consent to resign
from enrollment to practice before the
Internal Revenue Service has been accept-
ed by the Director of Practice under
§10.61 of this part; and

(6) Whose application for enrollment
has been denied.

(b) Enrollment card. The Director of
Practice will issue an enrollment card to
each individual whose application for
enrollment to practice before the Internal
Revenue Service is approved after the
effective date of this regulation. Each
enrollment card will be valid for the peri-
od stated on the enrollment card.
Enrollment cards issued to individuals

before February 1, 1999, are invalid. An
individual is not eligible to practice before
the Service if his or her enrollment card is
not valid.

(c) Term of enrollment. Each individual
enrolled to practice before the Internal
Revenue Service will be accorded active
enrollment status subject to his or her
renewal of enrollment as provided in this
part.

(d) Renewal of enrollment. To maintain
active enrollment to practice before the
Internal Revenue Service, each individual
enrolled is required to have his or her
enrollment renewed. Failure by an indi-
vidual to receive notification from the
Director of Practice of the renewal
requirement will not be justification for
the failure to satisfy this requirement.

(1) All individuals enrolled to practice
before the Internal Revenue Service must
apply for renewal of enrollment between
November 1, 2001, and January 31, 2002.
Those who receive initial enrollment
between November 1, 2001, and January
31, 2002, must apply for renewal of
enrollment by March 1, 2002. The renew-
al will be effective April 1, 2002.

(2) Thereafter, applications for renewal
will be required between November 1,
2004, and January 31, 2005, and between
November 1 and January 31 of every sub-
sequent third year. Those who receive ini-
tial enrollment during the renewal appli-
cation period must apply for renewal of
enrollment by March 1 of the renewal
year. Renewed enrollment will be effec-
tive April 1, 2005, and April 1 of every
subsequent third year.

(3) The Director of Practice will notify
the individual of his or her renewal of
enrollment and will issue the individual a
card evidencing renewal.

(4) A reasonable nonrefundable fee
may be charged for each application for
renewal of enrollment filed with the
Director of Practice.

(5) Forms required for renewal may be
obtained from the Director of Practice,
Internal Revenue Service, Washington,
DC 20224.

(e) Condition for renewal: Continuing
professional education. In order to quali-
fy for renewal of enrollment, an individ-
ual enrolled to practice before the Internal
Revenue Service must certify, on the
application for renewal form prescribed
by the Director of Practice, that he or she

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has satisfied the following continuing pro-
fessional education requirements.

(1) For renewed enrollment effective
April 1, 2002. (i) A minimum of 24 hours
of continuing education credit must be
completed between January 1, 2001, and
January 31, 2002.

(ii) An individual who receives initial
enrollment between January 1, 2001, and
January 31, 2002, is exempt from the con-
tinuing education requirement for the
renewal of enrollment effective April 1,
2002, but is required to file a timely appli-
cation for renewal of enrollment.

(2) For renewed enrollment effective
April 1, 2005, and every third year there-
after. (i) A minimum of 72 hours of con-
tinuing education credit must be complet-
ed between February 1, 2002, and
January 31, 2005, and during each subse-
quent three year period. Each such three
year period is known as an enrollment
cycle.

(ii) A minimum of 16 hours of continu-
ing education credit must be completed in
each year of an enrollment cycle.

(iii) An individual who receives initial
enrollment during an enrollment cycle
must complete two (2) hours of qualifying
continuing education credit for each
month enrolled during the enrollment
cycle. Enrollment for any part of a month
is considered enrollment for the entire
month.

(f) Qualifying continuing education-
(1) General. To qualify for continuing
education credit, a course of learning
must-

(i) Be a qualifying program designed to
enhance professional knowledge in
Federal taxation or Federal tax related
matters, i.e., programs comprised of cur-
rent subject matter in Federal taxation or
Federal tax related matters, including
accounting, tax preparation software and
taxation; and

(ii) Be conducted by a qualifying spon-
sor.

(2) Qualifying programs-(i) Formal
programs. A formal program qualifies as
continuing education programs if it-

(A) Requires attendance. Additionally,
the program sponsor must provide each
attendee with a certificate of attendance;
and

(B) Requires that the program be con-
ducted by a qualified instructor, discus-
sion leader, or speaker, i.e., a person
whose background, training, education
March 12, 2001

and experience is appropriate for
instructing or leading a discussion on the
subject matter of the particular program;
and

(C) Provides or requires a written out-
line, textbook, or suitable electronic edu-
cational materials.

(ii) Correspondence or individual study
programs (including taped programs).
Qualifying continuing education pro-
grams include correspondence or individ-
ual study programs that are conducted by
qualifying sponsors and completed on an
individual basis by the enrolled individ-
ual. The allowable credit hours for such
programs will be measured on a basis
comparable to the measurement of a sem-
inar or course for credit in an accredited
educational institution. Such programs
qualify as continuing education programs
if they-

(A) Require registration of the partici-
pants by the sponsor;

(B) Provide a means for measuring
completion by the participants (e.g., a
written examination), including the
issuance of a certificate of completion by
the sponsor; and

(C) Provide a written outline, textbook,
or suitable electronic educational materi-
als.

(iii) Serving as an instructor, discussion
leader or speaker. (A) One hour of con-
tinuing education credit will be awarded
for each contact hour completed as an
instructor, discussion leader, or speaker at
an educational program that meets the
continuing education requirements of
paragraph (f) of this section.

(B) Two hours of continuing education
credit will be awarded for actual subject
preparation time for each contact hour
completed as an instructor, discussion
leader, or speaker at such programs. It is
the responsibility of the individual claim-
ing such credit to maintain records to ver-
ify preparation time.

(C) The maximum credit for instruction
and preparation may not exceed 50 per-
cent of the continuing education require-
ment for an enrollment cycle.

(D) An instructor, discussion leader, or
speaker who makes more than one pre-
sentation on the same subject matter dur-
ing an enrollment cycle, will receive con-
tinuing education credit for only one such
presentation for the enrollment cycle.

(iv) Credit for published articles,
books, etc. (A) Continuing education

credit will be awarded for publications on
Federal taxation or Federal tax related
matters, including accounting, financial
management, tax preparation software,
and taxation, provided the content of such
publications is current and designed for
the enhancement of the professional
knowledge of an individual enrolled to
practice before the Internal Revenue
Service.

(B) The credit allowed will be on the
basis of one hour credit for each hour of
preparation time for the material. It is the
responsibility of the person claiming the
credit to maintain records to verify prepa-
ration time.

(C) The maximum credit for publica-
tions may not exceed 25 percent of the
continuing education requirement of any
enrollment cycle.

(3) Periodic examination. (i)
Individuals may establish eligibility for
renewal of enrollment for any enrollment
cycle by-

(A) Achieving a passing score on each
part of the Special Enrollment Examina-
tion administered under this part during
the three year period prior to renewal; and

(B) Completing a minimum of 16 hours
of qualifying continuing education during
the last year of an enrollment cycle.

(ii) Courses designed to help an appli-
cant prepare for the examination specified
in paragraph (a) of §10.4 are considered
basic in nature and are not qualifying con-
tinuing education.

(g) Sponsors. (1) Sponsors are those
responsible for presenting programs.

(2) To qualify as a sponsor, a program
presenter must-

(i) Be an accredited educational institu-
tion;

(ii) Be recognized for continuing edu-
cation purposes by the licensing body of
any State, possession, territory, Common-
wealth, or the District of Columbia re-
sponsible for the issuance of a license in
the field of accounting or law;

(iii) Be recognized by the Director of
Practice as a professional organization or
society whose programs include offering
continuing professional education oppor-
tunities in subject matters within the
scope of paragraph (f)(1)(i) of this sec-
tion; or

(iv) File a sponsor agreement with the
Director of Practice and obtain approval
of the program as a qualified continuing
education program.

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(3) A qualifying sponsor must ensure
the program complies with the following
requirements-

(i) Programs must be developed by
individual(s) qualified in the subject mat-
ter;

(ii) Program subject matter must be
current;

(iii) Instructors, discussion leaders, and
speakers must be qualified with respect to
program content;

(iv) Programs must include some
means for evaluation of technical content
and presentation;

(v) Certificates of completion must be
provided those who have successfully
completed the program; and

(vi) Records must be maintained by the
sponsor to verify the participants who
attended and completed the program for a
period of three years following comple-
tion of the program. In the case of con-
tinuous conferences, conventions, and the
like, records must be maintained to verify
completion of the program and attendance
by each participant at each segment of the
program.

(4) Professional organizations or soci-
eties wishing to be considered as qualified
sponsors must request this status from the
Director of Practice and furnish informa-
tion in support of the request together
with any further information deemed nec-
essary by the Director.

(5) A professional organization or soci-
ety recognized as a qualified sponsor by
the Director of Practice will retain its sta-
tus for one enrollment cycle. The Direc-
tor will publish the names of such spon-
sors on a periodic basis.

(h) Measurement of continuing educa-
tion coursework. (1) All continuing edu-
cation programs will be measured in
terms of contact hours. The shortest rec-
ognized program will be one contact hour.

(2) A contact hour is 50 minutes of con-
tinuous participation in a program. Credit
is granted only for a full contact hour, i.e.,
50 minutes or multiples thereof. For
example, a program lasting more than 50
minutes but less than 100 minutes will
count as one contact hour.

(3) Individual segments at continuous
conferences, conventions and the like will
be considered one total program. For
example, two 90-minute segments (180
minutes) at a continuous conference will
count as three contact hours.

(4) For university or college courses,
each semester hour credit will equal 15
contact hours and a quarter hour credit
will equal 10 contact hours.

(i) Recordkeeping requirements. (1)
Each individual applying for renewal
must retain for a period of three years fol-
lowing the date of renewal of enrollment
the information required with regard to
qualifying continuing professional educa-
tion credit hours. Such information
includes-

(i) The name of the sponsoring organi-
zation;

(ii) The location of the program;

(iii) The title of the program and
description of its content;

(iv) Written outlines, course syllibi,
textbook, and/or electronic materials pro-
vided or required for the course;

(v) The dates attended;

(vi) The credit hours claimed;

(vii) The name(s) of the instructor(s),
discussion leader(s), or speaker(s), if
appropriate; and

(viii) The certificate of completion
and/or signed statement of the hours of
attendance obtained from the sponsor.

(2) To receive continuing education
credit for service completed as an

instructor, discussion leader, or speak-
er, the following information must be
maintained for a period of three years fol-
lowing the date of renewal of enroll-
ment-

(i) The name of the sponsoring organi-
zation;

(ii) The location of the program;

(iii) The title of the program and
description of its content;

(iv) The dates of the program; and

(v) The credit hours claimed.

(3) To receive continuing education
credit for publications, the following
information must be maintained for a
period of three years following the date of
renewal of enrollment-

(i) The publisher;

(ii) The title of the publication;

(iii) A copy of the publication;

(iv) The date of publication; and

(v) Records that substantiate the hours
worked on the publication.

(j) Waivers. (1) Waiver from the con-
tinuing education requirements for a
given period may be granted by the
Director of Practice for the following
reasons-

(i) Health, which prevented compliance
with the continuing education require-
ments;

(ii) Extended active military duty;

(iii) Absence from the United States for
an extended period of time due to
employment or other reasons, provided
the individual does not practice before the
Internal Revenue Service during such
absence; and

(iv) Other compelling reasons, which
will be considered on a case-by-case
basis.

(2) A request for waiver must be
accompanied by appropriate documenta-
tion. The individual is required to furnish
any additional documentation or explana-
tion deemed necessary by the Director of
Practice. Examples of appropriate docu-
mentation could be a medical certificate
or military orders.

(3) A request for waiver must be filed
no later than the last day of the renewal
application period.

(4) If a request for waiver is not
approved, the individual will be placed in
inactive status, so notified by the Director
of Practice, and placed on a roster of inac-
tive enrolled individuals.

(5) If a request for waiver is approved,
the individual will be notified and issued
a card evidencing renewal.

(6) Those who are granted waivers are
required to file timely applications for
renewal of enrollment.

(k) Failure to comply. (1) Compliance
by an individual with the requirements of
this part is determined by the Director of
Practice. An individual who fails to meet
the requirements of eligibility for renewal
of enrollment will be notified by the
Director at his or her enrollment address
by first class mail. The notice will state
the basis for the determination of non-
compliance and will provide the individ-
ual an opportunity to furnish information
in writing relating to the matter within 60
days of the date of the notice. Such infor-
mation will be considered by the Director
in making a final determination as to eli-
gibility for renewal of enrollment.

(2) The Director of Practice may
require any individual, by notice sent by
first class mail to his or her enrollment
address, to provide copies of any records
required to be maintained under this part.
The Director may disallow any continuing
professional education hours claimed if

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the individual fails to comply with this
requirement.

(3) An individual who has not filed a
timely application for renewal of enroll-
ment, who has not made a timely response
to the notice of noncompliance with the
renewal requirements, or who has not sat-
isfied the requirements of eligibility for
renewal will be placed on a roster of inac-
tive enrolled individuals. During this
time, the individual will be ineligible to
practice before the Internal Revenue
Service.

(4) Individuals placed in inactive
enrollment status and individuals ineligi-
ble to practice before the Internal
Revenue Service may not, directly or indi-
rectly, indicate that they are enrolled to
practice before the Service, or use the
term "enrolled agent," the designation
"E. A.," or other form of reference to eli-
gibility to practice before the Service.

(5) An individual placed in an inactive
status may be reinstated to an active
enrollment status by filing an application
for renewal of enrollment and providing
evidence of the completion of the all
required continuing professional educa-
tion hours for the enrollment cycle.
Continuing education credit under this
subsection may not be used to satisfy the
requirements of the enrollment cycle in
which the individual has been placed back
on the active roster.

(6) An individual placed in an inactive
status must file an application for renewal
of enrollment and satisfy the requirements
for renewal as set forth in this section
within three years of being placed in an
inactive status. The name of such indi-
vidual otherwise will be removed from
the inactive enrollment roster and his or
her enrollment will terminate. Eligibility
for enrollment must then be reestablished
by the individual as provided in this sec-
tion.

(7) Inactive enrollment status is not
available to an individual who is the sub-
ject of a disciplinary matter in the Office
of Director of Practice.

(l) Inactive retirement status. An indi-
vidual who no longer practices before the
Internal Revenue Service may request
being placed in an inactive status at any
time and such individual will be placed in
an inactive retirement status. The individ-
ual will be ineligible to practice before the
Service. Such individual must file a time-

ly application for renewal of enrollment at
each applicable renewal or enrollment
period as provided in this section. An
individual who is placed in an inactive
retirement status may be reinstated to an
active enrollment status by filing an appli-
cation for renewal of enrollment and pro-
viding evidence of the completion of the
required continuing professional educa-
tion hours for the enrollment cycle.
Inactive retirement status is not available
to an individual who is subject of a disci-
plinary matter in the Office of Director of
Practice.

(m) Renewal while under suspension or
disbarment. An individual who is ineligi-
ble to practice before the Internal
Revenue Service by virtue of disciplinary
action is required to be in conformance
with the requirements for renewal of
enrollment before his or her eligibility is
restored.

(n) Verification. The Director of
Practice may review the continuing edu-
cation records of an enrolled individual
and/or qualified sponsor in a manner
deemed appropriate to determine compli-
ance with the requirements and standards
for renewal of enrollment as provided in
paragraph (f) of this section.

(o) Enrolled Actuaries. The enrollment
and the renewal of enrollment of actuaries
authorized to practice under paragraph (d)
of §10.3 are governed by the regulations
of the Joint Board for the Enrollment of
Actuaries at 20 CFR 901.1 et seq.

§10.7 Representing oneself; participating
in rulemaking; limited practice; special
appearances; and return preparation.

(a) Representing oneself. Individuals
may appear on their own behalf before the
Internal Revenue Service provided they
present satisfactory identification.

(b) Participating in rulemaking.
Individuals may participate in rulemaking
as provided by the Administrative
Procedure Act. See 5 U.S.C. 553.

(c) Limited practice-(1) In general.
Subject to the limitations in paragraph
(c)(2) of this section, an individual who is
not a practitioner may represent a taxpay-
er before the Internal Revenue Service in
the circumstances described in this para-
graph (c)(1), even if the taxpayer is not
present, provided the individual presents
satisfactory identification and proof of his
or her authority to represent the taxpayer.

The circumstances described in this para-
graph (c)(1) are as follows:

(i) An individual may represent a mem-
ber of his or her immediate family.

(ii) A regular full-time employee of an
individual employer may represent the
employer.

(iii) A general partner or a regular full-
time employee of a partnership may rep-
resent the partnership.

(iv) A bona fide officer or a regular full-
time employee of a corporation (including
a parent, subsidiary, or other affiliated
corporation), association, or organized
group may represent the corporation,
association, or organized group.

(v) A regular full-time employee of a
trust, receivership, guardianship, or estate
may represent the trust, receivership,
guardianship, or estate.

(vi) An officer or a regular employee of
a governmental unit, agency, or authority
may represent the governmental unit,
agency, or authority in the course of his or
her official duties.

(vii) An individual may represent any
individual or entity, who is outside the
United States, before personnel of the
Internal Revenue Service when such rep-
resentation takes place outside the United
States.

(viii) An individual who prepares and
signs a taxpayer's tax return as the prepar-
er, or who prepares a tax return but is not
required (by the instructions to the tax
return or regulations) to sign the tax
return, may represent the taxpayer before
revenue agents, customer service repre-
sentatives or similar officers and employ-
ees of the Internal Revenue Service dur-
ing an examination of the taxable year or
period covered by that tax return, but this
right does not permit such individual to
represent the taxpayer, regardless of the
circumstances requiring representation,
before appeals officers, revenue officers,
Counsel or similar officers or employees
of the Service or the Department of
Treasury.

(2) Limitations. (i) An individual who
is under suspension or disbarment from
practice before the Internal Revenue
Service may not engage in limited prac-
tice before the Service under paragraph
(c)(1) of this section.

(ii) The Director, after notice and
opportunity for a conference, may deny
eligibility to engage in limited practice

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before the Internal Revenue Service under
paragraph (c)(1) of this section to any
individual who has engaged in conduct
that would justify censuring, suspending,
or disbarring a practitioner from practice
before the Service.

(iii) An individual who represents a tax-
payer under the authority of paragraph
(c)(1) of this section is subject, to the
extent of his or her authority, to such rules
of general applicability regarding stan-
dards of conduct and other matters as the
Director of Practice prescribes.

(d) Special appearances. The Director
of Practice may, subject to such condi-
tions as he or she deems appropriate,
authorize an individual who is not other-
wise eligible to practice before the
Service to represent another person in a
particular matter.

(e) Preparing tax returns and furnish-
ing information. Any individual may pre-
pare a tax return, appear as a witness for
the taxpayer before the Internal Revenue
Service, or furnish information at the
request of the Service or any of its officers
or employees.

(f) Fiduciaries. For purposes of this
part, a fiduciary (i.e., a trustee, receiver,
guardian, personal representative, admin-
istrator, or executor) is considered to be
the taxpayer and not a representative of
the taxpayer.

### §10.8 Customhouse brokers.

Nothing contained in the regulations in
this part will affect or limit the right of a
customhouse broker, licensed as such by
the Commissioner of Customs in accor-
dance with the regulations prescribed
therefor, in any customs district in which
he or she is so licensed, at the local office
of the Internal Revenue Service or before
the National Office of the Service, to act
as a representative in respect to any mat-
ters relating specifically to the importa-
tion or exportation of merchandise under
the customs or internal revenue laws, for
any person for whom he or she has acted
as a customhouse broker.

## Subpart B - Duties and Restrictions Relating to Practice Before the Internal Revenue Service

§10.20 Information to be furnished.

(a) To the Internal Revenue Service. A
practitioner must, on a proper and lawful

request by a duly authorized officer or
employee of the Internal Revenue Service,
promptly submit records or information in
any matter before the Internal Revenue
Service unless the practitioner believes in
good faith and on reasonable grounds that
the records or information are privileged.
Where the requested records or informa-
tion are not in the possession or control of
the practitioner or the practitioner's client,
the practitioner must promptly notify the
requesting officer or employee, and must
provide any information that either the
practitioner or the practitioner's client has
regarding the identity of any person who
may have possession or control of the
requested records or information. A practi-
tioner may not interfere, or attempt to inter-
fere, with any proper and lawful effort by
the Service or its officers or employees to
obtain any record or information unless the
practitioner believes in good faith and on
reasonable grounds that the record or infor-
mation is privileged.

(b) To the Director of Practice. When a
proper and lawful request is made by the
Director of Practice, a practitioner must pro-
vide the Director with any information the
practitioner has concerning a violation or
possible violation of the regulations in this
part by any person, and to testify regarding
this information in any proceeding instituted
under this part, unless the practitioner
believes in good faith and on reasonable
grounds that the information is privileged.

§10.21 Knowledge of client's omission.

A practitioner who, having been
retained by a client with respect to a mat-
ter administered by the Internal Revenue
Service, knows that the client has not
complied with the revenue laws of the
United States or has made an error in or
omission from any return, document, affi-
davit, or other paper which the client sub-
mitted or executed under the revenue laws
of the United States, must advise the
client promptly of the fact of such non-
compliance, error, or omission, the man-
ner in which corrective action may be
taken, and the possible consequences of
not taking corrective action.

§10.22 Diligence as to accuracy.

(a) In general. A practitioner must
exercise due diligence-

(1) In preparing or assisting in the
preparation of, approving, and filing tax

returns, documents, affidavits, and other
papers relating to Internal Revenue
Service matters;

(2) In determining the correctness of
oral or written representations made by
the practitioner to the Department of the
Treasury; and

(3) In determining the correctness of
oral or written representations made by
the practitioner to clients with reference to
any matter administered by the Internal
Revenue Service.

(b) Reliance on others. Except as pro-
vided in §§10.33, 10.34, and 10.35, a
practitioner will be presumed to have
exercised due diligence for purposes of
this section if the practitioner relies on the
work product of another person and the
practitioner used reasonable care in
engaging, supervising, training, and eval-
uating the person, taking proper account
of the nature of the relationship between
the practitioner and the person.

§10.23 Prompt disposition of pending
matters.

A practitioner may not unreasonably
delay the prompt disposition of any matter
before the Internal Revenue Service.

§10.24 Assistance from or to disbarred or
suspended persons and former Internal
Revenue Service employees.

A practitioner may not, knowingly and
directly or indirectly:

(a) Accept assistance from or assist any
person who is under disbarment or sus-
pension from practice before the Internal
Revenue Service if the assistance relates
to a matter or matters constituting practice
before the Service.

(b) Accept assistance from any former
government employee where the provi-
sions of §10.25 of this part or any Federal
law would be violated.

§10.25 Practice by former Government
employees, their partners and their
associates.

(a) Definitions. For purposes of this
section-

(1) Assist means to act in such a way as
to advise, furnish information to, or other-
wise aid another person, directly or indi-
rectly.

(2) Government employee is an officer
or employee of the United States or any

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agency of the United States, including a
special government employee as defined
in 18 U.S.C. 202(a), or of the District of
Columbia, or of any State, or a member of
Congress or of any State legislature.

(3) Member of a firm is a sole practi-
tioner or an employee or associate thereof,
or a partner, stockholder, associate, affili-
ate or employee of a partnership, joint
venture, corporation, professional associ-
ation or other affiliation of two or more
practitioners who represent nongovern-
mental parties.

(4) Practitioner includes any individual
described in paragraph (f) of §10.2.

(5) Official responsibility means the
direct administrative or operating authori-
ty, whether intermediate or final, and
either exercisable alone or with others,
and either personally or through subordi-
nates, to approve, disapprove, or other-
wise direct Government action, with or
without knowledge of the action.

(6) Participate or participation means
substantial involvement as a Government
employee by making decisions, or prepar-
ing or reviewing documents with or with-
out the right to exercise a judgment of
approval or disapproval, or participating
in conferences or investigations, or ren-
dering advice of a substantial nature.

(7) Rule includes Treasury Regulations,
whether issued or under preparation for
issuance as Notices of Proposed Rule
Making or as Treasury Decisions; revenue
rulings; and revenue procedures published
in the Internal Revenue Bulletin. Rule
does not include a transaction as defined
in paragraph (a)(8) of this section.

(8) Transaction means any decision,
determination, finding, letter ruling, tech-
nical advice, Chief Counsel advice, or
contract or the approval or disapproval
thereof, relating to a particular factual sit-
uation or situations involving a specific
party or parties whose rights, privileges,
or liabilities under laws or regulations
administered by the Internal Revenue
Service, or other legal rights, are deter-
mined or immediately affected therein
and to which the United States is a party
or in which it has a direct and substantial
interest, whether or not the same taxable
periods are involved. Transaction does
not include rule as defined in paragraph
(a)(7) of this section.

(b) General rules. (1) No former
Government employee may, subsequent

to his or her Government employment,
represent anyone in any matter adminis-
tered by the Internal Revenue Service if
the representation would violate 18
U.S.C. 207 or any other laws of the
United States.

(2) No former Government employee
who participated in a transaction may, sub-
sequent to his or her Government employ-
ment, represent or knowingly assist, in that
transaction, any person who is or was a
specific party to that transaction.

(3) A former Government employee
who within a period of one year prior to
the termination of Government employ-
ment had official responsibility for a
transaction may not, within two years
after his or her Government employment
is ended, represent or knowingly assist in
that transaction any person who is or was
a specific party to that transaction.

(4) No former Government employee
may, within one year after his or her
Government employment is ended,
appear before any employee of the
Treasury Department in connection with
the publication, withdrawal, amendment,
modification, or interpretation of a rule in
the development of which the former
Government employee participated or for
which, within a period of one year prior to
the termination of his or her Government
employment, he or she had official
responsibility. This paragraph (b)(4) does
not, however, preclude such former
employee from appearing on his or her
own behalf or from representing a taxpay-
er before the Internal Revenue Service in
connection with a transaction involving
the application or interpretation of such a
rule with respect to that transaction, pro-
vided that such former employee does not
utilize or disclose any confidential infor-
mation acquired by the former employee
in the development of the rule.

(c) Firm representation. (1) No mem-
ber of a firm of which a former Govern-
ment employee is a member may repre-
sent or knowingly assist a person who was
or is a specific party in any transaction
with respect to which the restrictions of
paragraph (b)(2) or (3) of this section
apply to the former Government employ-
ee, in that transaction, unless the firm iso-
lates the former Government employee in
such a way to ensure that the former
Government employee cannot assist in the
representation.

(2) When isolation of a former Govern-
ment employee is required under para-
graph (c)(1) of this section, a statement
affirming the fact of such isolation must
be executed under oath by the former
Government employee and by another
member of the firm acting on behalf of the
firm. The statement must clearly identify
the firm, the former Government employ-
ee, and the transaction(s) requiring isola-
tion and it must be filed with the Director
of Practice and in such other place and in
the manner prescribed by rule or regula-
tion.

(d) Pending representation. Practice by
former Government employees, their
partners and associates with respect to
representation in specific matters where
actual representation commenced before
adoption of this regulation is governed by
the regulations set forth at 31 CFR Part 10
immediately preceding the adoption of
these regulations. The burden of showing
that representation commenced before
adoption of the revised regulations lies
with the former Government employees,
and their partners and associates.

§10.26 Notaries.

A practitioner may not take acknowl-
edgments, administer oaths, certify
papers, or perform any official act as a
notary public with respect to any matter
administered by the Internal Revenue
Service and for which he or she is
employed as counsel, attorney, or agent,
or in which he or she may be in any way
interested. (26 Op. Atty. Gen. 236).

§10.27 Fees.

(a) Generally. A practitioner may not
charge an unconscionable fee for repre-
senting a client in a matter before the
Internal Revenue Service.

(b) Contingent fees. A practitioner may
not charge a contingent fee for preparing
an original tax return or for any advice
rendered in connection with a position
taken or to be taken on an original tax
return. A practitioner may charge a con-
tingent fee for preparing, or for any advice
rendered in connection with a position
taken or to be taken on, an amended tax
return or a claim for refund (other than a
claim for refund made on an original tax
return) if the practitioner reasonably
anticipates at the time the fee arrangement

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is entered into that the amended tax return
or refund claim will receive substantive
review by the Internal Revenue Service.
For purposes of this section, a contingent
fee is any fee that is based, in whole or in
part, on whether or not a position taken on
a tax return or in a refund claim is sus-
tained by the Service or in litigation. A
contingent fee includes an indemnity
agreement, a guarantee, rescission rights,
insurance, or any other arrangement under
which the taxpayer or other person would
be entitled to be compensated or reim-
bursed by the practitioner in the event a
position taken on a tax return or in a
refund claim is not sustained, or any other
arrangement that has a similar effect.

§10.28 Return of client's records.

On the request of a client, a practition-
er must promptly return any and all
records of the client. The existence of a
dispute over fees does not relieve the
practitioner of his or her responsibility
under this section. The practitioner may
retain copies of the records returned to a
client.

### §10.29 Conflicting interests.

(a) A practitioner may not represent
potential conflicting interests in his or her
practice before the Internal Revenue
Service, unless-

(1) The practitioner reasonably believes
that the representation of any party before
the Service will not be adversely affected;
and

(2) All parties represented by the prac-
titioner who have an interest in the matter
before the Service expressly consent in
writing to the representation after the
practitioner has fully disclosed the poten-
tial conflict.

(b) Copies of the written consents must
be retained by the practitioner for at least
36 months from the date of the conclusion
of the representation of the affected
clients and the written consents must be
provided to any officer or employee of the
Internal Revenue Service on request.

(c) A practitioner may not represent a
party in his or her practice before the
Internal Revenue Service if the represen-
tation of the party may be materially lim-
ited by the practitioner's own interests,
unless the practitioner reasonably believes
the representation will not be adversely

affected and the client consents after the
practitioner has fully disclosed the poten-
tial conflict, including disclosure of the
implications of the potential conflict and
the risks involved.

§10.30 Solicitation.

(a) Advertising and solicitation restric-
tions. (1) A practitioner may not, with
respect to any Internal Revenue Service
matter, in any way use or participate in the
use of any form of public communication
or private solicitation containing a false,
fraudulent, or coercive statement or
claim; or a misleading or deceptive state-
ment or claim. Enrolled agents, in
describing their professional designation,
may not utilize the term of art "certified"
or "licensed" or indicate an
employer/employee relationship with the
Service. Examples of acceptable descrip-
tions are "enrolled to represent taxpayers
before the Internal Revenue Service,"
"enrolled to practice before the Internal
Revenue Service," and "admitted to prac-
tice before the Internal Revenue Service."
Enrolled agents and enrolled actuaries
may abbreviate such designation as either
EA or E.A. Examples of unacceptable
descriptions are "Internal Revenue
Service (or IRS) Enrolled Agent,"
"Enrolled Agent of the Internal Revenue
Service (or IRS)," "Certified Enrolled
Agent," or "Licensed to practice before
the Internal Revenue Service (or IRS)."

(2) A practitioner may not make, direct-
ly or indirectly, an uninvited written or
oral solicitation of employment in matters
related to the Internal Revenue Service if
the solicitation violates Federal or State
law or other applicable rule, e.g., attor-
neys are precluded from making a solici-
tation that is prohibited by the rules of the
State bar to which they are members. Any
lawful solicitation made by or on behalf
of a practitioner eligible to practice before
the Service must, nevertheless, clearly
identify the solicitation as such and, if
applicable, identify the source of the
information used in choosing the recipi-
ent.

(b) Fee information. (1)(i) A practi-
tioner may publish the availability of a
written schedule of fees and disseminate
the following fee information-

(A) Fixed fees for specific routine ser-
vices.

(B) Hourly rates.

(C) Range of fees for particular ser-
vices.

(D) Fee charged for an initial consulta-
tion.

(ii) Any statement of fee information
concerning matters in which costs may be
incurred must include a statement disclos-
ing whether clients will be responsible for
such costs.

(2) A practitioner may charge no more
than the rate(s) published under paragraph
(b)(1) of this section for a reasonable
period of time after the last date on which
the schedule of fees was published
(which, in no event, may be shorter than
30 days).

(c) Communication of fee information.
Fee information may be communicated in
professional lists, telephone directories,
print media, mailings, electronic mail,
facsimile, hand delivered flyers, radio,
television, and any other method. The
method chosen, however, must not cause
the communication to become untruthful,
deceptive, or otherwise in violation of
these regulations. A practitioner may not
persist in attempting to contact a prospec-
tive client if the prospective client has
made it known to the practitioner that he
or she does not desire to be solicited. In
the case of radio and television broadcast-
ing, the broadcast must be recorded and
the practitioner must retain a recording of
the actual transmission. In the case of
direct mail and e-commerce communica-
tions, the practitioner must retain a copy
of the actual communication, along with a
list or other description of persons to
whom the communication was mailed or
otherwise distributed. The copy must be
retained by the practitioner for a period of
at least 36 months from the date of the last
transmission or use.

(d) Improper associations. A practi-
tioner may not, in matters related to the
Internal Revenue Service, assist, or accept
assistance from, any person or entity who,
to the knowledge of the practitioner,
obtains clients or otherwise practices in a
manner forbidden under this section.

### §10.31 Negotiation of taxpayer checks.

A practitioner who prepares tax returns
may not endorse or otherwise negotiate
any check issued to a client by the govern-
ment in respect of a Federal tax liability.

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§10.32 Practice of law.

Nothing in the regulations in this part
may be construed as authorizing persons
not members of the bar to practice law.

§10.33 Tax shelter opinions used by third
parties to market tax shelters.

(a) In general. A practitioner who pro-
vides a tax shelter opinion that does not
conclude that the Federal tax treatment of
a tax shelter item or items is more likely
than not the proper treatment must com-
ply with each of the following require-
ments with respect to each such item.

(1) Factual matters. (i) The practition-
er must make inquiry as to all relevant
facts, be satisfied that the opinion takes
account of all relevant facts, and be satis-
fied that the material facts (including fac-
tual assumptions and representations) are
accurately and completely described in
the opinion and in any related offering
materials or sales promotion materials.

(ii) The opinion must not be based,
directly or indirectly, on any unreasonable
factual assumptions (including assump-
tions as to future events). Unreasonable
factual assumptions include-

(A) A factual assumption that the prac-
titioner knows or has reason to believe is
incorrect, incomplete, inconsistent with
an important fact or another factual
assumption, or implausible in any materi-
al respect; or

(B) A factual assumption regarding a
fact or facts that the practitioner could
reasonably request to be provided or to be
represented.

(iii) A practitioner may, where it would
be reasonable based on all the facts and
circumstances, rely upon factual represen-
tations, statements, findings, or agree-
ments (factual representations) (including
representations describing the specific
business reasons for the transaction, the
potential profitability of the transaction
apart from tax benefits, or a valuation pre-
pared by an independent party). Factors
relevant to whether such factual represen-
tations are reasonable include, but are not
limited to, whether the person making the
factual representations is knowledgeable
as to the facts being represented and is the
appropriate person to make such factual
representations. A practitioner does not
need to conduct an audit or independent
verification of a factual representation,

but the practitioner may not rely on factu-
al representations if the practitioner
knows or has reason to believe, based on
his or her background and knowledge,
that the relevant information is, or other-
wise appears to be, unreasonable, incor-
rect, incomplete, inconsistent with an
important fact or another factual represen-
tation, or implausible in any material
respect. For example, a representation is
incomplete if it states that there are busi-
ness reasons for the transaction without
describing those reasons, or if it states that
a transaction is potentially profitable apart
from tax benefits without providing ade-
quate factual support. In addition, a valu-
ation is inconsistent with an important
fact or factual assumption or is implausi-
ble if it appears to be based on facts that
are inconsistent with the facts of the trans-
action.

(iv) If the fair market value of property
or the expected financial performance of
an investment is relevant to the tax shelter
item, a practitioner may not accept an
appraisal or financial projection as sup-
port for the matters claimed therein
unless-

(A) The appraisal or financial projec-
tion makes sense on its face;

(B) The practitioner reasonably be-
lieves that the person making the
appraisal or financial projection is rep-
utable and competent to perform the
appraisal or projection; and

(C) The appraisal is based on the defin-
ition of fair market value prescribed under
the relevant Federal tax provisions.

(v) If the fair market value of purchased
property is to be established by reference
to its stated purchase price, the practition-
er must examine the terms and conditions
on which the property was (or is to be)
purchased to determine whether the stated
purchase price reasonably may be consid-
ered to be its fair market value.

(2) Relate law to facts. (i) The opinion
must relate the applicable law to the rele-
vant facts.

(ii) The opinion must clearly identify
the facts upon which the opinion's con-
clusions are based.

(iii) The opinion must contain a reasoned
analysis of the pertinent facts and legal
authorities and must not assume the favor-
able resolution of any Federal tax issue
material to the analysis or otherwise rely on
any unreasonable legal assumptions.

(iv) The opinion must not contain legal
analyses or conclusions with respect to
Federal tax issues that are inconsistent
with each other.

(3) Analysis of material Federal tax
issues. The practitioner must ascertain
that all material Federal tax issues have
been considered, and that all of those
issues that involve the reasonable possi-
bility of a challenge by the Internal
Revenue Service have been fully and fair-
ly addressed. The opinion must state that
the practitioner has considered the possi-
ble application to the facts of all poten-
tially relevant judicial doctrines, includ-
ing the step transaction, business purpose,
economic substance, substance over form,
and sham transaction doctrines, as well as
potentially relevant statutory and regula-
tory anti-abuse rules, and the opinion
must analyze whether the tax shelter item
is vulnerable to challenge under all poten-
tially relevant doctrines and anti-abuse
rules. In analyzing such judicial doctrines
and statutory and regulatory anti-abuse
rules, the opinion must take into account
the typical investor's non-tax and tax pur-
poses (and the relative weight of such pur-
poses) for entering into a transaction and
for structuring a transaction in a particular
manner.

(4) Evaluation of material Federal tax
issues. The practitioner must, where pos-
sible, clearly provide his or her conclusion
as to the likelihood that a typical investor
of the type to whom the tax shelter is or
will be marketed will prevail on the mer-
its with respect to each material Federal
tax issue that involves the reasonable pos-
sibility of a challenge by the Internal
Revenue Service. If the practitioner is
unable to reach such a conclusion with
respect to one or more Federal tax issues,
he or she must clearly state that he or she
is unable to reach such a conclusion with
respect to those issues. The practitioner's
opinion must fully describe the reasons
for the practitioner's conclusions or fully
describe the reasons for his or her inabili-
ty to reach a conclusion as to one or more
issues.

(5) Overall conclusion. (i) The practi-
tioner must, where possible, clearly pro-
vide an overall conclusion as to the likeli-
hood that the Federal tax treatment of the
tax shelter item or items is the proper
treatment. If the practitioner is unable to
reach such an overall conclusion, he or

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she must clearly state that he or she is
unable to reach such an overall conclusion
and the opinion must fully describe the
reasons for the practitioner's inability to
reach a conclusion.

(ii) The fact that the practitioner's opin-
ion does not reach an overall conclusion
that the Federal tax treatment of the tax
shelter item or items is more likely than
not the proper treatment, or the fact that
the practitioner is unable to reach an over-
all conclusion, must be clearly and promi-
nently disclosed on the first page of the
opinion.

(iii) The opinion must clearly and
prominently disclose on the first page of
the opinion that the opinion was not writ-
ten for the purpose of establishing-

(A) Under section 6662(d)(2)(C)(i)(II)
of the Internal Revenue Code and 26 CFR
1.6662-4(g)(4), that a taxpayer other than
a corporation reasonably believed at the
time a tax return was filed that the tax
treatment of a tax shelter item was more
likely than not the proper treatment of that
item; or

(B) Under section 6664(c)(1) of the
Internal Revenue Code and 26 CFR
1.6664-4(e), that a corporate taxpayer
acted with reasonable cause and in good
faith with respect to a tax shelter item.

(iv) In ascertaining that all material
Federal tax issues have been considered,
evaluating the merits of those issues and
evaluating whether the Federal tax treat-
ment of the tax shelter item or items is the
proper treatment, the possibility that a tax
return will not be audited, that an issue
will not be raised on audit, or that an issue
will be settled may not be taken into
account.

(6) Description of opinion. The practi-
tioner must take reasonable steps to assure
that any written materials or promotional
efforts that distribute, reflect or refer to
the tax shelter opinion, correctly and fair-
ly represent the nature and extent of the
opinion.

(b) Competence to provide opinion;
reliance on opinions of others. (1) The
practitioner must be knowledgeable in all
of the aspects of Federal tax law relevant
to the opinion being rendered.

(i) A practitioner may not provide a tax
shelter opinion that does not clearly pro-
vide his or her conclusion as to the likeli-
hood that a typical investor of the type to
whom the tax shelter is or will be market-

ed will prevail on the merits with respect
to each material Federal tax issue that
involves the reasonable possibility of a
challenge by the Internal Revenue
Service (or, alternatively, if the practi-
tioner is unable to reach a conclusion
with respect to one or more material
Federal tax issues, an opinion that does
not clearly state that he or she is unable to
reach a conclusion with respect to those
issues), or does not provide an overall
conclusion as to the likelihood that the
Federal tax treatment of the tax shelter
item or items is the proper treatment (or,
alternatively, if the practitioner is unable
to reach an overall conclusion, an opinion
that does not clearly state that he or she is
unable to reach such an overall conclu-
sion), unless-

(A) At least one other competent prac-
titioner provides an opinion on the likely
outcome with respect to all of the other
material Federal tax issues which involve
a reasonable possibility of challenge by
the Internal Revenue Service, and with
respect to the tax shelter item or items;
and

(B) The practitioner, on reviewing such
other opinions and any written materials
that distribute, reflect or refer to such
other opinions, has no reason to believe
that the other practitioner did not comply
with the standards of paragraph (a) of this
section.

(ii) Notwithstanding the foregoing, a
practitioner who has not been retained to
provide an overall evaluation may issue
an opinion on less than all the material tax
issues only if he or she has no reason to
believe, based on his or her knowledge
and experience, that an overall conclusion
given by the practitioner who reaches an
overall conclusion is incorrect on its face.
Such practitioner also must ensure that the
limited opinion satisfies the requirements
of this section that are otherwise applica-
ble.

(2) Financial forecasts and projections.
A practitioner who makes financial fore-
casts or projections relating to or based on
the tax consequences of the tax shelter
item that are included in written materials
disseminated to any or all of the same per-
sons as the opinion may rely on the opin-
ion of another practitioner as to any or all
material Federal tax issues, provided that
the practitioner who desires to rely on the
other opinion has no reason to believe the

practitioner rendering such other opinion
has not complied with the standards of
paragraph (a) of this §10.33, and the
requirements of paragraphs (b)(1)(i)(A)
and (B) and the first sentence of para-
graph (b)(1)(ii) of this section are satis-
fied. The practitioner's report must dis-
close any material Federal tax issue not
covered by, or incorrectly opined on, by
the other opinion, and shall set forth his or
her opinion with respect to each such
issue in a manner that satisfies the
requirements of paragraph (a) of this sec-
tion.

(c) Definitions. For purposes of this
section-

(1) Practitioner includes any individual
described in paragraph (f) of §10.2.

(2) The definition of tax shelter is set
forth in section 6662(d)(2)(C)(iii) of the
Internal Revenue Code.

(3) A tax shelter item is an item of
income, gain, loss, deduction or credit if
the item is directly or indirectly attribut-
able to a tax shelter as defined in section
6662(d)(2)(C)(iii) of the Internal Revenue
Code.

(4) A tax shelter opinion, as the term is
used in this section, is written advice by a
practitioner concerning the Federal tax
aspects of a tax shelter item or items that
a practitioner knows or has reason to
believe will be used or referred to by a
person other than the practitioner (or per-
son who is a member of, associated with,
or employed by the practitioner's firm or
company) in promoting, marketing or rec-
ommending the tax shelter to one or more
taxpayers, irrespective of whether such
promotional, marketing, or similar activi-
ties are conducted privately or publicly.
The term tax shelter opinion includes the
Federal tax aspects or tax risks portion of
offering materials prepared for the person
who is promoting, marketing or recom-
mending the tax shelter by or at the direc-
tion of a practitioner, whether or not a sep-
arate opinion letter is issued or whether or
not the practitioner's name is referred to
in offering materials or in connection with
sales promotion efforts. Similarly, a
financial forecast or projection prepared
by a practitioner is a tax shelter opinion if
it is predicated on assumptions regarding
Federal tax aspects of the investment and
that meets the other requirements of the
first sentence of this paragraph. The term
tax shelter opinion does not include

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advice provided in connection with the
review of portions of offering or sales pro-
motion materials, provided neither the
name of the practitioner or the practition-
er's firm, nor the fact that a practitioner
has rendered advice concerning the
Federal tax aspects, is referred to in the
offering materials or related sales promo-
tion efforts.

(5) A material Federal tax issue, as the
term is used in this section, is any Federal
tax issue the resolution of which could
have a significant impact (whether benefi-
cial or adverse) on a taxpayer under any
reasonably foreseeable circumstance. A
material Federal tax issue includes the
potential applicability of penalties, addi-
tions to tax, or interest charges that rea-
sonably could be asserted by the Internal
Revenue Service with respect to the tax
shelter item.

(6) The following examples illustrate
this section-

Example 1. A practitioner is requested by a third
party to prepare a memorandum evaluating whether
the purported Federal tax treatment of a tax shelter
item arising from a series of transactions will be sus-
tained if challenged by the Internal Revenue Service.
The practitioner concludes that there is a realistic
possibility that the purported treatment of the tax
shelter item is the proper treatment and has reason to
believe that the third party will use or refer to the
memorandum he prepares in promoting, marketing
or recommending the transaction to one or more tax-
payers. The memorandum is a tax shelter opinion
for purposes of this section.

Example 2. A practitioner writes a memorandum
that evaluates whether a hypothetical taxpayer which
enters into a series of transactions can offset a pre-
existing capital gain against certain losses arising
from the series of transactions. The practitioner con-
cludes that, while a significant purpose for entering
into the series of transactions is the avoidance or
evasion of Federal income tax within the meaning of
section 6662(d)(2)(C)(iii) of the Internal Revenue
Code, there is a realistic possibility that the tax loss
arising from this series of transactions is the proper
treatment. The practitioner plans to provide this
memorandum directly to clients who have capital
gains. The memorandum is not a tax shelter opinion
for purposes of this section because the promoting,
marketing or recommending of the tax shelter is not
being done by a person other than the practitioner.

§10.34 Standards for advising with
respect to tax return positions and for
preparing or signing returns.

(a) Realistic possibility standard. A
practitioner may not sign a tax return as a
preparer if the practitioner determines that
the tax return contains a position that does
not have a realistic possibility of being
sustained on its merits (the realistic possi-

bility standard) unless the position is not
frivolous and is adequately disclosed to
the Internal Revenue Service. A practi-
tioner may not advise a client to take a
position on a tax return, or prepare the
portion of a tax return on which a position
is taken, unless-

(1) The practitioner determines that the
position satisfies the realistic possibility
standard; or

(2) The position is not frivolous and the
practitioner advises the client of any
opportunity to avoid the accuracy-related
penalty in section 6662 of the Internal
Revenue Code by adequately disclosing
the position and of the requirements for
adequate disclosure.

(b) Advising clients on potential penal-
ties. A practitioner advising a client to
take a position on a tax return, or prepar-
ing or signing a tax return as a preparer,
must inform the client of the penalties rea-
sonably likely to apply to the client with
respect to the position advised, prepared,
or reported. The practitioner also must
inform the client of any opportunity to
avoid any such penalty by disclosure, if
relevant, and of the requirements for ade-
quate disclosure. This paragraph (b)
applies even if the practitioner is not sub-
ject to a penalty with respect to the posi-
tion.

(c) Relying on information furnished by
clients. A practitioner advising a client to
take a position on a tax return, or prepar-
ing or signing a tax return as a preparer,
generally may rely in good faith without
verification upon information furnished
by the client. The practitioner may not,
however, ignore the implications of infor-
mation furnished to, or actually known by,
the practitioner, and must make reason-
able inquiries if the information as fur-
nished appears to be incorrect, inconsis-
tent with an important fact or another
factual assumption, or incomplete.

(d) Definitions. For purposes of this
section-

(1) Realistic possibility. A position is
considered to have a realistic possibility
of being sustained on its merits if a rea-
sonable and well informed analysis by a
person knowledgeable in the tax law
would lead such a person to conclude that
the position has approximately a one in
three, or greater, likelihood of being sus-
tained on its merits. The authorities
described in 26 CFR 1.6662-4(d)(3)(iii),

or any successor provision, of the sub-
stantial understatement penalty regula-
tions may be taken into account for pur-
poses of this analysis. The possibility that
a tax return will not be audited, that an
issue will not be raised on audit, or that an
issue will be settled may not be taken into
account.

(2) Frivolous. A position is frivolous if
it is patently improper.

§10.35 More likely than not tax shelter
opinions.

(a) In general. A practitioner who pro-
vides a tax shelter opinion that concludes
that the Federal tax treatment of a tax
shelter item or items is more likely than
not (or at a higher level of confidence) the
proper treatment must comply with each
of the following requirements with
respect to each such item.

(1) Factual matters. (i) The practition-
er must make inquiry as to all relevant
facts, be satisfied that the opinion takes
account of all relevant facts, and be satis-
fied that the material facts (including fac-
tual assumptions and representations) are
accurately and completely described in
the opinion, and, where appropriate, in
any related offering materials or sales pro-
motion materials.

(ii) The opinion must not be based,
directly or indirectly, on any unreasonable
factual assumptions (including assump-
tions as to future events). Unreasonable
factual assumptions include-

(A) A factual assumption that the prac-
titioner knows or has reason to believe is
incorrect, incomplete, inconsistent with
an important fact or another factual
assumption, or implausible in any materi-
al respect; or

(B) A factual assumption regarding a
fact or facts that the practitioner could
reasonably request to be provided or to be
represented.

(C) A factual assumption that the trans-
action has a business reason, an assump-
tion that the transaction is potentially
profitable apart from tax benefits, or an
assumption with respect to a material val-
uation issue.

(iii) A practitioner may, where it would
be reasonable based on all the facts and
circumstances, rely on factual representa-
tions, statements, findings, or agreements
of the taxpayer or other persons ((factual
representations) (including representa-

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tions describing the specific business rea-
sons for the transaction, the potential
profitability of the transaction apart from
tax benefits, or a valuation prepared by an
independent party). Factors relevant to
whether such factual representations are
reasonable include, but are not limited to,
whether the person making the factual
representations is knowledgeable as to
the facts being represented and is the
appropriate person to make such factual
representations. A practitioner does not
need to conduct an audit or independent
verification of a factual representation,
but the practitioner may not rely on factu-
al representations if the practitioner
knows or has reason to believe, based on
his or her background and knowledge,
that the relevant information is, or other-
wise appears to be, unreasonable, incor-
rect, incomplete, inconsistent with an
important fact or another factual repre-
sentation, or implausible in any material
respect. For example, a representation is
incomplete if it states that there are busi-
ness reasons for the transaction without
describing those reasons, or if it states
that a transaction is potentially profitable
apart from tax benefits without providing
adequate factual support. In addition, a
valuation is inconsistent with an impor-
tant fact or factual assumption or is
implausible if it appears to be based on
facts that are inconsistent with the facts
of the transaction.

(iv) If the fair market value of property
or the expected financial performance of
an investment is relevant to the tax shelter
item, a practitioner may not accept an
appraisal or financial projection as sup-
port for the matters claimed therein
unless-

(A) The appraisal or financial projec-
tion makes sense on its face;

(B) The practitioner reasonably
believes that the person making the
appraisal or financial projection is rep-
utable and competent to perform the
appraisal or projection; and

(C) The appraisal is based on the defin-
ition of fair market value prescribed under
the relevant Federal tax provisions.

(v) If the fair market value of purchased
property is to be established by reference
to its stated purchase price, the practition-
er must examine the terms and conditions
on which the property was (or is to be)
purchased to determine whether the stated

purchase price reasonably may be consid-
ered to be its fair market value.

(2) Relate law to facts. (i) The opinion
must relate the applicable law to the rele-
vant facts.

(ii) The opinion must clearly identify
the facts upon which the opinion's con-
clusions are based.

(iii) The opinion must contain a rea-
soned analysis of the pertinent facts and
legal authorities and must not assume the
favorable resolution of any Federal tax
issue material to the analysis or otherwise
rely on any unreasonable legal assump-
tions.

(iv) The opinion must not contain legal
analyses or conclusions with respect to
Federal tax issues that are inconsistent
with each other.

(3) Analysis of material Federal tax
issues. The practitioner must ascertain
that all material Federal tax issues have
been considered, and that all of those
issues which involve the reasonable possi-
bility of a challenge by the Internal
Revenue Service have been fully and fair-
ly addressed. The opinion must state that
the practitioner has considered the possi-
ble application to the facts of all poten-
tially relevant judicial doctrines, includ-
ing the step transaction, business purpose,
economic substance, substance over form,
and sham transaction doctrines, as well as
potentially relevant statutory and regula-
tory anti-abuse rules, and the opinion
must analyze whether the tax shelter item
is vulnerable to challenge under all poten-
tially relevant doctrines and anti-abuse
rules. In analyzing such judicial doctrines
and statutory and regulatory anti-abuse
rules, the opinion must take into account
the taxpayer's non-tax and tax purposes
(and the relative weight of such purposes)
for entering into a transaction and for
structuring a transaction in a particular
manner.

(4) Evaluation of material Federal tax
issues and overall conclusion. (i) The
practitioner must clearly provide his or
her conclusion as to the likelihood that an
investor (or, where the practitioner is rely-
ing on a representation as to the charac-
teristics of potential investors, a typical
investor of the type to whom the tax shel-
ter is or will be marketed) will prevail on
the merits with respect to each material
Federal tax issue that involves the reason-
able possibility of a challenge by the

Internal Revenue Service. This require-
ment is not satisfied by including a state-
ment in the opinion that the practitioner
was unable to opine with respect to cer-
tain material Federal tax issues, including
but not limited to whether the transaction
has a business purpose or economic sub-
stance.

(ii) The opinion must unambiguously
conclude that the Federal tax treatment of
the tax shelter item or items is more like-
ly than not (or at a higher level of confi-
dence) the proper tax treatment. A favor-
able overall conclusion may not be based
solely on the conclusion that the taxpayer
more likely than not will prevail on the
merits of each material Federal tax issue.

(iii) In ascertaining that all material
Federal tax issues have been considered,
evaluating the merits of those issues and
evaluating whether the Federal tax treat-
ment of the tax shelter item or items is the
proper tax treatment, the possibility that a
tax return will not be audited, that an issue
will not be raised on audit, or that an issue
will be settled may not be taken into
account.

(5) Description of opinion. The practi-
tioner must take reasonable steps to assure
that any written materials or promotional
efforts that distribute, reflect or refer to
the tax shelter opinion, correctly and fair-
ly represent the nature and extent of the
opinion.

(b) Competence to provide opinion;
reliance on opinions of others. (1) The
practitioner must be knowledgeable in all
of the aspects of Federal tax law relevant
to the opinion being rendered. If the prac-
titioner is not sufficiently knowledgeable
to render an informed opinion with
respect to particular material Federal tax
issues, then the practitioner may rely on
the opinion of another practitioner with
respect to such issues, provided the prac-
titioner is satisfied that the other practi-
tioner is sufficiently knowledgeable
regarding such issues and the practitioner
does not know and has no reason to
believe that such opinion should not be
relied on.

(2) To the extent the practitioner relies
on an opinion of another practitioner, the
opinion rendered by the practitioner must
identify the other practitioner, state the
date on which the opinion was rendered,
and set forth the conclusions reached in
such opinion.

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(3) The practitioner also must be satis-
fied that the combined analysis, taken as a
whole, satisfies the requirements of this
§10.35.

(4) Financial forecasts and projections.
A practitioner who makes financial fore-
casts or projections relating to or based on
the tax consequences of the tax shelter
item that are included in written materials
disseminated to any or all of the same per-
sons as the opinion may rely on the opin-
ion of another practitioner as to any or all
material Federal tax issues, provided that
the practitioner who desires to rely on the
other opinion has no reason to believe the
practitioner rendering such other opinion
has not complied with the standards of
paragraph (a) of this §10.35, is satisfied
that the other practitioner is sufficiently
knowledgeable and does not know and
has no reason to believe that the opinion
of the other practitioner should not be re-
lied on. The practitioner's report must
disclose any material Federal tax issue not
covered by, or incorrectly opined on, by
the other opinion, and shall set forth his or
her opinion with respect to each such
issue in a manner that satisfies the re-
quirements of paragraph (a) of this sec-
tion.

(c) Definitions. For purposes of this
section-

(1) Practitioner includes any individual
described in paragraph (f) of §10.2.

(2) The definition of tax shelter is set
forth in section 6662(d)(2)(C)(iii) of the
Internal Revenue Code. Excluded from
the term are municipal bonds and quali-
fied retirement plans.

(3) A tax shelter item is an item of in-
come, gain, loss, deduction or credit if the
item is directly or indirectly attributable
to a tax shelter as defined in section
6662(d)(2)(C)(iii) of the Internal Revenue
Code.

(4) A tax shelter opinion, as the term is
used in this section, is written advice by
a practitioner concerning the Federal tax
aspects of a tax shelter item or items.
The term tax shelter opinion includes the
Federal tax aspects or tax risks portion of
offering materials prepared by or at the
direction of a practitioner, whether or not
a separate opinion letter is issued and
whether or not the practitioner's name is
referred to in offering materials or in
connection with sales promotion efforts.
Similarly, a financial forecast or projec-

tion prepared by a practitioner is a tax
shelter opinion if it is predicated on as-
sumptions regarding Federal tax aspects
of the investment and that meets the
other requirements of the first sentence
of this paragraph. The term tax shelter
opinion does not include advice provided
in connection with the review of portions
of offering materials or sales promotion
materials, provided neither the name of
the practitioner or the practitioner's firm
nor the fact that a practitioner has ren-
dered advice concerning the Federal tax
aspects, is referred to in the offering ma-
terials or related sales promotion materi-
als.

(5) A material Federal tax issue, as the
term is used in this section, is any Federal
tax issue the resolution of which could
have a significant impact (whether benefi-
cial or adverse) on a taxpayer under any
reasonably foreseeable circumstance.

(d) Effect of opinion that meets these
standards. An opinion of a practitioner
that meets these requirements will satisfy
the practitioner's responsibilities under
this section, but the persuasiveness of the
opinion with regard to the tax issues in
question and the taxpayer's good faith re-
liance on the opinion will be separately
determined under applicable provisions of
the law and regulations.

(e) For purposes of advising the Direc-
tor of Practice whether an individual may
have violated §10.33 or 10.35, the Direc-
tor is authorized to establish an Advisory
Committee composed of at least five indi-
viduals authorized to practice before the
Internal Revenue Service. Under proce-
dures established by the Director, such
Advisory Committee will, at the request
of the Director, review and make recom-
mendations with regard to the alleged vio-
lations of §10.33 or 10.35.

### §10.36 Procedures to ensure compliance.

A practitioner who is a member of, as-
sociated with, or employed by a firm must
take reasonable steps, consistent with his
or her authority and responsibility for the
firm's practice advising clients regarding
matters arising under the Federal tax
laws, to make certain that the firm has ad-
equate procedures in effect for purposes
of ensuring compliance with §10.33,
10.34, and 10.35. The Director of Prac-
tice may take disciplinary action against
any practitioner for failing to comply with

the requirements of the preceding sen-
tence if, and only if-

(a) The practitioner through willful-
ness, recklessness, or gross incompetence
does not take such reasonable steps and
the practitioner and one or more persons
who are members of, associated with, or
employed by the firm have, in connection
with their practice with the firm, engaged
in a pattern or practice of failing to com-
ply with §10.33, 10.34 or 10.35; or

(b) The practitioner takes such reason-
able steps but has actual knowledge that
one or more persons who are members of,
associated with, or employed by the firm
have, in connection with their practice
with the firm, engaged in a pattern or
practice of failing to comply with §10.33,
10.34 or 10.35 and the practitioner,
through willfulness, recklessness, or gross
incompetence, fails to take prompt action,
consistent with his or her authority and re-
sponsibility for the firm's practice advis-
ing clients regarding matters under the
Federal tax laws, to correct such pattern
or practice.

## Subpart C - Sanctions for Violation of the Regulations

§10.50 Sanctions.

(a) Authority to censure, suspend, or
disbar. The Secretary of the Treasury, or
his or her designate, after notice and an
opportunity for a proceeding, may cen-
sure, suspend or disbar any practitioner
from practice before the Internal Revenue
Service if the practitioner is shown to be
incompetent or disreputable, fails to com-
ply with any regulation in this part, or
with intent to defraud, willfully and
knowingly misleads or threatens a client
or prospective client. Censure is a public
reprimand.

(b) Authority to disqualify. The Secre-
tary of the Treasury, or his or her desig-
nate, after due notice and opportunity for
hearing, may disqualify any appraiser
with respect to whom a penalty has been
assessed under section 6701(a) of the In-
ternal Revenue Code.

(1) If any appraiser is disqualified pur-
suant to this subpart C, such appraiser is
barred from presenting evidence or testi-
mony in any administrative proceeding
before the Department of Treasury or the
Internal Revenue Service, regardless of
whether such evidence or testimony

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would pertain to an appraisal made prior
to or after such date.

(2) Any appraisal made by a disqualified
appraiser after the effective date of dis-
qualification will not have any probative
effect in any administrative proceeding be-
fore the Department of the Treasury or the
Internal Revenue Service. However, an
appraisal otherwise barred from admission
into evidence pursuant to this section may
be admitted into evidence solely for the
purpose of determining the taxpayer's re-
liance in good faith on such appraisal.

§10.51 Incompetence and disreputable
conduct.

Incompetence and disreputable conduct
for which a practitioner may be censured,
suspended or disbarred from practice be-
fore the Internal Revenue Service in-
cludes, but is not limited to-

(a) Conviction of any criminal offense
under the revenue laws of the United
States;

(b) Conviction of any criminal offense
involving dishonesty, or breach of trust;

(c) Conviction of any felony under
Federal or State law for which the con-
duct involved renders the practitioner
unfit to practice before the Internal Rev-
enue Service;

(d) Giving false or misleading informa-
tion, or participating in any way in the giv-
ing of false or misleading information to
the Department of the Treasury or any offi-
cer or employee thereof, or to any tribunal
authorized to pass upon Federal tax mat-
ters, in connection with any matter pending
or likely to be pending before them, know-
ing such information to be false or mis-
leading. Facts or other matters contained
in testimony, Federal tax returns, financial
statements, applications for enrollment, af-
fidavits, declarations, or any other docu-
ment or statement, written or oral, are in-
cluded in the term information.

(e) Solicitation of employment as pro-
hibited under §10.30, the use of false or
misleading representations with intent to
deceive a client or prospective client in
order to procure employment, or intimat-
ing that the practitioner is able improperly
to obtain special consideration or action
from the Internal Revenue Service or offi-
cer or employee thereof.

(f) Willfully failing to make a Federal
tax return in violation of the revenue laws
of the United States, willfully evading, at-

tempting to evade, or participating in any
way in evading or attempting to evade
any assessment or payment of any Federal
tax, or knowingly counseling or suggest-
ing to a client or prospective client an ille-
gal plan to evade Federal taxes or pay-
ment thereof.

(g) Misappropriation of, or failure
properly and promptly to remit funds re-
ceived from a client for the purpose of
payment of taxes or other obligations due
the United States.

(h) Directly or indirectly attempting to
influence, or offering or agreeing to at-
tempt to influence, the official action of
any officer or employee of the Internal
Revenue Service by the use of threats,
false accusations, duress or coercion, by
the offer of any special inducement or
promise of advantage or by the bestowing
of any gift, favor or thing of value.

(i) Disbarment or suspension from
practice as an attorney, certified public
accountant, public accountant, or actuary
by any duly constituted authority of any
State, possession, territory, Common-
wealth, the District of Columbia, any Fed-
eral court of record or any Federal
agency, body or board.

(j) Knowingly aiding and abetting an-
other person to practice before the Inter-
nal Revenue Service during a period of
suspension, disbarment, or ineligibility of
such other person.

(k) Contemptuous conduct in connec-
tion with practice before the Internal Rev-
enue Service, including the use of abusive
language, making false accusations and
statements, knowing them to be false, or
circulating or publishing malicious or li-
belous matter.

(l) Giving a false opinion, knowingly,
recklessly, or through gross incompe-
tence, including an opinion which is in-
tentionally or recklessly misleading, or
engaging in a pattern of providing incom-
petent opinions on questions arising under
the Federal tax laws. False opinions de-
scribed in this paragraph (l) include those
which reflect or result from a knowing
misstatement of fact or law, from an as-
sertion of a position known to be unwar-
ranted under existing law, from counsel-
ing or assisting in conduct known to be
illegal or fraudulent, from concealing
matters required by law to be revealed, or
from consciously disregarding informa-
tion indicating that material facts ex-

pressed in the tax opinion or offering ma-
terial are false or misleading. For pur-
poses of this paragraph, reckless conduct
is a highly unreasonable omission or mis-
representation involving an extreme de-
parture from the standards of ordinary
care that a practitioner should observe
under the circumstances. A pattern of
conduct is a factor that will be taken into
account in determining whether a practi-
tioner acted knowingly, recklessly, or
through gross incompetence. Gross in-
competence includes conduct that reflects
gross indifference, preparation which is
grossly inadequate under the circum-
stances, and a consistent failure to per-
form obligations to the client.

§10.52 Violation of regulations.

A practitioner may be censured, sus-
pended or disbarred from practice before
the Internal Revenue Service for any of
the following-

(a) Willfully violating any of the regu-
lations contained in this part.

(b) Recklessly or through gross incom-
petence (within the meaning of §10.51(l))
violating §10.33, 10.34, or 10.35.

§10.53 Receipt of information concerning
practitioner.

(a) Officer or employee of the Internal
Revenue Service. If an officer or em-
ployee of the Internal Revenue Service
has reason to believe that a practitioner
has violated any provision of this part, the
officer or employee will promptly make a
written report to the Director of Practice
of the alleged violation.

(b) Other persons. Any person other
than an officer or employee of the Internal
Revenue Service having information of a
violation of any provision of this part may
make an oral or written report of the al-
leged violation to the Director of Practice
or any officer or employee of the Service.
If the report is made to an officer or em-
ployee of the Service, the officer or em-
ployee will make a written report of the
alleged violation to the Director.

## Subpart D - Rules Applicable to Disciplinary Proceedings

§10.60 Institution of proceeding.

(a) Whenever the Director of Practice
determines that a practitioner violated any

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provision of the laws or regulations gov-
erning practice before the Internal Rev-
enue Service, the Director may reprimand
the practitioner or, in accordance with
§10.62, institute a proceeding for censure,
suspension, or disbarment of the practi-
tioner.

(b) Whenever the Director of Practice
is advised or becomes aware that a penal-
ty has been assessed against an appraiser
under section 6701(a) of the Internal
Revenue Code, the Director may repri-
mand the appraiser or, in accordance with
§10.62, institute a proceeding for disqual-
ification of the appraiser.

(c) A proceeding for censure, suspen-
sion, or disbarment of a practitioner or
disqualification of an appraiser is institut-
ed by the filing of a complaint, the con-
tents of which are more fully described in
§10.62. Except as provided in §10.82, a
proceeding will not be instituted under
this section unless the proposed respon-
dent previously has been advised in writ-
ing of the facts or conduct warranting
such action and has been accorded an
opportunity to provide an explanation or
description of mitigating circumstances.

§10.61 Conferences.

(a) In general. The Director of Practice
may confer with a practitioner or an
appraiser concerning allegations of mis-
conduct irrespective of whether a pro-
ceeding for censure, suspension, disbar-
ment, or disqualification has been
instituted against the practitioner or
appraiser. If the conference results in a
stipulation in connection with a proceed-
ing in which the practitioner or appraiser
is the respondent, the stipulation may be
entered in the record by either party to the
proceeding.

(b) Resignation or voluntary suspen-
sion or censure. To avoid the institution
or conclusion of a proceeding under para-
graph (a) of §10.60, a practitioner may
offer his or her consent to the issuance of
a censure, suspension or disbarment, or
may resign, as the case may be, from
practice before the Internal Revenue
Service. It is within the discretion of the
Director of Practice to accept the offered
censure, suspension, disbarment, or resig-
nation, in accordance with the consent
offered.

(c) Voluntary disqualification. To
avoid the institution or conclusion of a

proceeding under paragraph (b) of §10.60,
an appraiser may offer his or her consent
to disqualification. It is within the discre-
tion of the Director of Practice to accept
the offered disqualification in accordance
with the consent offered.

§10.62 Contents of complaint.

(a) Charges. A complaint must name
the respondent, give a plain and concise
description of the allegations that consti-
tute the basis for the proceeding, and be
signed by the Director of Practice. A
complaint is sufficient if it fairly informs
the respondent of the charges brought so
that he or she is able to prepare a defense.
In the case of a complaint filed against an
appraiser, the complaint is sufficient if it
refers to a penalty imposed previously on
the respondent under section 6701(a) of
the Internal Revenue Code.

(b) Demand for answer. The Director
of Practice must notify the respondent of
the place and time for answering the com-
plaint, the time for which may not be less
than 15 days from the date of service of
the complaint, and notice must be given
that a decision by default may be rendered
against the respondent in the event an
answer is not filed as required.

### §10.63 Service of complaint and other papers.

(a) Complaint. The complaint or a
copy of the complaint must be served on
the respondent by certified mail or first
class mail, as provided below; by deliver-
ing it to the respondent or the respon-
dent's authorized representative in person;
by leaving it at the office or place of busi-
ness of the respondent or the respondent's
authorized representative; or in any other
manner that has been agreed to by the
respondent. Where service is by certified
mail, the returned post office receipt duly
signed by or on behalf of the respondent
will be proof of service. If the certified
mail is not claimed or accepted by the
respondent and is returned undelivered,
complete service may be made on the
respondent by mailing the complaint to
the respondent by first class mail, provid-
ed the complaint is addressed to the
respondent at the respondent's last known
address as determined under section 6212
of the Internal Revenue Code and the reg-
ulations thereunder. If service is made on
the respondent or the respondent's autho-

rized representative in person, by leaving
the complaint at the office or place of
business of the respondent or the respon-
dent's authorized representative, or by
other means agreed to by the respondent,
the sworn or affirmed written statement of
service by the person making service, set-
ting forth the manner of service, including
the place, recipient, date and time of ser-
vice, will be proof of service.

(b) Service of papers other than com-
plaint. Any paper other than the com-
plaint may be served on the respondent
as provided in paragraph (a) of this sec-
tion or by mailing the paper by first class
mail to the respondent at his or her last
known address as determined under sec-
tion 6212 of the Internal Revenue Code
and the regulations thereunder, or by
mailing the paper by first class mail to
the respondent's authorized representa-
tive. This mailing constitutes complete
service.

(c) Filing of papers. Whenever the fil-
ing of a paper is required or permitted in
connection with a proceeding under this
part, and the place of filing is not speci-
fied by these regulations, rule, or order of
the Administrative Law Judge, the paper
must be filed with the Director of
Practice, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20224. All papers must be filed in
duplicate.

§10.64 Answer.

(a) Filing. The respondent's answer
must be filed in writing within the time
specified in the complaint unless, on
application of the respondent, the time is
extended by the Director of Practice or the
Administrative Law Judge. The answer is
to be filed in duplicate with the Director.

(b) Contents. The answer must contain
a statement of facts that constitute the
respondent's grounds of defense. The
respondent must specifically admit or
deny each allegation set forth in the com-
plaint, except that the respondent may
state that the respondent is without suffi-
cient information to admit or deny a spe-
cific allegation. The respondent, never-
theless, may not deny a material
allegation in the complaint which the
respondent knows to be true, or state that
the respondent is without sufficient infor-
mation to form a belief, when the respon-
dent possesses the required information.

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The respondent also must state affirma-
tively any special matters of defense on
which he or she relies.

(c) Failure to deny or answer allega-
tions in the complaint. Every allegation
in the complaint that is not denied in the
answer is deemed admitted and may be
considered proved; no further evidence in
respect of such allegation need be ad-
duced at a hearing. Failure to file an an-
swer within the time prescribed (or within
the time for answer as extended by the Di-
rector of Practice or the Administrative
Law Judge), constitutes an admission of
the allegations of the complaint and a
waiver of hearing, and the Administrative
Law Judge may make the decision by de-
fault without a hearing or further proce-
dure.

(d) Signature. The answer must be
signed by the respondent or the respon-
dent's authorized representative and must
include a statement directly above the sig-
nature acknowledging that the statements
made in the answer are true and correct
and that knowing and willful false state-
ments may be punishable under 18 U.S.C.
1001.

### §10.65 Supplemental charges.

If it appears that the respondent, in his
or her answer, falsely and in bad faith, de-
nies a material allegation of fact in the
complaint or states that the respondent
has insufficient knowledge to form a be-
lief, when the respondent in fact pos-
sesses such information, or if it appears
that the respondent has knowingly intro-
duced false testimony during proceedings
for his or her censure, suspension, disbar-
ment, or disqualification, the Director of
Practice may file supplemental charges
against the respondent. The supplemental
charges may be tried with other charges in
the case, provided the respondent is given
due notice of the charges and is afforded
an opportunity to prepare a defense to
such charges.

### §10.66 Reply to answer.

The Director of Practice may file a
reply to the respondent's answer, but un-
less otherwise ordered by the Administra-
tive law Judge, no reply to the respon-
dent's answer is required. If a reply is not
filed, new matter in the answer is deemed
denied.

§10.67 Proof; variance; amendment of
pleadings.

In the case of a variance between the
allegations in pleadings and the evidence
adduced in support of the pleadings, the
Administrative Law Judge may order or
authorize amendment of the pleadings to
conform to the evidence. The party who
would otherwise be prejudiced by the
amendment must be given a reasonable
opportunity to address the allegations of
the pleadings as amended and the Admin-
istrative Law Judge must make findings
on any issue presented by the pleadings as
amended.

§10.68 Motions and requests.

Unless the Administrative Law Judge
directs otherwise, motions and requests
may be filed with the Director of Practice
or with the Administrative Law Judge.

#### §10.69 Representation.

A respondent or proposed respondent
may appear in person or he or she may be
represented by a practitioner. The Direc-
tor of Practice may be represented by an
attorney or other employee of the Internal
Revenue Service.

§10.70 Administrative Law Judge.

(a) Appointment. Proceedings on com-
plaints for the censure, suspension or dis-
barment of a practitioner or the disqualifi-
cation of an appraiser will be conducted
by an Administrative Law Judge ap-
pointed as provided by 5 U.S.C. 3105.

(b) Powers of the Administrative Law
Judge. The Administrative Law Judge,
among other powers, has the authority, in
connection with any proceeding under
§10.60 assigned or referred to him or her,
to do the following-

(1) Administer oaths and affirmations;

(2) Make rulings on motions and re-
quests, which rulings may not be ap-
pealed prior to the close of a hearing ex-
cept in extraordinary circumstances and at
the discretion of the Administrative Law
Judge;

(3) Determine the time and place of
hearing and regulate its course and con-
duct;

(4) Adopt rules of procedure and mod-
ify the same from time to time as needed
for the orderly disposition of proceedings;

(5) Rule on offers of proof, receive rel-
evant evidence, and examine witnesses;

(6) Take or authorize the taking of de-
positions;

(7) Receive and consider oral or written
argument on facts or law;

(8) Hold or provide for the holding of
conferences for the settlement or simplifi-
cation of the issues with the consent of the
parties;

(9) Perform such acts and take such
measures as are necessary or appropriate
to the efficient conduct of any proceed-
ing; and

(10) Make decisions.

§10.71 Hearings.

(a) In general. An Administrative Law
Judge will preside at the hearing on a
complaint filed under paragraph (c) of
§ 10.60 for the censure, suspension, or dis-
barment of a practitioner or disqualifica-
tion of an appraiser. Hearings will be
stenographically recorded and transcribed
and the testimony of witnesses will be
taken under oath or affirmation. Hearings
will be conducted pursuant to 5 U.S.C.
556. A hearing in a proceeding requested
under paragraph (g) of §10.82 will be
conducted de novo.

(b) Failure to appear. If either party to
the proceeding fails to appear at the hear-
ing, after notice of the proceeding has
been sent to him or her, the party will be
deemed to have waived the right to a
hearing and the Administrative Law
Judge may make his or her decision
against the absent party by default.

§10.72 Evidence.

(a) In general. The rules of evidence
prevailing in courts of law and equity are
not controlling in hearings on complaints
filed under paragraph (c) of §10.60.
However, the Administrative Law Judge
may exclude evidence that is irrelevant,
immaterial, or unduly repetitious.

(b) Depositions. The deposition of any
witness taken pursuant to §10.73 may be
admitted into evidence in any proceeding
instituted under §10.60.

(c) Proof of documents. Official docu-
ments, records, and papers of the Internal
Revenue Service and the Office of Direc-
tor of Practice are admissible in evidence
without the production of an officer or
employee to authenticate them. Any such

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documents, records, and papers may be
evidenced by a copy attested or identified
by an officer or employee of the Service
or the Treasury Department, as the case
may be.

(d) Exhibits. If any document, record,
or other paper is introduced in evidence as
an exhibit, the Administrative Law Judge
may authorize the withdrawal of the
exhibit subject to any conditions that he or
she deems proper.

(e) Objections. Objections to evidence
are to be made in short form, stating the
grounds for the objection. Except as or-
dered by the Administrative Law Judge,
argument on objections will not be
recorded or transcribed. Rulings on ob-
jections are to be a part of the record, but
no exception to a ruling is necessary to
preserve the rights of the parties.

§10.73 Depositions.

(a) Depositions for use at a hearing
may be taken, with the written approval
of the Administrative Law Judge, by ei-
ther the Director of Practice or the respon-
dent or their duly authorized representa-
tives. Depositions may be taken before
any officer duly authorized to administer
an oath for general purposes or before an
officer or employee of the Internal Rev-
enue Service who is authorized to admin-
ister an oath in internal revenue matters.

(b) The party taking the deposition
must provide the deponent and the other
party with 10 days written notice of the
deposition, unless the deponent and the
parties agree otherwise. The notice must
specify the name of the deponent, the
time and place where the deposition is to
be taken, and whether the deposition will
be taken by oral or written interrogatories.
When a deposition is taken by written in-
terrogatories, any cross-examination also
will be by written interrogatories. Copies
of the written interrogatories must be
served on the other party with the notice
of deposition, and copies of any written
cross-interrogation must be mailed or de-
livered to the opposing party at least 5
days before the date that the deposition
will be taken, unless the parties mutually
agree otherwise. A party on whose behalf
a deposition is taken must file the re-
sponses to the written interrogatories or a
transcript of the oral deposition with the
Administrative Law Judge and serve
copies on the opposing party and the de-

ponent. Expenses in the reporting of de-
positions will be borne by the party that
requested the deposition.

§10.74 Transcript.

In cases where the hearing is steno-
graphically reported by a Government
contract reporter, copies of the transcript
may be obtained from the reporter at rates
not to exceed the maximum rates fixed by
contract between the Government and the
reporter. Where the hearing is steno-
graphically reported by a regular em-
ployee of the Internal Revenue Service, a
copy will be supplied to the respondent
either without charge or upon the pay-
ment of a reasonable fee. Copies of ex-
hibits introduced at the hearing or at the
taking or depositions will be supplied to
the parties upon the payment of a reason-
able fee (Sec. 501, Public Law
82-137)(65 Stat. 290)(31 U.S.C. 483a).

§10.75 Proposed findings and conclu-
sions.

Except in cases where the respondent
has failed to answer the complaint or
where a party has failed to appear at the
hearing, the parties must be afforded a
reasonable opportunity to submit pro-
posed findings and conclusions and their
supporting reasons to the Administrative
Law Judge.

### §10.76 Decision of the Administrative Law Judge.

As soon as practicable after the con-
clusion of a hearing and the receipt of
any proposed findings and conclusions
timely submitted by the parties, the Ad-
ministrative Law Judge will make the
decision in the case. The decision must
include a statement of findings and con-
clusions, as well as the reasons or basis
for making such findings and conclu-
sions, and an order of censure, suspen-
sion, disbarment, disqualification, or dis-
missal of the complaint. The
Administrative Law Judge will file the
decision with the Director of Practice,
who will transmit a copy of the decision
to the respondent or the respondent's au-
thorized representative. In the absence
of an appeal to the Secretary of the Trea-
sury, or review of the decision on motion
of the Secretary, the decision of the Ad-
ministrative Law Judge will without fur-

ther proceedings become the decision of
the Secretary of the Treasury 30 days
after the date of the Administrative Law
Judge's decision.

§10.77 Appeal to the Secretary.

Within 30 days from the date of the Ad-
ministrative Law Judge's decision, either
party may appeal to the Secretary of the
Treasury, or his or her designate. The re-
spondent must file his or her appeal with
the Director of Practice in duplicate and
notice of appeal must include exceptions
to the decision of the Administrative Law
Judge and supporting reasons for such ex-
ceptions. If the Director files an appeal,
he or she must transmit a copy to the re-
spondent. Within 30 days after receipt of
an appeal or copy thereof, the other party
may file a reply brief in duplicate with the
Director. If the reply brief is filed by the
Director, he or she must transmit a copy
of it to the respondent. The Director must
transmit the entire record to the Secretary
of the Treasury, or his or her designate,
after the appeal and any reply brief has
been filed.

§10.78 Decision of the Secretary.

On appeal from or review of the deci-
sion of the Administrative Law Judge, the
Secretary of the Treasury, or his or her
designate, will make the agency decision.
A copy of the agency's decision will be
transmitted to the respondent by the Di-
rector of Practice.

§10.79 Effect of disbarment, suspension,
or censure.

(a) Disbarment. Where the final order
in a case is against the respondent and is
for disbarment, the respondent will not be
permitted to practice before the Internal
Revenue Service unless and until autho-
rized to do so by the Director of Practice
pursuant to §10.81.

(b) Suspension. Where the final order
in a case is against the respondent and is
for suspension, the respondent will not be
permitted to practice before the Internal
Revenue Service during the period of sus-
pension.

(c) Censure. Where the final order in
the case is against the respondent and is
for censure, the respondent may be per-
mitted to practice before the Internal Rev-
enue Service, but the respondent's future

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representations may be subject to condi-
tions prescribed by the Director of Prac-
tice designed to promote high standards
of conduct. For example, where a practi-
tioner is censured because he or she failed
to advise his or her clients about a poten-
tial conflict of interest and obtain the
clients' written consents, the Director of
Practice may require the practitioner to
provide the Director or another Internal
Revenue Service official with a copy of
all future consents obtained by the practi-
tioner, whether or not such consents are
specifically requested.

§10.80 Notice of disbarment, suspension,
censure, or disqualification.

On the issuance of a final order censur-
ing, suspending, or disbarring a practi-
tioner or a final order disqualifying an ap-
praiser, the Director of Practice may give
notice of the censure, suspension, disbar-
ment, or disqualification to appropriate
officers and employees of the Internal
Revenue Service and to interested depart-
ments and agencies of the Federal govern-
ment. The Director may determine the
manner of giving notice to the proper au-
thorities of the State by which the cen-
sured, suspended, or disbarred person was
licensed to practice.

§10.81 Petition for reinstatement.

The Director of Practice may entertain
a petition for reinstatement from any per-
son disbarred from practice before the In-
ternal Revenue Service or any disquali-
fied appraiser after the expiration of 5
years following such disbarment or dis-
qualification. Reinstatement may not be
granted unless the Director is satisfied
that the petitioner, thereafter, is not likely
to conduct himself contrary to the regula-
tions in this part, and that granting such
reinstatement would not be contrary to the
public interest.

§10.82 Expedited suspension upon crimi-
nal conviction or loss of license for
cause.

(a) When applicable. Whenever the
Director of Practice determines that a
practitioner is described in paragraph (b)
of this section, the Director may institute
a proceeding under this section to suspend
the practitioner from practice before the
Internal Revenue Service.

(b) To whom applicable. This section
applies to any practitioner who, within 5
years of the date a complaint instituting
a proceeding under this section is
served-

(1) Has had his or her license to prac-
tice as an attorney, certified public ac-
countant, or actuary suspended or re-
voked for cause (not including a failure to
pay a professional licensing fee) by any
authority or court, agency, body, or board
described in §10.51(i); or

(2) Has been convicted of any crime
under title 26 of the United States Code,
any crime involving dishonesty or breach
of trust, or any felony for which the con-
duct involved renders the practitioner
unfit to practice before the Internal Rev-
enue Service.

(c) Instituting a proceeding. A pro-
ceeding under this section will be insti-
tuted by a complaint that names the re-
spondent, is signed by the Director of
Practice, is filed in the Director's office,
and is served according to the rules set
forth in paragraph (a) of §10.63. The
complaint must give a plain and concise
description of the allegations that consti-
tute the basis for the proceeding. The
complaint must notify the respondent-

(1) Of the place and due date for filing
an answer;

(2) That a decision by default may be
rendered if the respondent fails to file an
answer as required;

(3) That the respondent may request a
conference with the Director of Practice
to address the merits of the complaint and
that any such request must be made in the
answer; and

(4) That the respondent may be sus-
pended either immediately following the
expiration of the period by which an an-
swer must be filed or, if a conference is
requested, immediately following the
conference.

(d) Answer. The answer to a complaint
described in this section must be filed no
later than 30 calendar days following the
date the complaint is served, unless the
Director of Practice extends the time for
filing. The answer must be filed in accor-
dance with the rules set forth in §10.64,
except as otherwise provided in this sec-
tion. A respondent is entitled to a confer-
ence with the Director only if the confer-
ence is requested in a timely filed answer.
If a request for a conference is not made

in the answer or the answer is not timely
filed, the respondent will be deemed to
have waived his or her right to a confer-
ence and the Director may suspend such
respondent at any time following the date
on which the answer was due.

(e) Conference. The Director of Prac-
tice or his or her designee will preside at a
conference described in this section. The
conference will be held at a place and
time selected by the Director, but no
sooner than 14 calendar days after the
date by which the answer must be filed
with the Director, unless the respondent
agrees to an earlier date. An authorized
representative may represent the respon-
dent at the conference. Following the
conference, upon a finding that the re-
spondent is described in paragraph (b) of
this section, or upon the respondent's fail-
ure to appear at the conference either per-
sonally or through an authorized repre-
sentative, the Director may immediately
suspend the respondent from practice be-
fore the Internal Revenue Service.

(f) Duration of suspension. A suspen-
sion under this section will commence on
the date that written notice of the suspen-
sion is issued. A practitioner's suspension
will remain effective until the earlier of
the following-

(1) The Director of Practice lifts the
suspension after determining that the
practitioner is no longer described in
paragraph (b) of this section or for any
other reason; or

(2) The suspension is lifted by an Ad-
ministrative Law Judge or the Secretary
of the Treasury in a proceeding referred to
in paragraph (g) of this section and insti-
tuted under §10.60.

(g) Proceeding instituted under §10.60.
If the Director of Practice suspends a
practitioner under this section, the practi-
tioner may ask the Director to issue a
complaint under §10.60. The request
must be made in writing within 2 years
from the date on which the practitioner's
suspension commences. The Director
must issue a complaint requested under
this paragraph within 30 calendar days of
receiving the request.

## Subpart E - General Provisions

§10.90 Records.

(a) Availability. The Director of Prac-
tice will make available for public inspec-

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<!-- PageBreak -->

tion at the Office of Director of Practice
the roster of all persons enrolled to prac-
tice, the roster of all persons censured,
suspended, or disbarred from practice be-
fore the Internal Revenue Service, and the
roster of all disqualified appraisers. Other
records of the Director may be disclosed
upon specific request, in accordance with
the applicable disclosure rules of the In-
ternal Revenue Service and the Treasury
Department.

(b) Disciplinary procedures. A request
by a practitioner or appraiser that a hear-
ing in a disciplinary proceeding concern-
ing him or her be public, and that the
record of such disciplinary proceeding be
made available for inspection by interest-
ed persons may be granted by the Director
of Practice where the parties stipulate in
advance to protect from disclosure confi-
dential tax information in accordance with
all applicable statutes and regulations.

§10.91 Saving clause.

Any proceeding instituted under this
part, but not closed prior to the effective
date of these revised regulations, will not
be affected by the revisions. Any pro-
ceeding under this part based on conduct
engaged in prior to the effective date of
these regulations may be instituted subse-
quent to the effective date of these revi-
sions. Conduct engaged in prior to the
effective date of these regulations is sub-
ject to the regulations in effect at the time
the conduct occurred.

§10.92 Special orders.

The Secretary of the Treasury reserves
the power to issue such special orders as
he or she deems proper in any cases with-
in the purview of this part.

§10.93 Effective date.

Subject to §10.91, Part 10 is applicable
on the date final regulations are published
in the Federal Register.

Robert E. Wenzel,
Deputy Commisioner
of Internal Revenue.

Approved January 3, 2001.

Jonathan Talisman,
Assistant Secretary (Tax Policy).

(Filed by the Office of the Federal Register on Janu-
ary 11, 2001, 8:45 a.m., and published in the issue of

the Federal Register for January 12, 2001, 66 F.R.
3276)

## Notice of Proposed Rulemaking and Notice of Public Hearing

### Guidance on Reporting of Deposit Interest Paid to Nonresident Aliens

REG-126100-00

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing and notice of public hearing.

SUMMARY: This document contains
proposed regulations that provide guid-
ance on the reporting requirements for
interest on deposits maintained at the U.S.
office of certain financial institutions and
paid to nonresident alien individuals.
These proposed regulations affect persons
making payments of interest with respect
to such a deposit. This document also
provides a notice of public hearing on
these proposed regulations.

DATES: Written or electronic comments
must be received by February 27, 2001.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for 10 a.m. on March
21, 2001, must be received by February
27, 2001.

ADDRESSES: Send submissions to:
CC:M&SP:RU (REG-126100-00), Room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions also may be hand
delivered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG-126100-00),
Courier's Desk, Internal Revenue Service
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the "Tax Regs" option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in Room
4718, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-

tions, Kate Y. Hwa (202), 622-3840 (not a
toll free number); concerning submissions
of comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, Lanita Vandyke, (202) 622-
7180 (not a toll free number).

SUPPLEMENTARY INFORMATION:

#### Paperwork Reduction Act

The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn:
IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC
20224. Comments on the collections of
information should be received by April
16, 2001. Comments are specifically re-
quested concerning:

Whether the proposed collection of
information is necessary for the proper
operation of the functions of the IRS,
including whether the information will
have practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information (see below);

How the quality, utility, and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.

The collection of information in these
proposed regulations is in §§1.6049-4(b)
(5)(i), 1.6049-6(e)(4)(i), and (ii). This in-
formation is required to determine if tax-
payers have properly reported amounts
received as income. The collection of in-
formation is mandatory. The likely re-
spondents are businesses and other for-
profit institutions.

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March 12, 2001

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The estimated average annual burden
per respondent and/or recordkeeper re-
quired by §§1.6049-4(b)(5)(i), 1.6049-6
(e)(4)(i), and (ii) will be reflected in the
burdens of Forms W-8, 1042, 1042-S,
and the income tax return of a foreign per-
son.

Further, the estimated average annual
burden per respondent and/or record-
keeper for the statement required by
§1.6049-6(e)(4)(i) is as follows:

Estimated total annual reporting bur-
den: 500 hours.

Estimated average annual burden per
respondent: 15 minutes.

Estimated number of respondents:
2,000.

Estimated annual frequency of re-
sponses: annually.

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.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

#### Background and Explanation of Provi- sions

The IRS previously determined that in-
formation concerning interest paid on de-
posits from U.S. bank accounts to nonres-
ident alien individuals who are residents
of Canada would be significant in further-
ing its compliance efforts. Consequently,
§1.6049-8(a) requires the reporting of
such interest on a Form 1042-S.

The proposed regulations extend the
information reporting requirement for
bank deposit interest paid to nonresi-
dent alien individuals who are residents
of other foreign countries. This exten-
sion is appropriate for two reasons.
First, requiring routine reporting to the
IRS of all bank deposit interest paid
within the United States will help to en-
sure voluntary compliance by U.S. tax-
payers by minimizing the possibility of
avoidance of the U.S. information re-
porting system (such as through false
claims of foreign status). Second, sev-
eral countries that have tax treaties or

other agreements that provide for the
exchange of tax information with the
United States have requested informa-
tion concerning bank deposits of indi-
vidual residents of their countries. Be-
cause of the importance that the United
States attaches to exchanging tax infor-
mation as a way of encouraging volun-
tary compliance and furthering trans-
parency, see e.g. S. Exec. Rep. No.
106-8, at 15 (1st Sess. 1999), Treasury
and the IRS believe it is important for
the United States to facilitate, wherever
possible, the effective exchange of all
relevant tax information with our treaty
partners.

In addition to extending the informa-
tion reporting requirement for interest
paid on deposits maintained at a bank's
office within the United States to all non-
resident alien individuals, the proposed
regulations also make the following
minor changes and clarifications.

Section 1.6049-6 provides that a copy
of Form 1042-S must be furnished to the
recipient for interest paid on deposits
maintained at a bank's office within the
United States. Paragraph (e)(4)(i) of that
section has been revised to clarify that the
payor or middleman can satisfy this
requirement by furnishing a copy of Form
1042-S either in person or to the last
known address of the recipient.

A new paragraph (e)(4)(ii) has been
added to §1.6049-6 to provide guidance
on the manner in which a Form 1042-S
is furnished when there are joint account
holders. Specifically, if any joint
account holder is a U.S. non-exempt
recipient, the payor or middleman must
report the entire payment to that person.
If all joint account holders are foreign
persons, the payor or middleman must
report the payment to the nonresident
alien individual that is a resident of a
country with which the United States has
an income tax treaty or a tax information
exchange agreement (TIEA). If more
than one of the joint account holders is a
foreign person and is a resident of a
country with which the United States has
an income tax treaty or a TIEA, the
payor or middleman must report the pay-
ment to the person that is the primary
account holder. The payor or middle-
man must, however, furnish a Form
1042-S to any account holder who
requests it.

Section 1.6049-8(a) provides that
interest paid with respect to a deposit
maintained at an office within the United
States to individuals who are Canadian
residents must be reported. The payor or
middleman may rely on the permanent
address found on Form W-8 to make the
determination of whether the nonresident
alien individual resides in Canada.
However, the regulation also provides that
a payor or middleman may rely on its
actual knowledge of the individual's resi-
dence address in Canada, even if a valid
Form W-8 has not been provided, to make
such a determination. This "actual
knowledge of the individual's residence
address" rule has been eliminated because
it creates a result that is contrary to the
presumption rules contained in
§1.1441-1(b)(3)(iii) (and made applicable
to reportable payments by §1.6049-
5(d)(2)). Accordingly, §1.6049- 8(a) has
been clarified to provide that, while
amounts described in §1.6049-8(a) gener-
ally are not subject to backup withholding
under section 3406, the payor must report
the payment on a Form 1099 as made to a
U.S. non-exempt recipient in accordance
with the presumption rules of §§1.6049-
5(d)(2) and 1.1441-1(b)(3)(iii) if the
payor or middleman does not have either
a valid Form W-8 or valid Form W-9.
Further, such payment is subject to back-
up withholding under section 3406.

#### Proposed Effective Date

These regulations are proposed to apply
to payments made after December 31 of
the year in which they are published as
final regulations in the Federal Register.

#### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information
on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rule-
making will be submitted to the Chief

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Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.

#### Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely (in the
manner described in the "ADDRESSES"
portion of this preamble) to the IRS.
The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be
made easier to understand. All com-
ments will be available for public
inspection and copying.

A public hearing has been scheduled
for March 31, 2001, beginning at 10 a.m.
in Room 4718, Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building securi-
ty procedures, visitors must enter at the
10th Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the "FOR FURTHER INFORMA-
TION CONTACT" portion of this pream-
ble.

The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments must submit writ-
ten comments and an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
(8) copies) by February 27, 2001. A peri-
od of 10 minutes will be allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
reviewing outlines has passed. Copies of
the agenda will be available free of charge
at the hearing.

#### Drafting Information

The principal author of the regulations
is Kate Y. Hwa, Office of Associate Chief
Counsel (International). However, other
personnel from the IRS and Treasury

Department participated in their develop-
ment.

## Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 31 are
proposed to be amended as follows:

PART 1 - INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In section 1.6049-4, paragraph
(b)(5) is revised to read as follows:

§1.6049-4 Return of information as to
interest paid and original issue discount
includible in gross income after
December 31, 1982.

* * * * *

(b) * * *

(5) Interest payments to nonresident
alien individuals-(i) General rule. In
the case of interest aggregating $10 or
more paid to a nonresident alien individ-
ual (as defined in section 7701(b)(1)(B))
that is reportable under §1.6049-8(a), the
payor shall make an information return on
Form 1042-S for the calendar year in
which the interest is paid. The payor or
middleman shall prepare and file Form
1042-S at the time and in the manner pre-
scribed by section 1461 and the regula-
tions under that section and by the form
and its accompanying instructions. See
§§1.1461-1(b) (rules regarding the prepa-
ration of a Form 1042) and 1.6049-
6(e)(4) (rules for furnishing a copy of the
Form 1042-S to the payee). To determine
whether an information return is required
for original issue discount, see §§1.6049-
5(f) and 1.6049-8(a).

(ii) Effective date. Paragraph (b)(5)(i)
of this section shall be effective for pay-
ments made after December 31 of the year
in which the final regulations are pub-
lished in the Federal Register with
respect to a Form W-8 (Certificate of
Foreign Status) furnished to the payor or
middleman after that date. (For interest
paid to a Canadian nonresident alien indi-
vidual on or before December 31 of the
year in which final regulations are pub-
lished in the Federal Register, see
§1.6049-4(b)(5) as in effect and con-
tained in 26 CFR part 1 revised April 1,
2000.)

Par. 3. Section 1.6049-6 is amended as
follows:

1\. Paragraph (e)(4) is revised.

2\. In paragraph (e)(5), the first sen-
tence is revised and a new sentence is
added at the end of the paragraph.

The addition and revisions read
as follows:

§1.6049-6 Statements to recipients of
interest payments and holders of
obligations for attributed original issue
discount.

* * * * *

(e) * * *

(4) Special rule for amounts described
in §1.6049-8(a)-(i) In general. In the
case of amounts described in §1.6049-
8(a) (relating to payments of deposit inter-
est to nonresident alien individuals) paid
after December 31 of the year in which
the final regulations are published in the
Federal Register, any person who makes
a Form 1042-S under section 6049(a) and
§1.6049-4(b)(5) shall furnish a statement
to the recipient either in person or by first-
class mail to the recipient's last known
address. The statement shall include a
copy of the Form 1042-S required to be
prepared pursuant to §1.6049-4(b)(5) and
a statement to the effect that the informa-
tion on the form is being furnished to the
United States Internal Revenue Service
and may be furnished to the government
of the foreign country where the recipient
resides.

(ii) Joint account holders. In the case
of joint account holders, a payor or mid-
dleman must report the entire amount of
interest as paid to any joint account hold-
er that provides a valid Form W-9, or, if
any account holder has not furnished a
Form W-8 or Form W-9, any account
holder that is presumed to be a U.S. non-
exempt recipient under §§1.6049-5(d)(2)
and1.1441-1(b)(3)(iii). If all of the joint
account holders are foreign persons, then
the payor or middleman must report the
payment to the nonresident alien individ-
ual that is a resident of a country with
which the United States has an income tax
treaty or a tax information exchange
agreement. If more than one of the joint
account holders is a foreign person and is
a resident of a country with which the
United States has an income tax treaty or
a tax information exchange agreement,

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then the payor or middleman may report
the interest as paid to any such account
holder that is treated as the primary
account holder under §31.3406(h)-2(a).
If, however, any account holder requests
its own Form 1042-S, the payor or mid-
dleman must furnish a Form 1042-S to
the account holder who requests it.

(5) Effective date. This paragraph
(e)(4) is effective for payee statements
due after December 31 of the year in
which the final regulations are pub-
lished in the Federal Register, without
regard to extensions. * * * (For interest
paid to a Canadian nonresident alien in-
dividual on or before December 31 of
the year in which final regulations are
published in the Federal Register, see
§1.6049- 6(e)(4) as in effect and con-
tained in 26 CFR part 1 revised April 1,
2000.)

* * * * *

Par. 4. In section 1.6049-8, the section
heading and paragraph (a) are revised to
read as follows:

§1.6049-8 Interest and original issue
discount paid to nonresident alien
individuals.

(a) Interest subject to reporting re-
quirement. For purposes of §§1.6049-4,
1.6049-6, and this section and except as
provided in paragraph (b) of this section,
the term interest means interest paid to a
nonresident alien individual after De-
cember 31 of the year in which the final
regulations are published in the Federal
Register, where the interest is described
in section 871(i)(2)(A) with respect to a
deposit maintained at an office within
the United States. For purposes of the
regulations under section 6049, a nonres-
ident alien individual is a person de-
scribed in section 7701(b) (1)(B). The
payor or middleman may rely upon a
valid Form W-8 to determine whether
the payment is made to a nonresident
alien individual. Generally, amounts de-
scribed in this paragraph (a) are not sub-
ject to backup withholding under section
3406. See §31.3406(g)-1(d) of this
chapter. However, if the payor or mid-
dleman does not have either a valid Form
W-8 or valid Form W-9, the payor or
middleman must report the payment as
made to a U.S. non-exempt recipient if it
must so treat the payee under the pre-
sumption rules of §1.6049-5(d)(2) and

§1.1441-1(b)(3)(iii) and must also
backup withhold under section 3406.
(For interest paid to a Canadian nonresi-
dent alien individual on or before De-
cember 31 of the year in which final reg-
ulations are published in the Federal
Register, see §1.6049-8(a) as in effect
and contained in 26 CFR part 1 revised
April 1, 2000.)
* * * * *

PART 31 - EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE

Par. 5. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 6. In section 31.3406(g)-1, para-
graph (d) is revised to read as follows:

§31.3406(g)-1 Exceptions for payments
to certain payees and certain other
payment.

* * * * *

(d) Reportable payments made to non-
resident alien individuals. A payment of
interest that is reported on Form 1042-S
as paid to a nonresident alien individual
under §1.6049-8(a) of this chapter is not
subject to withholding under section
3406. (For interest paid to a Canadian
nonresident alien individual on or before
December 31 of the year in which final
regulations are published in the Federal
Register, see §31.3406(g)-1(d) as in
effect and contained in 26 CFR part 1
revised April 1, 2000.)

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

(Filed by the Office of the Federal Register on Janu-
ary 16, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 17, 2001, 66 F.R.
3925)

## Notice of Proposed Rulemaking and Notice of Public Hearing

Required Distributions From
Retirement Plans

REG-130477-00;
REG-130481-00

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
and notice of public hearing.

SUMMARY: This document contains
proposed regulations relating to required
minimum distributions from qualified
plans, individual retirement plans,
deferred compensation plans under sec-
tion 457, and section 403(b) annuity con-
tracts, custodial accounts, and retirement
income accounts. These regulations will
provide the public with guidance neces-
sary to comply with the law and will
affect administrators of, participants in,
and beneficiaries of qualified plans; insti-
tutions that sponsor and individuals who
administer individual retirement plans,
individuals who use individual retirement
plans for retirement income, and benefi-
ciaries of individual retirement plans; and
employees for whom amounts are con-
tributed to section 403(b) annuity con-
tracts, custodial accounts, or retirement
income accounts and beneficiaries of such
contracts and accounts.

DATES: Written and electronic com-
ments must be received by April 19, 2001.
Outlines of topics to be discussed at the
public hearing scheduled for June 1, 2001,
at 10 a.m. must be received by May 11,
2001.

ADDRESSES: Send submissions to:
CC:M&SP:RU (REG-130477-00/REG-
130481-00) room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG-130477-00/
REG-130481-00), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue
NW, Washington, DC. Alternatively, tax-
payers may submit comments electronically
via the Internet by selecting the "Tax Regs"
option of the IRS Home Page, or by submit-
ting comments directly to the IRS Internet
site at: http://www.irs.gov/tax_regs/
reglist.html. The public hearing on June 1,
2001, will be held in the IRS Auditorium
(7th Floor), Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Cathy
A. Vohs, 202-622-6090; concerning sub-
missions and the hearing, and/or to be
placed on the building access list to attend

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the hearing, Guy Traynor, 202-622-7180
(not toll-free numbers).

## Paperwork Reduction Act

The collections of information con-
tained in these proposed regulations have
been reviewed and approved by the Office
of Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545-0996, in conjunction with the notice
of proposed rulemaking published on July
27, 1987, 52 F.R. 28070, REG-EE-
113-82, Required Distributions From
Qualified Plans and Individual Retirement
Plans, and control number 1545-1573, in
conjunction with the notice of proposed
rulemaking published on December 30,
1997, 62 F.R. 67780, REG-209463-82
(1998-1 C.B. 376), Required Distribu-
tions from Qualified Plans and Individual
Retirement Plans.

An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.

Books and records relating to the col-
lection of information must be retained
as long as their contents may become
material in the administration of any
internal revenue law. Generally, tax
returns and tax return information are
confidential, as required by 26 U.S.C.
6103.

## Background

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) and to the Pension
Excise Tax Regulations (26 CFR Part 54)
under sections 401, 403, 408, and 4974 of
the Internal Revenue Code of 1986. It is
contemplated that proposed rules similar
to those in these proposed regulations
applicable to section 401 will be pub-
lished in the near future for purposes of
applying the distribution requirements of
section 457(d). These amendments are
proposed to conform the regulations to
section 1404 of the Small Business Job
Protection Act of 1996 (SBJPA) (110 Stat.
1791), sections 1121 and 1852 of the Tax
Reform Act of 1986 (TRA of 1986) (100
Stat. 2464 and 2864), sections 521 and
713 of the Tax Reform Act of 1984 (TRA

of 1984) (98 Stat. 865 and 955), and sec-
tions 242 and 243 of the Tax Equity and
Fiscal Responsibility Act of 1982
(TEFRA) (96 Stat. 521). The regulations
provide guidance on the required mini-
mum distribution requirements under sec-
tion 401(a)(9) for plans qualified under
section 401(a). The rules are incorporated
by reference in section 408(a)(6) and
(b)(3) for individual retirement accounts
and annuities (IRAs), section 408A(c)(5)
for Roth IRAs, section 403(b)(10) for sec-
tion 403(b) annuity contracts, and section
457(d) for eligible deferred compensation
plans.

For purposes of this discussion of the
background of the regulations in this pre-
amble, as well as the explanation of pro-
visions below, whenever the term employ-
ee is used, it is intended to include not
only an employee but also an IRA owner.

Section 401(a)(9) provides rules for
distributions during the life of the
employee in section 401(a)(9)(A) and
rules for distributions after the death of
the employee in section 401(a)(9)(B).
Section 401(a)(9)(A)(ii) provides that the
entire interest of an employee in a quali-
fied plan must be distributed, beginning
not later than the employee's required
beginning date, in accordance with regu-
lations, over the life of the employee or
over the lives of the employee and a des-
ignated beneficiary (or over a period not
extending beyond the life expectancy of
the employee and a designated beneficia-
ry).

Section 401(a)(9)(C) defines required
beginning date for employees (other than
5-percent owners and IRA owners) as
April 1 of the calendar year following the
later of the calendar year in which the
employee attains age 70 1/2 or the calen-
dar year in which the employee retires.
For 5-percent owners and IRA owners, the
required beginning date is April 1 of the
calendar year following the calendar year
in which the employee attains age 70 1/2,
even if the employee has not retired.

Section 401(a)(9)(D) provides that
(except in the case of a life annuity) the
life expectancy of an employee and the
employee's spouse that is used to deter-
mine the period over which payments
must be made may be redetermined, but
not more frequently than annually.

Section 401(a)(9)(E) provides that the
term designated beneficiary means any

individual designated as a beneficiary by
the employee.

Section 401(a)(9)(G) provides that any
distribution required to satisfy the inci-
dental death benefit requirement of sec-
tion 401(a) is a required minimum distrib-
ution.

Section 401(a)(9)(B)(i) provides that, if
the employee dies after distributions have
begun, the employee's interest must be
distributed at least as rapidly as under the
method used by the employee.

Section 401(a)(9)(B)(ii) and (iii) pro-
vides that, if the employee dies before
required minimum distributions have
begun, the employee's interest must be
either: distributed (in accordance with
regulations) over the life or life expectan-
cy of the designated beneficiary with the
distributions beginning no later than 1
year after the date of the employee's
death, or distributed within 5 years after
the death of the employee. However,
under section 401(a)(9)(B)(iv), a surviv-
ing spouse may wait until the date the
employee would have attained age 70 1/2
to begin taking required minimum distrib-
utions.

Comprehensive proposed regulations
under section 401(a)(9) were previously
published in the Federal Register on July
27, 1987, 52 F.R. 28070. Many of the
comments on the 1987 proposed regula-
tions expressed concerns that the required
minimum distribution must be satisfied
separately for each IRA owned by an indi-
vidual by taking distributions from each
IRA. In response, Notice 88-38 (1988-1
C.B. 524) provided that the amount of the
required minimum distribution must be
calculated for each IRA, but permitted
that amount to be taken from any IRA.
Amendments to the 1987 proposed regu-
lations published in the Federal Register
on December 30, 1997, 62 F.R. 67780, re-
sponded to comments on the use of trusts
as beneficiaries. Notice 96-67 (1996-2
C.B. 235) and Notice 97-75 (1997-2 C.B.
337) provided guidance on the changes
made to section 401(a)(9) by the SBJPA.
The guidance in Notice 88-38, Notice
96-67, and Notice 97-75 is incorporated
in these proposed regulations with some
modifications.

Even though the distribution require-
ments added by TEFRA were retroactive-
ly repealed by TRA of 1984, the transition
election rule in section 242(b) of TEFRA

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was preserved. Notice 83-23 (1983-2
C.B. 418) continues to provide guidance
for distributions permitted by this transi-
tion election rule. These proposed regula-
tions retain the additional guidance on the
transition rule provided in the 1987 pro-
posed regulations.

As discussed below, in response to
extensive comments, the rules for calcu-
lating required minimum distributions
from individual accounts under the 1987
proposed regulations have been substan-
tially simplified. Certain other 1987 rules
have also been simplified and modified,
although many of the 1987 rules remain
unchanged. In particular, due to the rela-
tively small number of comments on prac-
tices with respect to annuity contracts, and
the effect of the 1987 proposed regula-
tions on these practices, the basic struc-
ture of the 1987 proposed regulation pro-
visions with respect to annuity payments
is retained in these proposed regulations.
The IRS and Treasury are continuing to
study these rules and specifically request
updated comments on current practices
and issues relating to required minimum
distributions from annuity contracts.

## Explanation of Provisions

### Overview

Many of the comments on the 1987
proposed regulations addressed the rules
for required minimum distributions dur-
ing an employee's life, including calcula-
tion of life expectancy and determination
of designated beneficiary. In particular,
comments raised concerns about the de-
fault provisions, election requirements,
and plan language requirements. In gen-
eral, the need to make decisions at age 70
1/2, which under the 1987 proposed regu-
lations would bind the employee in future
years during which financial circum-
stances could change significantly, was
perceived as unreasonably restrictive. In
addition, the determination of life ex-
pectancy and designated beneficiary and
the resulting required minimum distribu-
tion calculation for individual accounts
were viewed as too complex.

To respond to these concerns, these
proposed regulations would make it much
easier for individuals - both plan partic-
ipants and IRA owners - and plan
administrators to understand and apply
the minimum distribution rules. The new

proposed regulations would make major
simplifications to the rules, including the
calculation of the required minimum dis-
tribution during the individual's lifetime
and the determination of a designated
beneficiary for distributions after death.
The new proposed regulations simplify
the rules by

· Providing a simple, uniform table that
all employees can use to determine the
minimum distribution required during
their lifetime. This makes it far easier
to calculate the required minimum dis-
tribution because employees would

· no longer need to determine their
beneficiary by their required be-
ginning date,

· no longer need to decide whether
or not to recalculate their life ex-
pectancy each year in determining
required minimum distributions,
and

· no longer need to satisfy a sepa-
rate incidental death benefit rule.

· Permitting the required minimum distri-
bution during the employee's lifetime to
be calculated without regard to the ben-
eficiary's age (except when required
distributions can be reduced by taking
into account the age of a beneficiary
who is a spouse more than 10 years
younger than the employee).

· Permitting the beneficiary to be deter-
mined as late as the end of the year fol-
lowing the year of the employee's
death. This allows

· the employee to change desig-
nated beneficiaries after the re-
quired beginning date without in-
creasing the required minimum
distribution and

· the beneficiary to be changed
after the employee's death, such
as by one or more beneficiaries
disclaiming or being cashed out.

· Permitting the calculation of post-death
minimum distributions to take into
account an employee's remaining life
expectancy at the time of death, thus
allowing distributions in all cases to be
spread over a number of years after
death.

These simplifications would also have
the effect of reducing the required mini-
mum distributions for the vast majority of
employees.

The uniform distribution period

Under these proposed regulations and
the 1987 proposed regulations, for distrib-
utions from an individual account, the
required minimum distribution is deter-
mined by dividing the account balance by
the distribution period. For lifetime
required minimum distributions, these
proposed regulations provide a uniform
distribution period for all employees of
the same age. The uniform distribution
period table is the required minimum dis-
tribution incidental benefit (MDIB) divi-
sor table originally prescribed in
§1.401(a)(9)-2 of the 1987 proposed reg-
ulations and now included in A-4 of
§1.401(a)(9)-5 of the new proposed regu-
lations. An exception applies if the
employee's sole beneficiary is the
employee's spouse and the spouse is more
than 10 years younger than the employee.
In that case, the employee is permitted to
use the longer distribution period mea-
sured by the joint life and last survivor life
expectancy of the employee and spouse.

These changes provide a simple admin-
istrable rule for plans and individuals.
Using the MDIB table, most employees
will be able to determine their required
minimum distribution for each year based
on nothing more than their current age
and their account balance as of the end of
the prior year (which IRA trustees report
annually to IRA owners). Under the 1987
proposed regulations, some employees
already use the MDIB table to determine
required minimum distributions. Under
the new proposed regulations, they would
continue to do so. For the majority of
other employees, required minimum dis-
tributions would be reduced as a result of
the changes.

For years after the year of the employ-
ee's death, the distribution period is gen-
erally the remaining life expectancy of the
designated beneficiary. The beneficiary's
remaining life expectancy is calculated
using the age of the beneficiary in the year
following the year of the employee's
death, reduced by one for each subsequent
year. If the employee's spouse is the
employee's sole beneficiary at the end of
the year following the year of death, the
distribution period during the spouse's life
is the spouse's single life expectancy. For
years after the year of the spouse's death,
the distribution period is the spouse's life
expectancy calculated in the year of death,
reduced by one for each subsequent year.

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If there is no designated beneficiary as of
the end of the year after the employee's
death, the distribution period is the
employee's life expectancy calculated in
the year of death, reduced by one for each
subsequent year.

The MDIB table is based on the joint
life expectancies of an individual and a
survivor 10 years younger at each age
beginning at age 70. Allowing the use of
this table reflects the fact that an employ-
ee's beneficiary is subject to change until
the death of the employee and ultimately
may be a beneficiary more than 10 years
younger than the employee. The pro-
posed regulations would allow lifetime
distributions at a rate consistent with this
possibility. Consistent with the require-
ments of section 401(a)(9)(A)(ii), the dis-
tribution period after death is measured by
the life expectancy of the employee's des-
ignated beneficiary in the year following
death, or the employee's remaining life
expectancy if there is no designated bene-
ficiary. This ensures that the employee's
entire benefit is distributed over a period
described in section 401(a)(9)(A)(ii), i.e.,
the life expectancy of the employee or the
joint life expectancy of the employee and
a designated beneficiary.

The approach in these proposed regula-
tions allowing the use of a uniform life-
time distribution period addresses con-
cerns raised in comments on the 1987
proposed regulations that the rules are too
complex. It eliminates the use of two
tables and the interaction of the multiple
beneficiary and change in beneficiary
rules. Finally, it generally eliminates the
need to fix the amount of the distribution
during the employee's lifetime based on
the beneficiary designated on the required
beginning date and eliminates the need to
elect recalculation or no recalculation of
life expectancies at the required beginning
date.

Suggestions have been received that
the life expectancy table used to calculate
required minimum distributions should be
revised to reflect recent increases in
longevity. These proposed regulations in-
stead provide authority for the Commis-
sioner to issue guidance of general applic-
ability revising the life expectancy tables
and the uniform distribution table in the
future if it becomes appropriate. While
life expectancy has increased in the 14
years since the issuance of the section 72

life expectancy tables, those tables may
already overstate the average life ex-
pectancy of the class of individuals who
are subject to these required minimum
distribution rules (qualified plan partici-
pants, IRA owners, et al.). That is be-
cause those existing section 72 tables
were derived from the particular mortality
experience of the select population of in-
dividuals who purchase individual annu-
ities, as opposed to the population who
are subject to the required minimum dis-
tribution rules. In any event, as noted ear-
lier, the new proposed uniform distribu-
tion period-equal to the joint life
expectancy of an individual and a sur-
vivor 10 years younger at each age-
would lengthen the lifetime distribution
period for most employees and beneficia-
ries. In fact, the new proposed regula-
tions would lengthen that period more for
many individuals than would an update to
reflect recent increases in longevity. The
IRS and Treasury believe that this length-
ening of the distribution period for most
employees provides further justification
for retaining the existing life expectancy
tables at this time.

Some commentators suggested that the
calculation of required minimum distribu-
tions include credit for any distribution in a
prior year that exceeded that year's re-
quired minimum distribution. However,
such a "credit" carryforward would require
significant additional data retention and
would add substantial complexity to the
calculation of required minimum distribu-
tions. By using the prior year's ending ac-
count balance for calculating required min-
imum distributions, distribution of
amounts in excess of the required mini-
mum distribution has the effect of reducing
future required minimum distributions
over the remaining distribution period to
some extent. Accordingly, these proposed
regulations do not provide for a credit car-
ryforward.

### Determination of the designated beneficiary

These proposed regulations provide
that, generally, the designated beneficiary
is determined as of the end of the year fol-
lowing the year of the employee's death
rather than as of the employee's required
beginning date or date of death, as under
the 1987 proposed regulations. Thus, any
beneficiary eliminated by distribution of

the benefit or through disclaimer (or oth-
erwise) during the period between the
employee's death and the end of the year
following the year of death is disregarded
in determining the employee's designated
beneficiary for purposes of calculating
required minimum distributions. If, as of
the end of the year following the year of
the employee's death, the employee has
more than one designated beneficiary and
the account or benefit has not been divid-
ed into separate accounts or shares for
each beneficiary, the beneficiary with the
shortest life expectancy is the designated
beneficiary, consistent with the approach
in the 1987 proposed regulations.

This approach for determining the des-
ignated beneficiary following the death of
an employee after the employee's re-
quired beginning date is simpler in sev-
eral respects than the approach in the
1987 proposed regulations and responds
to concerns raised with respect to the ef-
fects of beneficiary designation at the re-
quired beginning date. Under this ap-
proach, the determination of the
designated beneficiary and the calculation
of the beneficiary's life expectancy gener-
ally are contemporaneous with com-
mencement of required distributions to
the beneficiary. Any prior beneficiary
designation is irrelevant for distributions
from individual accounts, unless the em-
ployee takes advantage of a lifetime dis-
tribution period measured by the joint life
expectancy of the employee and a spouse
more than 10 years younger than the em-
ployee. Further, for an employee with a
designated beneficiary, this approach pro-
vides the same rules for distributions after
the employee's death, regardless of
whether death occurs before or after an
employee's required beginning date. Fi-
nally, in the case of an employee who
elects or defaults into recalculation of life
expectancy and who dies without a desig-
nated beneficiary, the requirement that the
employee's entire remaining account bal-
ance be distributed in the year after an
employee's death has been eliminated and
replaced with a distribution period equal
to the employee's remaining life ex-
pectancy recalculated immediately before
death.

### Default rule for post-death distributions

As requested by some commentators,
these proposed regulations would change

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the default rule in the case of death before
the employee's required beginning date
for a nonspouse designated beneficiary
from the 5-year rule in section
401(a)(9)(B)(ii) to the life expectancy rule
in section 401(a)(9)(B)(iii). Thus, absent
a plan provision or election of the 5-year
rule, the life expectancy rule would apply
in all cases in which the employee has a
designated beneficiary. As in the case of
death on or after the employee's required
beginning date, the designated beneficiary
whose life expectancy is used to deter-
mine the distribution period would be
determined as of the end of the year fol-
lowing the year of the employee's death,
rather than as of the employee's date of
death (as would have been required under
the 1987 proposed regulations). The 5-
year rule would apply automatically only
if the employee did not have a designated
beneficiary as of the end of the year fol-
lowing the year of the employee's death.
Finally, in the case of death before the
employee's required beginning date, these
proposed regulations allow a waiver,
unless the Commissioner determines oth-
erwise, of any excise tax resulting from
the life expectancy rule during the first
five years after the year of the employee's
death if the employee's entire benefit is
distributed by the end of the fifth year fol-
lowing the year of the employee's death.

### Annuity payments

These proposed regulations make sev-
eral changes to the rules for determining
whether annuity payments satisfy section
401(a)(9). The changes are designed to
make these rules more administrable
without adverse effects on the basic struc-
ture and application of the rules. The IRS
and Treasury are continuing to study and
evaluate whether additional changes
would be appropriate for determining
whether annuity payments satisfy section
401(a)(9). Some comments were re-
ceived on the annuity rules in 1987, but
updated comments that include a discus-
sion of current industry practices, prod-
ucts, and concerns would be helpful.

These proposed regulations provide
that the designated beneficiary for deter-
mining the distribution period for annuity
payments generally is the beneficiary as
of the annuity starting date, even if that
date is after the required beginning date.
Thus, if annuity payments commence

after the required beginning date, the de-
termination of the designated beneficiary
is contemporaneous with the annuity
starting date and any intervening changes
in the beneficiary designation since the
required beginning date are ignored.
Second, as requested in comments, these
regulations extend to all annuity payment
streams the rule in the 1987 proposed
regulations that allows a life annuity with
a period certain not exceeding 20 years to
commence on the required beginning
date with no makeup for the first distribu-
tion calendar year. For this purpose, the
regulations clarify that only accruals as
of the end of the prior calendar year must
be taken into account in calculating the
amount of an annuity commencing on the
required beginning date. Subsequent ac-
cruals are treated as additional accruals
that must be taken into account in the
next calendar year. Also as requested in
comments, the regulations provide that,
although additional accruals need to be
taken into account in the first payment in
the calendar year following the year of
the accrual, actual payment in the form of
a make-up payment need only be com-
pleted by the end of that calendar year.

The permitted increase in annuity pay-
ments to an employee upon the death of
the survivor annuitant has been expanded
to cover the elimination of the survivor
portion of a joint and survivor annuity due
to a qualified domestic relations order.
Further, in response to comments, in the
case of an annuity contract purchased
from an insurance company, an exception
to the nonincreasing-payment require-
ment in these proposed regulations has
been added to accommodate a cash refund
upon the employee's death of the amount
of the premiums paid for the contract.

One of the rules in the 1987 proposed
regulations that the IRS and Treasury are
continuing to study and evaluate is the
rule providing that if the distributions
from a defined benefit plan are not in the
form of an annuity, the employee's bene-
fit will be treated as an individual account
for purposes of determining required min-
imum distributions. The IRS and Treasury
are continuing to consider whether reten-
tion of this rule is appropriate for defined
benefit plans. Similarly, the IRS and
Treasury are continuing to consider
whether the rule permitting the benefit
under a defined benefit plan to be divided

into segregated shares for purposes of sec-
tion 401(a)(9) is useful and appropriate
for defined benefit plans.

### Trust as beneficiary

These proposed regulations retain the
provision in the proposed regulations, as
amended in 1997, allowing an underlying
beneficiary of a trust to be an employee's
designated beneficiary for purposes of
determining required minimum distribu-
tions when the trust is named as the bene-
ficiary of a retirement plan or IRA, pro-
vided that certain requirements are met.
One of these requirements is that docu-
mentation of the underlying beneficiaries
of the trust be provided timely to the plan
administrator. In the case of individual
accounts, unless the lifetime distribution
period for an employee is measured by the
joint life expectancy of the employee and
the employee's spouse, the deadline under
these proposed regulations for providing
the beneficiary documentation would be
the end of the year following the year of
the employee's death. This is consistent
with the deadline for determining the
employee's designated beneficiary.
Because the designated beneficiary during
an employee's lifetime is not relevant for
determining lifetime required minimum
distributions in most cases under these
proposed regulations, the burden of life-
time documentation requirements con-
tained in the previous proposed regula-
tions is significantly reduced.

A significant number of commentators
on the 1997 amendment to the proposed
regulations requested clarification that a
testamentary trust named as an em-
ployee's beneficiary is a trust that quali-
fies for the look-through rule to the under-
lying beneficiaries, as permitted in the
1997 proposed regulations. These pro-
posed regulations provide examples in
which a testamentary trust is named as an
employee's beneficiary and the look-
through trust rules apply. As previously
illustrated in the facts of Rev. Rul.
2000-2, 2000-3 I.R.B. 305, the examples
also clarify that remaindermen of a
"QTIP" trust must be taken into account
as beneficiaries in determining the distrib-
ution period for required minimum distri-
butions if amounts are accumulated for
their benefit during the life of the income
beneficiary under the trust.

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### Rules for qualified domestic relations orders

These proposed regulations retain the
basic rules in the 1987 proposed regula-
tion for a qualified domestic relations
order (QDRO). Thus, for example, the
proposed regulations continue to provide
that a former spouse to whom all or a por-
tion of the employee's benefit is payable
pursuant to a QDRO will be treated as a
spouse (including a surviving spouse) of
the employee for purposes of section
401(a)(9), including the minimum distrib-
ution incidental benefit requirement,
regardless of whether the QDRO specifi-
cally provides that the former spouse is
treated as the spouse for purposes of sec-
tions 401(a)(11) and 417. This rule
applies regardless of the number of for-
mer spouses an employee has who are
alternate payees with respect to the
employee's retirement benefits. Further,
for example, if a QDRO divides the indi-
vidual account of an employee in a
defined contribution plan into a separate
account for the employee and a separate
account for the alternate payee, the
required minimum distribution to the
alternate payee during the lifetime of the
employee must nevertheless be deter-
mined using the same rules that apply to
distribution to the employee. Thus,
required minimum distributions to the
alternate payee must commence by the
employee's required beginning date.
However, the required minimum distribu-
tion for the alternate payee will be sepa-
rately determined. The required mini-
mum distributions for the alternate payee
during the lifetime of the employee may
be determined either using the uniform
distribution period discussed above based
on the age of the employee in the distrib-
ution calendar year, or, if the alternate
payee is the employee's former spouse
and is more than 10 years younger than
the employee, using the joint life
expectancy of the employee and the alter-
nate payee.

Election of surviving spouse to treat an
inherited IRA as spouse's own IRA

These proposed regulations clarify the
rule in the 1987 proposed regulations that
allows the surviving spouse of a decedent
IRA owner to elect to treat an IRA inher-
ited by the surviving spouse from that

owner as the spouse's own IRA. The 1987
proposed regulations provide that this
election is deemed to have been made if
the surviving spouse contributes to the
IRA or does not take the required mini-
mum distribution for a year under section
401(a)(9)(B) as a beneficiary of the IRA.
These new proposed regulations clarify
that this deemed election is permitted to
be made only after the distribution of the
required minimum amount for the
account, if any, for the year of the individ-
ual's death. Further these new proposed
regulations clarify that this deemed elec-
tion is permitted only if the spouse is the
sole beneficiary of the account and has an
unlimited right to withdrawal from the
account. This requirement is not satisfied
if a trust is named as beneficiary of the
IRA, even if the spouse is the sole benefi-
ciary of the trust. These clarifications
make the election consistent with the
underlying premise that the surviving
spouse could have received a distribution
of the entire decedent IRA owner's
account and rolled it over to an IRA estab-
lished in the surviving spouse's own name
as IRA owner.

These new proposed regulations also
clarify that, except for the required mini-
mum distribution for the year of the indi-
vidual's death, the spouse is permitted to
roll over the post-death required mini-
mum distribution under section
401(a)(9)(B) for a year if the spouse is es-
tablishing the IRA rollover account in the
name of the spouse as IRA owner. How-
ever, if the surviving spouse is age 70 1/2
or older, the minimum lifetime distribu-
tion required under section 401(a)(9)(A)
must be made for the year and, because it
is a required minimum distribution, that
amount may not be rolled over. These
proposed regulations provide that this
election by a surviving spouse eligible to
treat an IRA as the spouse's own may also
be accomplished by redesignating the
IRA with the name of the surviving
spouse as owner rather than beneficiary.

IRA reporting of required minimum dis-
tributions

Because these regulations substantially
simplify the calculation of required mini-
mum distributions from IRAs, IRA
trustees, custodians, and issuers determin-
ing the account balance as of the end of
the year can also calculate the following

year's required minimum distribution for
each IRA. To improve compliance and
further reduce the burden imposed on
IRA owners and beneficiaries, under the
authority provided in section 408(i), these
proposed regulations would require the
trustee, custodian, or issuer of each IRA
to report the amount of the required mini-
mum distribution from the IRA to the IRA
owner or beneficiary and to the IRS at the
time and in the manner provided under
IRS forms and instructions. This report-
ing would be required regardless of
whether the IRA owner is planning to take
the required minimum distribution from
that IRA or from another IRA, and would
indicate that the IRA owner is permitted
to take the required minimum distribution
from any other IRA of the owner. During
year 2001, the IRS will be receiving pub-
lic comments and consulting with inter-
ested parties to assist the IRS in evaluat-
ing what form best accommodates this
reporting requirement, what timing is ap-
propriate (e.g., the beginning of the calen-
dar year for which the required amount is
being calculated), and what effective date
would be most appropriate for the report-
ing requirement. In this context, after
thorough consideration of comments and
consultation with interested parties, the
IRS intends to develop procedures and a
schedule for reporting that provides ade-
quate lead time, and minimizes the report-
ing burden, for IRA trustees, issuers, and
custodians in complying with this new re-
porting requirement while providing the
most useful information to the IRA own-
ers and beneficiaries.

The IRS and Treasury are also consid-
ering whether similar reporting would be
appropriate for section 403(b) contracts.

Permitted Delays Relative to QDROs and
State Insurer Delinquency Proceedings

The regulations permit the required
minimum distribution for a year to be de-
layed to a later year in certain circum-
stances. Specifically, commentators re-
quested a delay during a period of up to
18 months during which an amount is
segregated in connection with the review
of a domestic relations order pursuant to
section 414(p)(7). Commentators also re-
quested that a delay be permitted while
annuity payments under an annuity con-
tract issued by a life insurance company
in state insurer delinquency proceedings

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have been reduced or suspended by rea-
son of state proceedings. These proposed
regulations allow delay in these circum-
stances.

Correction of failures under section
401(a)(9)

The proposed regulations do not set
forth the special rule relieving a plan from
disqualification for isolated instances of
failure to satisfy section 401(a)(9) be-
cause all failures for qualified plans and
section 403(b) accounts under section
401(a)(9) are now permitted to be cor-
rected through the Employee Plans Com-
pliance Resolution System (EPCRS). See
Rev. Proc. 2000-16 (2000-6 I.R.B. 518).

### Amendment of Qualified Plans

These regulations are proposed to be
effective for distributions for calendar
years beginning on or after January 1,
2002. For distributions for calendar years
beginning before the effective date of
final regulations, plan sponsors can con-
tinue to rely on the 1987 proposed regula-
tions, to the extent those proposed regula-
tions are not inconsistent with the changes
to section 401(a)(9) made by the Small
Business Job Protection Act of 1996
(SBJPA) and guidance related to those
changes. Alternatively, for distributions
for the 2001 and subsequent calendar
years beginning before the effective date
of final regulations, plan sponsors are per-
mitted, but not required, to follow these
proposed regulations in the operation of
their plans by adopting the model amend-
ment set forth below.

The Treasury Department and the IRS
are making the model amendment set
forth below available to plan sponsors to
permit them to apply these proposed reg-
ulations in the operation of their plans
without violating the requirement that a
plan be operated in accordance with its
terms. Plan sponsors who adopt the
model amendment will have reliance that,
during the term of the amendment, opera-
tion of their plans in a manner that satis-
fies the minimum distribution require-
ments in these proposed regulations will
not cause their plans to fail to be qualified.
In addition, distributees will have reliance
that distributions that are made during the
term of the amendment that satisfy the
minimum distribution requirements in
these proposed regulations. The model

amendment may be adopted by plan spon-
sors, practitioners who sponsor volume
submitter specimen plans and sponsors of
master and prototype (M&P) plans.

These proposed regulations permit
plans to make distributions under either
default provisions or under permissible
optional provisions. A plan that has been
amended by adoption of the model
amendment will be treated as operating in
conformance with a requirement of the
proposed regulations that permits the use
of either default or optional provisions if
the plan is operated consistently in accor-
dance with either the default rule or a spe-
cific permitted alternative, notwithstand-
ing the plan's terms.

The Service will not issue determina-
tion, opinion or advisory letters on the
basis of the changes in these proposed
regulations until the publication of final
regulations. Until such time, the IRS will
continue to issue such letters on the basis
of the 1987 proposed regulations and
SBJPA. Although the IRS will not issue
determination, opinion or advisory letters
with respect to the model amendment, the
adoption of the model amendment will
not affect a determination letter issued for
a plan whose terms otherwise satisfy the
1987 proposed regulations and SBJPA.
Plan sponsors should not adopt other
amendments to attempt to conform their
plans to the changes in these proposed
regulations before the publication of final
regulations. The IRS intends to publish
procedures at a later date that will allow
qualified plans to be amended to reflect
the regulations under section 401(a)(9)
when they are finalized.

Qualified plans are required to be
amended for changes in the plan qualifi-
cation requirements made by GUST by
the end of the GUST remedial amend-
ment period under section 401(b), which
is generally the end of the first plan year
beginning on or after January 1, 2001, or,
if applicable, a later date determined
under the provisions of section 19 of
Rev. Proc. 2000-20 (2000-6 I.R.B. 553).
Many plans have been operated in a
manner that reflects the changes to sec-
tion 401(a)(9) made by SBJPA and will
have to be amended for these changes by
the end of the GUST remedial amend-
ment period. The IRS intends that its
procedures for amending qualified plans
for the final regulations under section

401(a)(9) will generally avoid the need
for plan sponsors, volume submitter
practitioners and M&P plan sponsors to
request another determination, opinion
or advisory letter subsequent to their
application for a GUST letter. In addi-
tion, to the extent such a subsequent let-
ter is needed or desired, the IRS intends
that its procedures will provide that the
application for the letter will not have to
be submitted prior to the next time the
plan is otherwise amended or required to
be amended.

The model amendment described above
is set forth below:

"With respect to distributions under
the Plan made for calendar years
beginning on or after January 1, 2001
(ALTERNATIVELY, SPECIFY A
LATER CALENDAR YEAR FOR
WHICH THE AMENDMENT IS TO
BE INITIALLY EFFECTIVE), the
Plan will apply the minimum distrib-
ution requirements of section
401(a)(9) of the Internal Revenue
Code in accordance with the regula-
tions under section 401(a)(9) that
were proposed in January 2001,
notwithstanding any provision of the
Plan to the contrary. This amend-
ment shall continue in effect until the
end of the last calendar year begin-
ning before the effective date of final
regulations under section 401(a)(9)
or such other date as may be speci-
fied in guidance published by the
Internal Revenue Service."

### Amendment of IRAs and Effective Date

These regulations are proposed to be
effective for distributions for calendar
years beginning on or after January 1,
2002. For distributions for the 2001 cal-
endar year, IRA owners are permitted, but
not required, to follow these proposed
regulations in operation, notwithstanding
the terms of the IRA documents. IRA
owners may therefore rely on these pro-
posed regulations for distributions for the
2001 calendar year. However, IRA spon-
sors should not amend their IRA docu-
ments to conform their IRAs to the
changes in these proposed regulations
before the publication of final regulations.
The IRS will not issue model IRAs on the
basis of the changes in these proposed
regulations until the publication of final
regulations. Until such time, IRA owners

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can continue to use the current model
IRAs which are based on the 1987 pro-
posed regulations under section 401(a)(9).
The IRS will publish procedures at a later
date that will allow IRAs to be amended
to reflect final regulations under section
401(a)(9).

## Proposed Effective Date

The regulations are proposed to be
applicable for determining required mini-
mum distributions for calendar years
beginning on or after January 1, 2002.
For determining required minimum distri-
butions for calendar year 2001, taxpayers
may rely on these proposed regulations or
on the 1987 proposed regulations. If, and
to the extent, future guidance is more
restrictive than the guidance in these pro-
posed regulations, the future guidance
will be issued without retroactive effect.

## Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that,
when determining the minimum required
distribution in cases where a plan partici-
pant wishes to designate a trust as benefi-
ciary of the participant's benefit, the
reporting burden is primarily on the plan
participant, or trustee of the trust named
as beneficiary, to supply information
rather than on the entity maintaining the
retirement plan and the fact that the num-
ber of participants per plan to whom the
burden applies is insignificant. The
recordkeeping burden with respect to sec-
tion 403(b) contracts under the pre-1987
account balance must be maintained only
applies to issuers and custodians of those
contracts, which generally are not small
entities. Accordingly, a Regulatory
Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code,
these proposed regulations will be submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on their impact on small busi-
ness.

## Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (preferably a signed original
and eight (8) copies) that are submitted
timely to the IRS. In addition to the other
requests for comments set forth in this doc-
ument, the IRS and Treasury also request
comments on the clarity of the proposed
rule and how it may be made easier to
understand. All comments will be avail-
able for public inspection and copying.

A public hearing has been scheduled for
June 1, 2001, at 10 a.m. in the IRS
Auditorium (7th Floor), Internal Revenue
Building, 1111 Constitution Avenue NW.,
Washington, DC. Due to building securi-
ty procedures, visitors must enter at the
10th street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors will
not be admitted beyond the immediate
entrance area more than 15 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
"FOR FURTHER INFORMATION CON-
TACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3)
apply to the hearing.

Persons who wish to present oral com-
ments at the hearing must submit written
comments and an outline of the topics to
be discussed and the time to be devoted to
each topic (signed original and eight (8)
copies) by May 11, 2001.

A period of 10 minutes will be allotted
to each person for making comments.

An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.

## Drafting Information

The principal authors of these regula-
tions are Marjorie Hoffman and Cathy A.
Vohs of the Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). How-
ever, other personnel from the IRS and
Treasury participated in their development.
*
*
*
*
*

## Adoption of Amendments of the Regulations

Accordingly, 26 CFR part 1 is amended
as follows:

# PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805

§1.401(a)(9)-1 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-2 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-3 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-4 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-5 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-6 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-7 is also issued under 26
U.S.C. 401(a)(9).

§1.401(a)(9)-8 is also issued under 26
U.S.C. 401(a)(9). * * *

§1.403(b)-2 is also issued under 26

U.S.C. 403(b)(10). * * *

§1.408-8 is also issued under 26 U.S.C.
408(a)(6) and (b)(3). * *

Par. 2. Sections 1.401(a)(9)-0 through
1.401(a)(9)-8 are added to read as fol-
lows:

§1.401(a)(9)-0 Required minimum
distributions; table of contents.

This table of contents lists the regula-
tions relating to required minimum distri-
butions under section 401(a)(9) of the
Internal Revenue Code as follows:
§1.401(a)(9)-0 Required minimum dis-
tributions; table of contents.

§1.401(a)(9)-1 Required minimum dis-
tribution requirement in general.

§1.401(a)(9)-2 Distributions commenc-
ing before an employee's death.

§1.401(a)(9)-3 Death before required
beginning date.

§1.401(a)(9)-4 Determination of the
designated beneficiary.

§1.401(a)(9)-5 Required minimum dis-

tributions from defined contribution
plans.

§1.401(a)(9)-6 Required minimum dis-
tributions from defined benefit plans.
§1.401(a)(9)-7 Rollovers and transfers.

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§1.401(a)(9)-8 Special rules.

§1.401(a)(9)-1 Required minimum dis-
tribution requirement in general.

Q-1. What plans are subject to the
required minimum distribution require-
ment under section 401(a)(9) and
§§1.401(a)(9)-1 through 1.401(a)(9)-8?

A-1. All stock bonus, pension, and
profit-sharing plans qualified under sec-
tion 401(a) and annuity contracts
described in section 403(a) are subject to
the required minimum distribution rules
in section 401(a)(9) and §§1.401(a)(9)-1
through 1.401(a)(9)-8. See §1.403(b)-2
for the distribution rules applicable to
annuity contracts or custodial accounts
described in section 403(b), see §1.408-8
for the distribution rules applicable to
individual retirement plans, see
§1.408A-6 described for the distribution
rules applicable to Roth IRAs under sec-
tion 408A, and see section 457(d)(2)(A)
for distribution rules applicable to certain
deferred compensation plans for employ-
ees of tax exempt organizations or state
and local government employees.

Q-2. Which employee account bal-
ances and benefits held under qualified
trusts and plans are subject to the distrib-
ution rules of section 401(a)(9) and
§§1.401(a)(9)-1 through 1.401(a)(9)-8?

A-2. The distribution rules of section
401(a)(9) apply to all account balances
and benefits in existence on or after
January 1, 1985. Sections 1.401(a)(9)-1
through 1.401(a)(9)-8 apply for purposes
of determining required minimum distrib-
utions for calendar years beginning on or
after January 1, 2002.

Q-3. What specific provisions must a
plan contain in order to satisfy section
401(a)(9)?

A-3. (a) Required provisions. In order to
satisfy section 401(a)(9), the plan must
include several written provisions reflecting
section 401(a)(9). First, the plan must gen-
erally set forth the statutory rules of section
401(a)(9), including the incidental death
benefit requirement in section 401(a)(9)(G).
Second, the plan must provide that distribu-
tions will be made in accordance with
§§1.401(a)(9)-1 through 1.401(a)(9)-8. The
plan document must also provide that the
provisions reflecting section 401(a)(9) over-
ride any distribution options in the plan
inconsistent with section 401(a)(9). The
plan also must include any other provisions

reflecting section 401(a)(9) as are prescribed
by the Commissioner in revenue rulings,
notices, and other guidance published in the
Internal Revenue Bulletin. See §601.601
(d)(2)(ii)(b) of this chapter.

(b) Optional provisions. The plan may
also include written provisions regarding
any optional provisions governing plan
distributions that do not conflict with sec-
tion 401(a)(9) and the regulations there-
under.

(c) Absence of optional provisions.
Plan distributions commencing after an
employee's death will be required to be
made under the default provision set forth
in §1.401(a)(9)-3 for distributions unless
the plan document contains optional pro-
visions that override such default provi-
sions. Thus, if distributions have not
commenced to the employee at the time of
the employee's death, distributions after
the death of an employee are to be made
automatically in accordance with the
default provisions in A-4(a) of
§1.401(a)(9)-3 unless the plan either
specifies in accordance with A-4(b) of
§1.401(a)(9)-3 the method under which
distributions will be made or provides for
elections by the employee (or beneficiary)
in accordance with A-4(c) of §1.401(a)
(9)-3 and such elections are made by the
employee or beneficiary.

§1.401(a)(9)-2 Distributions

commencing before an employee's death.

Q-1. In the case of distributions com-
mencing before an employee's death, how
must the employee's entire interest be dis-
tributed in order to satisfy section
401(a)(9)(A)?

A-1. (a) In order to satisfy section
401(a)(9)(A), the entire interest of each
employee must be distributed to such
employee not later than the required
beginning date, or must be distributed,
beginning not later than the required
beginning date, over the life of the
employee or joint lives of the employee
and a designated beneficiary or over a
period not extending beyond the life
expectancy of the employee or the joint
life and last survivor expectancy of the
employee and the designated beneficiary.

(b) Section 401(a)(9)(G) provides that
lifetime distributions must satisfy the inci-
dental death benefit requirements.

(c) The amount required to be distrib-
uted for each calendar year in order to sat-

isfy section 401(a)(9)(A) and (G) general-
ly depends on whether a distribution is in
the form of distributions under a defined
contribution plan or annuity payments
under a defined benefit plan. For the
method of determining the required mini-
mum distribution in accordance with sec-
tion 401(a)(9)(A) and (G) from an indi-
vidual account under a defined
contribution plan, see §1.401(a)(9)-5.
For the method of determining the
required minimum distribution in accor-
dance with section 401(a)(9)(A) and (G)
in the case of annuity payments from a
defined benefit plan or an annuity con-
tract, see §1.401(a)(9)-6.

Q-2. For purposes of section
401(a)(9)(C), what does the term required
beginning date mean?

A-2. (a) Except as provided in para-
graph (b) of this A-2 with respect to a 5-
percent owner, as defined in paragraph
(c), the term required beginning date
means April 1 of the calendar year fol-
lowing the later of the calendar year in
which the employee attains age 70 1/2, or
the calendar year in which the employee
retires from employment with the
employer maintaining the plan.

(b) In the case of an employee who is a
5-percent owner, the term required begin-
ning date means April 1 of the calendar
year following the calendar year in which
the employee attains age 70 1/2 .

(c) For purposes of section 401(a)(9), a
5-percent owner is an employee who is a
5-percent owner (as defined in section
416) with respect to the plan year ending
in the calendar year in which the employ-
ee attains age 70 1/2.

(d) Paragraph (b) of this A-2 does not
apply in the case of a governmental plan
(within the meaning of section 414(d)) or
a church plan. For purposes of this para-
graph, the term church plan means a plan
maintained by a church for church
employees, and the term church means
any church (as defined in section
3121(w)(3)(A)) or qualified church-con-
trolled organization (as defined in section
3121(w)(3)(B)).

(e) A plan is permitted to provide that
the required beginning date for purposes
of section 401(a)(9) for all employees is
April 1 of the calendar year following the
calendar year in which the employee
attained age 70 1/2 regardless of whether
the employee is a 5-percent owner.

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Q-3. When does an employee attain
age 70 1/2?

A-3. An employee attains age 70 1/2 as
of the date six calendar months after the
70th anniversary of the employee's birth.
For example, if an employee's date of
birth was June 30, 1932, the 70th anniver-
sary of such employee's birth is June 30,
2002. Such employee attains age 70 1/2
on December 30, 2002. Consequently, if
the employee is a 5-percent owner or
retired, such employee's required begin-
ning date is April 1, 2003. However, if the
employee's date of birth was July 1, 1932,
the 70th anniversary of such employee's
birth would be July 1, 2002. Such
employee would then attain age 70 1/2 on
January 1, 2003, and such employee's
required beginning date would be April 1,
2004.

Q-4. Must distributions made before
the employee's required beginning date
satisfy section 401(a)(9)?

A-4. Lifetime distributions made
before the employee's required beginning
date for calendar years before the employ-
ee's first distribution calendar year, as
defined in A-1(b) of §1.401(a)(9)-5, need
not be made in accordance with section
401(a)(9). However, if distributions com-
mence before the employee's required
beginning date under a particular distribu-
tion option, such as in the form of an
annuity, the distribution option fails to sat-
isfy section 401(a)(9) at the time distribu-
tions commence if, under terms of the par-
ticular distribution option, distributions to
be made for the employee's first distribu-
tion calendar year or any subsequent dis-
tribution calendar year will fail to satisfy
section 401(a)(9).

Q-5. If distributions have begun to an
employee before the employee's death (in
accordance with section 401(a)(9)(A)(ii)),
how must distributions be made after an
employee's death?

A-5. Section 401(a)(9)(B)(i) provides
that if the distribution of the employee's
interest has begun in accordance with
section 401(a)(9)(A)(ii) and the em-
ployee dies before his entire interest has
been distributed to him, the remaining
portion of such interest must be distrib-
uted at least as rapidly as under the dis-
tribution method being used under sec-
tion 401(a)(9)(A)(ii) as of the date of his
death. The amount required to be dis-
tributed for each distribution calendar

year following the calendar year of
death generally depends on whether a
distribution is in the form of distribu-
tions from an individual account under a
defined contribution plan or annuity
payments under a defined benefit plan.
For the method of determining the re-
quired minimum distribution in accor-
dance with section 401(a)(9)(B)(i) from
an individual account, see A-5(a) of
§1.401(a)(9)-5 for the calculation of the
distribution period that applies when an
employee dies after the employee's re-
quired beginning date. In the case of an-
nuity payments from a defined benefit
plan or an annuity contract, see
§1.401(a)(9)-6.

Q-6. For purposes of section
401(a)(9)(B), when are distributions con-
sidered to have begun to the employee in
accordance with section 401(a)(9)(A)(ii)?

A-6. (a) General rule. Except as other-
wise provided in A-10 of §1.401(a) (9)-6,
distributions are not treated as having
begun to the employee in accordance with
section 401(a)(9)(A)(ii) until the em-
ployee's required beginning date, without
regard to whether payments have been
made before that date. For example, if em-
ployee A upon retirement in 2002, the cal-
endar year A attains age 65 1/2, begins re-
ceiving installment distributions from a
profit-sharing plan over a period not ex-
ceeding the joint life and last survivor ex-
pectancy of A and A's beneficiary, benefits
are not treated as having begun in accor-
dance with section 401(a)(9)(A)(ii) until
April 1, 2008 (the April 1 following the cal-
endar year in which A attains age 70 1/2).
Consequently, if such employee dies before
April 1, 2008 (A's required beginning date),
distributions after A's death must be made
in accordance with section 401(a)(9)(B)(ii)
or (iii) and (iv) and §1.401(a)(9)-3, and not
section 401(a)(9)(B)(i). This is the case
without regard to whether the plan has dis-
tributed the minimum distribution for the
first distribution calendar year (as defined
in A-1(b) of §1.401(a)(9)-5) before A's
death.

(b) If a plan provides, in accordance
with A-2(e) of this section, that the
required beginning date for purposes of
section 401(a)(9) for all employees is
April 1 of the calendar year following the
calendar year in which the employee
attains age 70 1/2, an employee who dies
after the required beginning date deter-

mined under the plan terms is treated as
dying after the employee's required
beginning date for purposes of A-5(a) of
this section even though the employee
dies before the April 1 following the cal-
endar year in which the employee retires.

§1.401(a)(9)-3 Death before required
beginning date.

Q-1. If an employee dies before the
employee's required beginning date, how
must the employee's entire interest be dis-
tributed in order to satisfy section
401(a)(9)?

A-1. (a) Except as otherwise provided
in A-10 of §1.401(a)(9)-6, if an employee
dies before the employee's required
beginning date (and, thus, generally
before distributions are treated as having
begun in accordance with section
401(a)(9)(A)(ii)), distribution of the
employee's entire interest must be made
in accordance with one of the methods
described in section 401(a)(9)(B)(ii) or
(iii). One method (the five-year rule in
section 401(a)(9)(B)(ii)) requires that the
entire interest of the employee be distrib-
uted within five years of the employee's
death regardless of who or what entity
receives the distribution. Another method
(the life expectancy rule in section
401(a)(9)(B)(iii)) requires that any por-
tion of an employee's interest payable to
(or for the benefit of) a designated benefi-
ciary be distributed, commencing within
one year of the employee's death, over the
life of such beneficiary (or over a period
not extending beyond the life expectancy
of such beneficiary). Section 401(a)(9)
(B)(iv) provides special rules where the
designated beneficiary is the surviving
spouse of the employee, including a spe-
cial commencement date for distributions
under section 401(a)(9)(B)(iii) to the sur-
viving spouse.

(b) See A-4 of this section for the rules
for determining which of the methods
described in paragraph (a) applies. See
A-3 of this section to determine when dis-
tributions under the exception to the five-
year rule in section 401(a)(9)(B)(iii) and
(iv) must commence. See A-2 of this sec-
tion to determine when the five-year peri-
od in section 401(a)(9)(B)(ii) ends. For
distributions using the life expectancy
rule in section 401(a)(9)(B)(iii) and (iv),
see §1.401(a)(9)-4 in order to determine
the designated beneficiary under section

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401(a)(9)(B)(iii) and (iv), see §1.401(a)
(9)-5 for the rules for determining the
required minimum distribution under a
defined contribution plan, and see
§1.401(a)(9)-6 for required minimum dis-
tributions under defined benefit plans.

Q-2. By when must the employee's
entire interest be distributed in order to
satisfy the five-year rule in section
401(a)(9)(B)(ii)?

A-2. In order to satisfy the five-year
rule in section 401(a)(9)(B)(ii), the
employee's entire interest must be distrib-
uted by the end of the calendar year which
contains the fifth anniversary of the date
of the employee's death. For example, if
an employee dies on January 1, 2002, the
entire interest must be distributed by the
end of 2007, in order to satisfy the five-
year rule in section 401(a)(9)(B)(ii).

Q-3. When are distributions required to
commence in order to satisfy the life
expectancy rule in section 401(a)(9)
(B)(iii) and (iv)?

A-3. (a) Nonspouse beneficiary. In
order to satisfy the life expectancy rule in
section 401(a)(9)(B)(iii), if the designated
beneficiary is not the employee's surviv-
ing spouse, distributions must commence
on or before the end of the calendar year
immediately following the calendar year
in which the employee died. This rule
also applies to the distribution of the
entire remaining benefit if another indi-
vidual is a designated beneficiary in addi-
tion to the employee's surviving spouse.
See A-2 and A-3 of §1.401(a)(9)-8, how-
ever, if the employee's benefit is divided
into separate accounts (or segregated
shares, in the case of a defined benefit
plan).

(b) Spousal beneficiary. In order to
satisfy the rule in section 401(a)(9)(B)(iii)
and (iv), if the sole designated beneficiary
is the employee's surviving spouse, distri-
butions must commence on or before the
later of- -

(1) The end of the calendar year imme-
diately following the calendar year in
which the employee died; and

(2) The end of the calendar year in
which the employee would have attained
age 70 1/2.

Q-4. How is it determined whether the
five-year rule in section 401(a)(9)(B)(ii)
or the life expectancy rule in section
401(a)(9)(B)(iii) and (iv) applies to a dis-
tribution?

A-4. (a) No plan provision. If a plan
does not adopt an optional provision
described in paragraph (b) or (c) of this
A-4 specifying the method of distribution
after the death of an employee, distribu-
tion must be made as follows:

(1) If the employee has a designated
beneficiary, as determined under
§1.401(a)(9)-4, distributions are to be
made in accordance with the life
expectancy rule in section 401(a)(9)
(B)(iii) and (iv).

(2) If the employee has no designated
beneficiary, distributions are to be made
in accordance with the five-year rule in
section 401(a)(9)(B)(ii).

(b) Optional plan provisions. The plan
may adopt a provision specifying either
that the five-year rule in section
401(a)(9)(B)(ii) will apply to certain dis-
tributions after the death of an employee
even if the employee has a designated
beneficiary or that distribution in every
case will be made in accordance with the
five-year rule in section 401(a)(9)(B)(ii).
Further, a plan need not have the same
method of distribution for the benefits of
all employees.

(c) Elections. A plan may adopt a pro-
vision that permits employees (or benefi-
ciaries) to elect on an individual basis
whether the five-year rule in section
401(a)(9)(B)(ii) or the life expectancy
rule in section 401(a)(9)(B)(iii) and (iv)
applies to distributions after the death of
an employee who has a designated benefi-
ciary. Such an election must be made no
later than the earlier of, the end of the cal-
endar year in which distribution would be
required to commence in order to satisfy
the requirements for the life expectancy
rule in section 401(a)(9)(B)(iii) and (iv)
(see A-3 of this section for the determina-
tion of such calendar year), or the end of
the calendar year which contains the fifth
anniversary of the date of death of the
employee. As of the date determined
under the life expectancy rule, the election
must be irrevocable with respect to the
beneficiary (and all subsequent beneficia-
ries) and must apply to all subsequent cal-
endar years. If a plan provides for the
election, the plan may also specify the
method of distribution that applies if nei-
ther the employee nor the beneficiary
makes the election. If neither the employ-
ee nor the beneficiary elects a method and
the plan does not specify which method

applies, distribution must be made in
accordance with paragraph (a).

Q-5. If the employee's surviving
spouse is the employee's designated ben-
eficiary and such spouse dies after the
employee, but before distributions have
begun to the surviving spouse under sec-
tion 401(a)(9)(B)(iii) and (iv), how is the
employee's interest to be distributed?

A-5. Pursuant to section 401(a)(9)(B)
(iv)(II), if the surviving spouse dies after
the employee, but before distributions to
such spouse have begun under section
401(a)(9)(B)(iii) and (iv), the five-year
rule in section 401(a)(9)(B)(ii) and the life
expectancy rule in section 401(a)(9)(B)
(iii) are to be applied as if the surviving
spouse were the employee. In applying
this rule, the date of death of the surviving
spouse shall be substituted for the date of
death of the employee. However, in such
case, the rules in section 401(a)(9)(B)(iv)
are not available to the surviving spouse
of the deceased employee's surviving
spouse.

Q-6. For purposes of section 401(a)(9)
(B)(iv)(II), when are distributions consid-
ered to have begun to the surviving
spouse?

A-6. Distributions are considered to
have begun to the surviving spouse of an
employee, for purposes of section
401(a)(9)(B)(iv)(II), on the date, deter-
mined in accordance with A-3 of this sec-
tion, on which distributions are required
to commence to the surviving spouse,
even though payments have actually been
made before that date. See A-11 of
§1.401(a)(9)-6 for a special rule for annu-
ities.

§1.401(a)(9)-4 Determination of the
designated beneficiary.

Q-1. Who is a designated beneficiary
under section 401(a)(9)(E)?

A-1. A designated beneficiary is an
individual who is designated as a benefi-
ciary under the plan. An individual may
be designated as a beneficiary under the
plan either by the terms of the plan or, if
the plan so provides, by an affirmative
election by the employee (or the employ-
ee's surviving spouse) specifying the ben-
eficiary. A beneficiary designated as such
under the plan is an individual who is
entitled to a portion of an employee's ben-
efit, contingent on the employee's death
or another specified event. For example,

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if a distribution is in the form of a joint
and survivor annuity over the life of the
employee and another individual, the plan
does not satisfy section 401(a)(9) unless
such other individual is a designated ben-
eficiary under the plan. A designated ben-
eficiary need not be specified by name in
the plan or by the employee to the plan in
order to be a designated beneficiary so
long as the individual who is to be the
beneficiary is identifiable under the plan
as of the date the beneficiary is deter-
mined under A-4 of this section. The
members of a class of beneficiaries capa-
ble of expansion or contraction will be
treated as being identifiable if it is possi-
ble, as of the date the beneficiary is deter-
mined, to identify the class member with
the shortest life expectancy. The fact that
an employee's interest under the plan
passes to a certain individual under
applicable state law does not make that
individual a designated beneficiary unless
the individual is designated as a benefi-
ciary under the plan.

Q-2. Must an employee (or the
employee's spouse) make an affirmative
election specifying a beneficiary for a per-
son to be a designated beneficiary under
section 40l(a)(9)(E)?

A-2. No. A designated beneficiary is
an individual who is designated as a ben-
eficiary under the plan whether or not the
designation under the plan was made by
the employee. The choice of beneficiary
is subject to the requirements of sections
401(a)(11), 414(p), and 417.

Q-3. May a person other than an indi-
vidual be considered to be a designated
beneficiary for purposes of section
401(a)(9)?

A-3. (a) No. Only individuals may be
designated beneficiaries for purposes of
section 401(a)(9). A person that is not an
individual, such as the employee's estate,
may not be a designated beneficiary, and,
if a person other than an individual is des-
ignated as a beneficiary of an employee's
benefit, the employee will be treated as
having no designated beneficiary for pur-
poses of section 401(a)(9). However, see
A-5 of this section for special rules which
apply to trusts.

(b) If an employee is treated as having
no designated beneficiary, for distribu-
tions under a defined contribution plan,
the distribution period under section
401(a)(9)(A)(ii) after the death of the
employee is limited to the period

described in A-5(a)(2) of §1.401(a)(9)-5
(the remaining life expectancy of the
employee determined in accordance with
A-5(c)(3) of §1.401(a)(9)-5). Further, in
such case, except as provided in A-10 of
§1.401(a)(9)-6, if the employee dies
before the employee's required beginning
date, distribution must be made in accor-
dance with the 5-year rule in section
401(a)(9)(B)(ii).

Q-4. When is the designated beneficia-
ry determined?

A-4. (a) General rule. Except as pro-
vided in paragraph (b) and §1.401(a)
(9)-6, the employee's designated benefi-
ciary will be determined based on the ben-
eficiaries designated as of the last day of
the calendar year following the calendar
year of the employee's death.
Consequently, except as provided in
§1.401(a)(9)-6, any person who was a
beneficiary as of the date of the employ-
ee's death, but is not a beneficiary as of
that later date (e.g., because the person
disclaims entitlement to the benefit in
favor of another beneficiary or because
the person receives the entire benefit to
which the person is entitled before that
date), is not taken into account in deter-
mining the employee's designated benefi-
ciary for purposes of determining the dis-
tribution period for required minimum
distributions after the employee's death.

(b) Surviving spouse. As provided in
A-5 of §1.401(a)(9)-3, in the case in
which the employee's spouse is the desig-
nated beneficiary as of the date described
in paragraph (a) of this A-5, and the sur-
viving spouse dies after the employee and
before the date on which distributions
have begun to the spouse under section
401(a)(9)(B)(iii) and (iv), the rule in sec-
tion 40l(a)(9)(B)(iv)(II) will apply. Thus,
the relevant designated beneficiary for
determining the distribution period is the
designated beneficiary of the surviving
spouse. Such designated beneficiary will
be determined as of the last day of the cal-
endar year following the calendar year of
surviving spouse's death. If, as of such
last day, there is no designated beneficia-
ry under the plan with respect to that sur-
viving spouse, distribution must be made
in accordance with the 5-year rule in sec-
tion 401(a)(9)(B)(ii) and A-2 of
§1.401(a)(9)-3.

(c) Multiple beneficiaries. Notwith-
standing anything in this A-4 to the con-
trary, the rules in A-7 of §1.401(a)(9)-5

apply if more than one beneficiary is des-
ignated with respect to an employee as of
the date on which the designated benefi-
ciary is to be determined in accordance
with paragraphs (a) and (b) of this A-4.

Q-5. If a trust is named as a beneficia-
ry of an employee, will the beneficiaries
of the trust with respect to the trust's inter-
est in the employee's benefit be treated as
having been designated as beneficiaries of
the employee under the plan for purposes
of determining the distribution period
under section 401(a)(9)?

A-5. (a) Only an individual may be a
designated beneficiary for purposes of
determining the distribution period under
section 401(a)(9). Consequently, a trust is
not a designated beneficiary even though
the trust is named as a beneficiary.
However, if the requirements of para-
graph (b) of this A-5 are met, the benefi-
ciaries of the trust will be treated as hav-
ing been designated as beneficiaries of the
employee under the plan for purposes of
determining the distribution period under
section 401(a)(9).

(b) The requirements of this paragraph
(b) are met if, during any period during
which required minimum distributions are
being determined by treating the benefi-
ciaries of the trust as designated benefi-
ciaries of the employee, the following
requirements are met:

(1) The trust is a valid trust under state
law, or would be but for the fact that there
is no corpus.

(2) The trust is irrevocable or will, by
its terms, become irrevocable upon the
death of the employee.

(3) The beneficiaries of the trust who
are beneficiaries with respect to the trust's
interest in the employee's benefit are
identifiable from the trust instrument
within the meaning of A-1 of this section.

(4) The documentation described in
A-6 of this section has been provided to
the plan administrator.

(c) In the case of payments to a trust
having more than one beneficiary, see A-7
of §1.401(a)(9)-5 for the rules for deter-
mining the designated beneficiary whose
life expectancy will be used to determine
the distribution period. If the beneficiary
of the trust named as beneficiary is anoth-
er trust, the beneficiaries of the other trust
will be treated as having been designated
as beneficiaries of the employee under the
plan for purposes of determining the dis-
tribution period under section 401(a)(9)

2001-11 I.R.B.

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(A)(ii), provided that the requirements of
paragraph (b) of this A-5 are satisfied with
respect to such other trust in addition to
the trust named as beneficiary.

Q-6. If a trust is named as a beneficiary
of an employee, what documentation must
be provided to the plan administrator?

A-6. (a) Required minimum distribu-
tions before death. In order to satisfy the
documentation requirement of this A-6 for
required minimum distributions under
section 401(a)(9) to commence before the
death of an employee, the employee must
comply with either paragraph (a)(1) or (2)
of this A-6:

(1) The employee provides to the plan
administrator a copy of the trust instru-
ment and agrees that if the trust instru-
ment is amended at any time in the future,
the employee will, within a reasonable
time, provide to the plan administrator a
copy of each such amendment.

(2) The employee-

(i) Provides to the plan administrator a
list of all of the beneficiaries of the trust
(including contingent and remaindermen
beneficiaries with a description of the
conditions on their entitlement);

(ii) Certifies that, to the best of the
employee's knowledge, this list is correct
and complete and that the requirements of
paragraphs (b)(1), (2), and (3) of A-5 of
this section are satisfied;

(iii) Agrees that, if the trust instrument
is amended at any time in the future, the
employee will, within a reasonable time,
provide to the plan administrator correct-
ed certifications to the extent that the
amendment changes any information pre-
viously certified; and

(iv) Agrees to provide a copy of the
trust instrument to the plan administrator
upon demand.

(b) Required minimum distributions
after death. In order to satisfy the docu-
mentation requirement of this A-6 for
required minimum distributions after the
death of the employee, by the last day of
the calendar year immediately following
the calendar year in which the employee
died, the trustee of the trust must either - -

(1) Provide the plan administrator with
a final list of all beneficiaries of the trust
(including contingent and remaindermen
beneficiaries with a description of the
conditions on their entitlement) as of the
end of the calendar year following the cal-
endar year of the employee's death; certi-

fy that, to the best of the trustee's knowl-
edge, this list is correct and complete and
that the requirements of paragraph (b)(1),
(2), and (3) of A-5 of this section are sat-
isfied; and agree to provide a copy of the
trust instrument to the plan administrator
upon demand; or

(2) Provide the plan administrator with
a copy of the actual trust document for the
trust that is named as a beneficiary of the
employee under the plan as of the
employee's date of death.

(c) Relief for discrepancy between trust
instrument and employee certifications or
earlier trust instruments. (1) If required
minimum distributions are determined
based on the information provided to the
plan administrator in certifications or trust
instruments described in paragraph (a)(1),
(a)(2) or (b) of this A-6, a plan will not fail
to satisfy section 401(a)(9) merely
because the actual terms of the trust
instrument are inconsistent with the infor-
mation in those certifications or trust
instruments previously provided to the
plan administrator, but only if the plan
administrator reasonably relied on the
information provided and the required
minimum distributions for calendar years
after the calendar year in which the dis-
crepancy is discovered are determined
based on the actual terms of the trust
instrument.

(2) For purposes of determining the
amount of the excise tax under section
4974, the required minimum distribution
is determined for any year based on the
actual terms of the trust in effect during
the year.

§1.401 (a)(9)-5 Required minimum
distributions from defined contribution
plans.

Q-1. If an employee's benefit is in the
form of an individual account under a
defined contribution plan, what is the
amount required to be distributed for each
calendar year?

A-1. (a) General rule. If an employ-
ee's accrued benefit is in the form of an
individual account under a defined contri-
bution plan, the minimum amount
required to be distributed for each distrib-
ution calendar year, as defined in para-
graph (b) of this A-1, is equal to the quo-
tient obtained by dividing the account
(determined under A-3 of this section) by
the applicable distribution period (deter-

mined under A-4 of this section).
However, the required minimum distribu-
tion amount will never exceed the entire
vested account balance on the date of the
distribution. Further, the minimum distri-
bution required to be distributed on or
before an employee's required beginning
date is always determined under section
401(a)(9)(A)(ii) and this A-1 and not sec-
tion 401(a)(9)(A)(i).

(b) Distribution calendar year. A cal-
endar year for which a minimum distrib-
ution is required is a distribution calendar
year. If an employee's required beginning
date is April 1 of the calendar year fol-
lowing the calendar year in which the
employee attains age 70 1/2, the employ-
ee's first distribution calendar year is the
year the employee attains age 70 1/2. If
an employee's required beginning date is
April 1 of the calendar year following the
calendar year in which the employee
retires, the calendar year in which the
employee retires is the employee's first
distribution calendar year. In the case of
distributions to be made in accordance
with the life expectancy rule in
§1.401(a)(9)-3 and in section
401(a)(9)(B)(iii) and (iv), the first distrib-
ution calendar year is the calendar year
containing the date described in A-3(a) or
A-3(b) of §1.401(a)(9)-3, whichever is
applicable.

(c) Time for distributions. The distrib-
ution required to be made on or before the
employee's required beginning date shall
be treated as the distribution required for
the employee's first distribution calendar
year (as defined in paragraph (b) of this
A-1). The required minimum distribution
for other distribution calendar years,
including the required minimum distribu-
tion for the distribution calendar year in
which the employee's required beginning
date occurs, must be made on or before
the end of that distribution calendar year.

(d) Minimum distribution incidental
benefit requirement. If distributions are
made in accordance with this section, the
minimum distribution incidental benefit
requirement of section 401(a)(9)(G) will
be satisfied.

(e) Annuity contracts. Instead of satis-
fying this A-1, the required minimum dis-
tribution requirement may be satisfied by
the purchase of an annuity contract from
an insurance company in accordance with
A-4 of §1.401(a)(9)-6 with the employ-

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ee's entire individual account. If such an
annuity is purchased after distributions
are required to commence (the required
beginning date, in the case of distributions
commencing before death, or the date
determined under A-3 of §1.401(a)(9)-3,
in the case of distributions commencing
after death), payments under the annuity
contract purchased will satisfy section
401(a)(9) for distribution calendar years
after the calendar year of the purchase if
payments under the annuity contract are
made in accordance with §1.401(a)(9)-6.
In such a case, payments under the annu-
ity contract will be treated as distributions
from the individual account for purposes
of determining if the individual account
satisfies section 401(a)(9) for the calendar
year of the purchase. An employee may
also purchase an annuity contract for a
portion of the employee's account under
the rules of A-2(c) of §1.401(a)(9)-8.

Q-2. If an employee's benefit is in the
form of an individual account and, in any
calendar year, the amount distributed
exceeds the minimum required, will cred-
it be given in subsequent calendar years
for such excess distribution?

A-2. If, for any distribution calendar
year, the amount distributed exceeds the
minimum required, no credit will be given
in subsequent calendar years for such
excess distribution.

Q-3. What is the amount of the account
of an employee used for determining the
employee's required minimum distribu-
tion in the case of an individual account?

A-3. (a) In the case of an individual
account, the benefit used in determining
the required minimum distribution for a
distribution calendar year is the account
balance as of the last valuation date in the
calendar year immediately preceding that
distribution calendar year (valuation cal-
endar year) adjusted in accordance with
paragraphs (b) and (c) of this A-3.

(b) The account balance is increased by
the amount of any contributions or forfei-
tures allocated to the account balance as of
dates in the valuation calendar year after the
valuation date. Contributions include con-
tributions made after the close of the valua-
tion calendar year which are allocated as of
dates in the valuation calendar year.

(c)(1) The account balance is de-
creased by distributions made in the valu-
ation calendar year after the valuation
date.

(2)(i) The following rule applies if any
portion of the required minimum distrib-
ution for the first distribution calendar
year is made in the second distribution
calendar year (i.e., generally, the distribu-
tion calendar year in which the required
beginning date occurs). In such case, for
purposes of determining the account bal-
ance to be used for determining the
required minimum distribution for the
second distribution calendar year, distrib-
utions described in paragraph (c)(1) shall
include an additional amount. This addi-
tional amount is equal to the amount of
any distribution made in the second dis-
tribution calendar year on or before the
required beginning date that is not in
excess (when added to the amounts dis-
tributed in the first calendar year) of the
amount required to meet the required
minimum distribution for the first distrib-
ution calendar year.

(ii) This paragraph (c)(2) is illustrated
by the following example:

Example. (i) Employee X, born October 1, 1931,
is an unmarried participant in a qualified defined
contribution plan (Plan Z). After retirement, X
attains age 70 1/2 in calendar year 2002. X's
required beginning date is April 1, 2003. As of the
last valuation date under Plan Z in calendar year
2001, which was on December 31, 2001, the value of
X's account balance was $25,300. No contributions
are made or amounts forfeited after such date which
are allocated in calendar year 2001. No rollover
amounts are received after such date by Plan Z on
X's behalf which were distributed by a qualified plan
or IRA in calendar years 2001, 2002, or 2003. The
applicable distribution period from the table in A-
4(a)(2) for an individual age 71 is 25.3 years. The
required minimum distribution for calendar year
2002 is $1,000 ($25,300 divided by 25.3). That
amount is distributed to X on April 1, 2003.

(ii) The value of X's account balance as of
December 31, 2002 (the last valuation date under
Plan Z in calendar year 2002) is $26,400. No contri-
butions are made or amounts forfeited after such
date which are allocated in calendar year 2002. In
order to determine the benefit to be used in calculat-
ing the required minimum distribution for calendar
year 2003, the account balance of $26,400 will be
reduced by $1,000, the amount of the required mini-
mum distribution for calendar year 2002 made on
April 1, 2003. Consequently, the benefit for purpos-
es of determining the required minimum distribution
for calendar year 2003 is $25,400.

(iii) If, instead of $1,000 being distributed to X,
$20,000 is distributed on April 1, 2003, the account
balance of $26,400 would still be reduced by $1,000
in order to determine the benefit to be used in cal-
culating the required minimum distribution for cal-
endar year 2003. The amount of the distribution
made on April 1, 2003, in order to meet the required
minimum distribution for 2002 would still be
$1,000. The remaining $19,000 ($20,000 - $1,000)
of the distribution is not the required minimum dis-
tribution for 2002. Instead, the remaining $19,000
of the distribution is sufficient to satisfy the
required minimum distribution requirement with
respect to X for calendar year 2003. The amount
which is required to be distributed for calendar year
2003 is $1,040.10 ($25,400 divided by 24.4, the
applicable distribution period for an individual age
72). Consequently, no additional amount is
required to be distributed to X in 2003 because
$19,000 exceeds $1,040.10. However, pursuant to
A-2 of this section, the remaining $17,959.90
($19,000-$1,040.10) may not be used to satisfy the
required minimum distribution requirements for
calendar year 2004 or any subsequent calendar
years.

(d) If an amount is distributed by one
plan and rolled over to another plan
(receiving plan), A-2 of §1.401(a)(9)-7
provides additional rules for determining
the benefit and required minimum distrib-
ution under the receiving plan. If an
amount is transferred from one plan
(transferor plan) to another plan (transfer-
ee plan), A-3 and A-4 of §1.401(a)(9)-7
provide additional rules for determining
the amount of the required minimum dis-
tribution and the benefit under both the
transferor and transferee plans.

Q-4. For required minimum distribu-
tions during an employee's lifetime, what
is the applicable distribution period?

A-4. (a) General rule- (1)
Applicable distribution period. Except as
provided in paragraph (b) of this A-4, the
applicable distribution period for required
minimum distributions for distribution
calendar years up to and including the dis-
tribution calendar year that includes the
employee's date of death is determined
using the table in paragraph (a)(2) for the
employee's age as of the employee's
birthday in the relevant distribution calen-
dar year.

(2) Table for determining distribution
period-(i) General rule. The following
table is used for determining the distribu-
tion period for lifetime distributions to an
employee.

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Age of the employee

Distribution period

70

26.2

71

25.3

72

24.4

73

23.5

74

22.7

75

21.8

76

20.9

77

20.1

78

19.2

79

18.4

80

17.6

81

16.8

82

16.0

83

15.3

84

14.5

85

13.8

86

13.1

87

12.4

88

11.8

89

11.1

90

10.5

91

9.9

92

9.4

93

8.8

94

8.3

95

7.8

96

7.3

97

6.9

98

6.5

99

6.1

100

5.7

101

5.3

102

5.0

103

4.7

104

4.4

105

4.1

106

3.8

107

3.6

108

3.3

109

3.1

110

2.8

111

2.6

112

2.4

113

2.2

114

2.0

115 and older

1.8

(ii) Authority for revised table. The
table in A-4(a)(2)(i) of this section may be
replaced by any revised table prescribed
by the Commissioner in revenue rulings,
notices, or other guidance published in the
Internal Revenue Bulletin. See §601.601
(d)(2)(ii)(b) of this chapter.

(b) Spouse is sole beneficiary. If the
sole designated beneficiary of an employ-

ee is the employee's surviving spouse, for
required minimum distributions during
the employee's lifetime, the applicable
distribution period is the longer of the dis-
tribution period determined in accordance
with paragraph (a) of this A-4 or the joint
life expectancy of the employee and
spouse using the employee's and spouse's
attained ages as of the employee's and the

spouse's birthdays in the distribution cal-
endar year. The spouse is sole designated
beneficiary for purposes of determining
the applicable distribution period for a
distribution calendar year during the
employee's lifetime if the spouse is the
sole beneficiary of the employee's entire
interest at all times during the distribution
calendar year.

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Q-5. For required minimum distribu-
tions after an employee's death, what is
the applicable distribution period?

A-5. (a) Death on or after the em-
ployee's required beginning date. If an
employee dies on or after distribution has
begun as determined under A-6 of
§1.401(a)(9)-2 (generally after the em-
ployee's required beginning date), in
order to satisfy section 401(a)(9)(B)(i),
the applicable distribution period for dis-
tribution calendar years after the distribu-
tion calendar year containing the em-
ployee's date of death is either-

(1) If the employee has a designated
beneficiary as of the date determined
under A-4 of §1.401(a)(9)-4, the remain-
ing life expectancy of the employee's des-
ignated beneficiary determined in accor-
dance with paragraph(c)(1) or (2) of A-5;
or

(2) If the employee does not have a des-
ignated beneficiary as of the date deter-
mined under A-4(a) of §1.401(a)(9)-4, the
remaining life expectancy of the employ-
ee determined in accordance with para-
graph (c)(3) of this A-5.

(b) Death before an employee's
required beginning date. If an employee
dies before distribution has begun as
determined under A-5 of §1.401(a)(9)-2
(generally before the employee's required
beginning date), in order to satisfy section
401(a)(9)(B)(iii) or (iv) and the life
expectancy rule described in A-1 of
§1.401(a)(9)-3, the applicable distribution
period for distribution calendar years after
the distribution calendar year containing
the employee's date of death is the
remaining life expectancy of the employ-
ee's designated beneficiary, determined in
accordance with paragraph (c)(1) or (2) of
this A-5.

(c) Life expectancy-(1) Nonspouse
designated beneficiary. The applicable
distribution period measured by the bene-
ficiary's remaining life expectancy is
determined using the beneficiary's age as
of the beneficiary's birthday in the calen-
dar year immediately following the calen-
dar year of the employee's death. In sub-
sequent calendar years the applicable
distribution period is reduced by one for
each calendar year that has elapsed since
the calendar year immediately following
the calendar year of the employee's death.

(2) Spouse designated beneficiary. If
the surviving spouse of the employee is

the employee's sole beneficiary, the
applicable period is measured by the sur-
viving spouse's life expectancy using the
surviving spouse's birthday for each dis-
tribution calendar year for which a
required minimum distribution is required
after the calendar year of the employee's
death. For calendar years after the calen-
dar year of the spouse's death, the
spouse's remaining life expectancy is the
life expectancy of the spouse using the
age of the spouse as of the spouse's birth-
day in the calendar year of the spouse's
death. In subsequent calendar years, the
applicable distribution period is reduced
by one for each calendar year that has
elapsed since the calendar year immedi-
ately following the calendar year of the
spouse's death.

(3) No designated beneficiary. The
applicable distribution period measured
by the employee's remaining life
expectancy is the life expectancy of the
employee using the age of the employee
as of the employee's birthday in the cal-
endar year of the employee's death. In
subsequent calendar years the applicable
distribution period is reduced by one for
each calendar year that has elapsed since
the calendar year of death.

Q-6. What life expectancies must be
used for purposes of determining required
minimum distributions under section
401(a)(9)?

A-6. (a) General rule. Unless other-
wise prescribed in accordance with para-
graph (b) of this A-6, life expectancies for
purposes of determining required mini-
mum distributions under section 401(a)(9)
must be computed using the expected
return multiples in Tables V and VI of
§1.72-9.

(b) Revised expected return table. The
expected return multiples described in
paragraph (a) of this A-6 may be replaced
by revised expected return multiples pre-
scribed for use for purposes of determin-
ing required minimum distributions under
section 401(a)(9) by the Commissioner in
revenue rulings, notices, and other guid-
ance published in the Internal Revenue
Bulletin. See §601.601(d)(2)(ii)(b) of this
chapter.

Q-7. If an employee has more than one
designated beneficiary, which designated
beneficiary's life expectancy will be used
to determine the applicable distribution
period?

A-7. (a) General rule. (1) Except as
otherwise provided in paragraph (c) of
this A-7, if more than one individual is
designated as a beneficiary with respect to
an employee as of any applicable date for
determining the designated beneficiary,
the designated beneficiary with the short-
est life expectancy will be the designated
beneficiary for purposes of determining
the distribution period. However, except
as otherwise provided in A-5 of
§1.401(a)(9)-4 and paragraph (c)(1) of
this A-7, if a person other than an individ-
ual is designated as a beneficiary, the
employee will be treated as not having
any designated beneficiaries for purposes
of section 401(a)(9) even if there are also
individuals designated as beneficiaries.

(2) See A-2 of §1.401(a)(9)-8 for spe-
cial rules which apply if an employee's
benefit under a plan is divided into sepa-
rate accounts (or segregated shares in the
case of a defined benefit plan) and the
beneficiaries with respect to a separate
account differ from the beneficiaries of
another separate account.

(b) Contingent beneficiary. Except as
provided in paragraph (c)(1) of this A-7, if
a beneficiary's entitlement to an employ-
ee's benefit is contingent on an event
other than the employee's death or the
death of another beneficiary, such contin-
gent beneficiary is considered to be a des-
ignated beneficiary for purposes of deter-
mining which designated beneficiary has
the shortest life expectancy under para-
graph (a) of this A-7.

(c) Death contingency. (1) If a bene-
ficiary (subsequent beneficiary) is entitled
to any portion of an employee's benefit
only if another beneficiary dies before the
entire benefit to which that other benefi-
ciary is entitled has been distributed by
the plan, the subsequent beneficiary will
not be considered a beneficiary for pur-
poses of determining who is the designat-
ed beneficiary with the shortest life
expectancy under paragraph (a) of this
A-7 or whether a beneficiary who is not
an individual is a beneficiary. This rule
does not apply if the other beneficiary
dies prior to the applicable date for deter-
mining the designated beneficiary.

(2) If the designated beneficiary whose
life expectancy is being used to calculate
the distribution period dies on or after the
applicable date, such beneficiary's
remaining life expectancy will be used to

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determine the distribution period whether
or not a beneficiary with a shorter life
expectancy receives the benefits.

(3) This paragraph (c) is illustrated by
the following examples:

Example 1. Employer L maintains a defined con-
tribution plan, Plan W. Unmarried Employee C dies
in calendar year 2001 at age 30. As of December 31,
2002, D, the sister of C, is the beneficiary of C's
account balance under Plan W. Prior to death C has
designated that, if D dies before C's entire account
balance has been distributed to D, E, mother of C
and D, will be the beneficiary of the account bal-
ance. Because E is only entitled, as a beneficiary, to
any portion of C's account if D dies before the entire
account has been distributed, E is disregarded in
determining C's designated beneficiary.
Accordingly, even after D's death, D's life expectan-
cy continues to be used to determined the distribu-
tion period.

Example 2. (i) Employer M maintains a defined
contribution plan, Plan X. Employee A, an employ-
ee of M, died in 2001 at the age of 55, survived by
spouse, B, who was 50 years old. Prior to A's death,
M had established an account balance for A in Plan
X. A's account balance is invested only in produc-
tive assets. A named the trustee of a testamentary
trust (Trust P) established under A's will as the ben-
eficiary of all amounts payable from the A's account
in Plan X after A's death. A copy of the Trust P and
a list of the trust beneficiaries were provided to the
plan administrator of Plan X by the end of the calen-
dar year following the calendar year of A's death. As
of the date of A's death, the Trust P was irrevocable
and was a valid trust under the laws of the state of
A's domicile. A's account balance in Plan X was
includible in A's gross estate under § 2039.

(ii) Under the terms of Trust P, all trust income is
payable annually to B, and no one has the power to
appoint Trust P principal to any person other than B.
A's children, who are all younger than B, are the sole
remainder beneficiaries of the Trust P. No other per-
son has a beneficial interest in Trust P. Under the
terms of the Trust P, B has the power, exercisable
annually, to compel the trustee to withdraw from A's
account balance in Plan X an amount equal to the
income earned on the assets held in A's account in
Plan X during the calendar year and to distribute that
amount through Trust P to B. Plan X contains no
prohibition on withdrawal from A's account of
amounts in excess of the annual required minimum
distributions under section 401(a)(9). In accordance
with the terms of Plan X, the trustee of Trust P elects,
in order to satisfy section 401(a)(9), to receive annu-
al required minimum distributions using the life
expectancy rule in section 401(a)(9)(B)(iii) for dis-
tributions over a distribution period equal to B's life
expectancy. If B exercises the withdrawal power, the
trustee must withdraw from A's account under Plan
X the greater of the amount of income earned in the
account during the calendar year or the required
minimum distribution. However, under the terms of
Trust P, and applicable state law, only the portion of
the Plan X distribution received by the trustee equal
to the income earned by A's account in Plan X is
required to be distributed to B (along with any other
trust income.)

(iii) Because some amounts distributed from A's
account in Plan X to Trust P may be accumulated in

Trust P during B's lifetime for the benefit of A's chil-
dren, as remaindermen beneficiaries of Trust P, even
though access to those amounts are delayed until
after B's death, A's children are beneficiaries of A's
account in Plan X in addition to B and B is not the
sole beneficiary of A's account. Thus the designated
beneficiary used to determine the distribution period
from A's account in Plan X is the beneficiary with
the shortest life expectancy. B's life expectancy is
the shortest of all the potential beneficiaries of the
testamentary trust's interest in A's account in Plan X
(including remainder beneficiaries). Thus, the distri-
bution period for purposes of section 401(a)(9)
(B)(iii) is B's life expectancy. Because B is not the
sole beneficiary of the testamentary trust's interest
in A's account in Plan X, the special rule in
401(a)(9)(B)(iv) is not available and the annual re-
quired minimum distributions from the account to
Trust M must begin no later than the end of the cal-
endar year immediately following the calendar year
of A's death.

Example 3. (i) The facts are the same as
Example 2 except that the testamentary trust instru-
ment provides that all amounts distributed from A's
account in Plan X to the trustee while B is alive will
be paid directly to B upon receipt by the trustee of
Trust P.

(ii) In this case, B is the sole beneficiary of A's
account in Plan X for purposes of determining the
designated beneficiary under section 401(a)(9)
(B)(iii) and (iv). No amounts distributed from A's
account in Plan X to Trust P are accumulated in
Trust P during B's lifetime for the benefit of any
other beneficiary. Because B is the sole beneficiary
of the testamentary trust's interest in A's account in
Plan X, the annual required minimum distributions
from A's account to Trust P must begin no later than
the end of the calendar year in which A would have
attained age 70 1/2 rather than the calendar year
immediately following the calendar year of A's
death.

(d) Designations by beneficiaries. (1)
If the plan provides (or allows the em-
ployee to specify) that, after the end of the
calendar year following the calendar year
in which the employee died, any person or
persons have the discretion to change the
beneficiaries of the employee, then, for
purposes of determining the distribution
period after the employee's death, the
employee will be treated as not having
designated a beneficiary. However, such
discretion will not be found to exist mere-
ly because a beneficiary may designate a
subsequent beneficiary for distributions of
any portion of the employee's benefit
after the beneficiary dies.

(2) This paragraph (d) is illustrated by
the following example:

Example. The facts are the same as in Example 1
in paragraph (c)(3) of this A-7, except that, as per-
mitted under the plan, D designates E as the benefi-
ciary of any amount remaining after the death of D
rather than C making this designation. E is still dis-
regarded in determining C's designated beneficiary
for purposes of section 401(a)(9).

Q-8. If a portion of an employee's
individual account is not vested as of the
employee's required beginning date, how
is the determination of the required mini-
mum distribution affected?

A-8. If the employee's benefit is in the
form of an individual account, the benefit
used to determine the required minimum
distribution for any distribution calendar
year will be determined in accordance
with A-1 of this section without regard to
whether or not all of the employee's ben-
efit is vested. If any portion of the
employee's benefit is not vested, distribu-
tions will be treated as being paid from
the vested portion of the benefit first. If,
as of the end of a distribution calendar
year (or as of the employee's required
beginning date, in the case of the employ-
ee's first distribution calendar year), the
total amount of the employee's vested
benefit is less than the required minimum
distribution for the calendar year, only the
vested portion, if any, of the employee's
benefit is required to be distributed by the
end of the calendar year (or, if applicable,
by the employee's required beginning
date). However, the required minimum
distribution for the subsequent distribu-
tion calendar year must be increased by
the sum of amounts not distributed in
prior calendar years because the employ-
ee's vested benefit was less than the
required minimum distribution (subject to
the limitation that the required minimum
distribution for that subsequent distribu-
tion calendar year will not exceed the
vested portion of the employee's benefit).
In such case, an adjustment for the addi-
tional amount distributed which corre-
sponds to the adjustment described in
A-3(c)(2) of this section will be made to
the account used to determine the required
minimum distribution for that calendar
year.

§1.401(a)(9)-6 Required minimum
distributions from defined benefit plans.

Q-1. How must annuity distributions
under a defined benefit plan be paid in
order to satisfy section 401(a)(9)?

A-1. (a) In order to satisfy section
401(a)(9), annuity distributions under a
defined benefit plan must be paid in peri-
odic payments made at intervals not
longer than one year (payment intervals)
for a life (or lives), or over a period cer-
tain not longer than a life expectancy (or

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joint life and last survivor expectancy)
described in section 401(a)(9)(A)(ii) or
section 401(a)(9)(B)(iii), whichever is
applicable. The life expectancy (or joint
life and last survivor expectancy) for pur-
poses of determining the length of the
period certain will be determined in
accordance with A-3 of this section. Once
payments have commenced over a period
certain, the period certain may not be
lengthened even if the period certain is
shorter than the maximum permitted. Life
annuity payments must satisfy the mini-
mum distribution incidental benefit
requirements of A-2 of this section. All
annuity payments (life and period certain)
also must either be nonincreasing or
increase only as follows:

(1) With any percentage increase in a
specified and generally recognized cost-
of-living index;

(2) To the extent of the reduction in the
amount of the employee's payments to
provide for a survivor benefit upon death,
but only if the beneficiary whose life was
being used to determine the period
described in section 401(a)(9)(A)(ii) over
which payments were being made dies or
is no longer the employee's beneficiary
pursuant to a qualified domestic relations
order within the meaning of section
414(p);

(3) To provide cash refunds of employ-
ee contributions upon the employee's
death; or

(4) Because of an increase in benefits
under the plan.

(b) The annuity may be a life annuity
(or joint and survivor annuity) with a peri-
od certain if the life (or lives, if applica-
ble) and period certain each meet the
requirements of paragraph (a) of this A-1.
For purposes of this section, if distribution
is permitted to be made over the lives of
the employee and the designated benefi-
ciary, references to life annuity include a
joint and survivor annuity.

(c) Distributions under a variable an-
nuity will not be found to be increasing
merely because the amount of the pay-
ments varies with the investment perfor-
mance of the underlying assets. How-
ever, the Commissioner may prescribe
additional requirements applicable to
such variable life annuities in revenue rul-
ings, notices, and other guidance pub-
lished in the Internal Revenue Bulletin.
See §601.601(d)(2)(ii)(b) of this chapter.

(d) (1) Except as provided in (d)(2) of
this A-1, annuity payments must com-
mence on or before the employee's
required beginning date (within the mean-
ing of A-2 of §1.401(a)(9)-2). The first
payment which must be made on or
before the employee's required beginning
date must be the payment which is
required for one payment interval. The
second payment need not be made until
the end of the next payment interval even
if that payment interval ends in the next
calendar year. Similarly, in the case of
distributions commencing after death in
accordance with section 401(a)(9)(B)(iii)
and (iv), the first payment that must be
made on or before the date determined
under A-3(a) or (b) (whichever is applica-
ble) of §1.401(a)(9)-3 must be the pay-
ment which is required for one payment
interval. Payment intervals are the peri-
ods for which payments are received, e.g.,
bimonthly, monthly, semi-annually, or
annually. All benefit accruals as of the last
day of the first distribution calendar year
must be included in the calculation of the
amount of the life annuity payments for
payment intervals ending on or after the
employee's required beginning date.

(2) In the case of an annuity contract
purchased after the required beginning
date, the first payment interval must begin
on or before the purchase date and the
payment required for one payment inter-
val must be made no later than the end of
such payment interval.

(3) This paragraph (d) is illustrated by
the following example:

Example. A defined benefit plan (Plan X) pro-
vides monthly annuity payments of $500 for the life
of unmarried participants with a 10-year period cer-
tain. An unmarried participant (A) in Plan X attains
age 70 1/2 in 2001. In order to meet the require-
ments of this paragraph, the first payment which
must be made on behalf of A on or before April 1,
2002, will be $500 and the payments must continue
to be made in monthly payments of $500 thereafter
for the life and 10-year certain period.

(e) If distributions from a defined ben-
efit plan are not in the form of an annuity,
the employee's benefit will be treated as
an individual account for purposes of
determining the required minimum distri-
bution. See §1.401(a)(9)-5.

Q-2. How must distributions in the
form of a life (or joint and survivor) annu-
ity be made in order to satisfy the mini-
mum distribution incidental benefit
(MDIB) requirement of section
401(a)(9)(G)?

A-2. (a) Life annuity for employee. If
the employee's benefit is payable in the
form of a life annuity for the life of the
employee satisfying section 401(a)(9), the
MDIB requirement of section 401(a)
(9)(G) will be satisfied.

(b) Joint and survivor annuity, spouse
beneficiary. If the employee's sole bene-
ficiary, as of the annuity starting date for
annuity payments, is the employee's
spouse and the distributions satisfy sec-
tion 401(a)(9) without regard to the
MDIB requirement, the distributions to
the employee will be deemed to satisfy
the MDIB requirement of section
401(a)(9)(G). For example, if an employ-
ee's benefit is being distributed in the
form of a joint and survivor annuity for
the lives of the employee and the employ-
ee's spouse and the spouse is the sole ben-
eficiary of the employee, the amount of
the periodic payment payable to the
spouse may always be 100 percent of the
annuity payment payable to the employee
regardless of the difference in the ages
between the employee and the employee's
spouse. However, the amount of the pay-
ments under the annuity must be nonin-
creasing unless specifically permitted
under A-1 of this section.

(c) Joint and survivor annuity, non-
spouse beneficiary - (1) Explanation of
rule. If distributions commence under a
distribution option that is in the form of a
joint and survivor annuity for the joint
lives of the employee and a beneficiary
other than the employee's spouse, the
MDIB requirement will not be satisfied
as of the date distributions commence
unless the distribution option provides
that annuity payments to be made to the
employee on and after the employee's
required beginning date will satisfy the
conditions of this paragraph. The period-
ic annuity payment payable to the sur-
vivor must not at any time on and after
the employee's required beginning date
exceed the applicable percentage of the
annuity payment payable to the employee
using the table below. Thus, this require-
ment must be satisfied with respect to
any benefit increase after such date,
including increases to reflect increases in
the cost of living. The applicable per-
centage is based on the excess of the age
of the employee over the age of the ben-
eficiary as of their attained ages as of
their birthdays in a calendar year. If the

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employee has more than one beneficiary,
the applicable percentage will be the per-

centage using the age of the youngest
beneficiary. Additionally, the amount of

the annuity payments must satisfy A-1 of
this section.

## (2) Table.

Excess of age of employee over age of beneficiary

Applicable percentage

10 years or less

100%

11

96%

12

93%

13

90%

14

87%

15

84%

16

82%

17

79%

18

77%

19

75%

20

73%

21

72%

22

70%

23

68%

24

67%

25

66%

26

64%

27

63%

28

62%

29

61%

30

60%

31

59%

32

59%

33

58%

34

57%

35

56%

36

56%

37

55%

38

55%

39

54%

40

54%

41

53%

42

53%

43

53%

44 and greater

52%

(3) Example. This paragraph (c) is
illustrated by the following example:

Example. Distributions commence on January 1,
2001, to an employee (Z), born March 1, 1935, after
retirement at age 65. Z's daughter (Y), born February
5, 1965, is Z's beneficiary. The distributions are in the
form of a joint and survivor annuity for the lives of Z
and Y with payments of $500 a month to Z and upon
Z's death of $500 a month to Y, i.e., the projected

monthly payment to Y is 100 percent of the monthly
amount payable to Z. There is no provision under the
option for a change in the projected payments to Y as
of April 1, 2006, Z's required beginning date.
Consequently, as of January 1, 2001, the date annuity
distributions commence, the plan does not satisfy the
MDIB requirement in operation because, as of such
date, the distribution option provides that, as of Z's
required beginning date, the monthly payment to Y

upon Z's death will exceed 60 percent of Z's monthly
payment (the maximum percentage for a difference of
ages of 30 years).

(d) Period certain and annuity fea-
tures. If a distribution form includes a life
annuity and a period certain, the amount
of the annuity payments payable to the
employee must satisfy paragraph (c) of

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this A-2, and the period certain may not
exceed the period determined under A-3
of this section.

Q-3. How long is a period certain
under an annuity contract permitted to
extend?

A-3. (a) Distributions commencing
during the employee's life - - (1) Spouse
beneficiary. If an employee's spouse is the
employee's sole beneficiary as of the
annuity starting date, the period certain
for annuity distributions commencing
during the life of an employee with an
annuity starting date on or after the
employee's required beginning date is not
permitted to exceed the joint life and last
survivor expectancy of the employee and
the spouse using the age of the employee
and spouse as of their birthdays in the cal-
endar year that contains the annuity start-
ing date.

(2) Nonspouse beneficiary. If an em-
ployee's surviving spouse is not the em-
ployee's sole beneficiary as of the annu-
ity starting date, the period certain for
any annuity distributions during the life
of the employee with an annuity starting
date on or after the employee's required
beginning date is not permitted to exceed
the shorter of the applicable distribution
period for the employee (determined in
accordance with the table in A-4(a)(2) of
§1.401(a)(9)-5) for the calendar year
that contains the annuity starting date or
the joint life and last survivor ex-
pectancy of the employee and the em-
ployee's designated beneficiary, deter-
mined using the designated beneficiary
as of the annuity starting date and using
their ages as of their birthdays in the cal-
endar year that contains the annuity
starting date. See A-10 for the rule for
annuity payments with an annuity start-
ing date before the required beginning
date.

(b) Life expectancy rule. (1) If annuity
distributions commence after the death of
the employee under the life expectancy
rule (under section 401(a)(9)(iii) or (iv)),
the period certain for any distributions
commencing after death cannot exceed
the applicable distribution period deter-
mined under A-5(b) of §1.401(a)(9)-5 for
the distribution calendar year that con-
tains the annuity starting date.

(2) If the annuity starting date is in a
calendar year before the first distribution
calendar year, the period certain may not

exceed the life expectancy of the desig-
nated beneficiary using the beneficiary's
age in the year that contains the annuity
starting date.

Q-4. May distributions be made from
an annuity contract which is purchased
from an insurance company?

A-4. Yes. Distributions may be made
from an annuity contract which is pur-
chased with the employee's benefit by the
plan from an insurance company and
which makes payments that satisfy the
provisions of this section. In the case of
an annuity contract purchased from an
insurance company, there is also an
exception to the nonincreasing require-
ment in A-1(a) of this section for an
increase to provide a cash refund upon the
employee's death equal to the excess of
the amount of the premiums paid for the
contract over the prior distributions under
the contract. If the payments actually
made under the annuity contract do not
meet the requirements of section
401(a)(9), the plan fails to satisfy section
401(a)(9).

Q-5. In the case of annuity distribu-
tions under a defined benefit plan, how
must additional benefits which accrue
after the employee's required beginning
date be distributed in order to satisfy sec-
tion 401(a)(9)?

A-5. (a) In the case of annuity distribu-
tions under a defined benefit plan, if any
additional benefits accrue after the
employee's required beginning date, dis-
tribution of such amount as a separate
identifiable component must commence
in accordance with A-1 of this section
beginning with the first payment interval
ending in the calendar year immediately
following the calendar year in which such
amount accrues.

(b) A plan will not fail to satisfy sec-
tion 401(a)(9) merely because there is an
administrative delay in the commence-
ment of the distribution of the separate
identifiable component, provided that the
actual payment of such amount com-
mences as soon as practicable but not
later than by the end of the first calendar
year following the calendar year in
which the additional benefit accrues, and
that the total amount paid during such
first calendar year is not less than the
total amount that was required to be paid
during that year under A-5(a) of this sec-
tion.

Q-6. If a portion of an employee's ben-
efit is not vested as of the employee's
required beginning date, how is the deter-
mination of the required minimum distri-
bution affected?

A-6. In the case of annuity distributions
from a defined benefit plan, if any portion
of the employee's benefit is not vested as
of December 31 of a distribution calendar
year (or as of the employee's required
beginning date in the case of the employ-
ee's first distribution calendar year), the
portion which is not vested as of such date
will be treated as not having accrued for
purposes of determining the required min-
imum distribution for that distribution cal-
endar year. When an additional portion of
the employee's benefit becomes vested,
such portion will be treated as an addition-
al accrual. See A-5 of this section for the
rules for distributing benefits which accrue
under a defined benefit plan after the
employee's required beginning date.

Q-7. If an employee retires after the
calendar year in which the employee
attains age 70 1/2, for what period must
the employee's accrued benefit under a
defined benefit plan be actuarially
increased?

A-7. (a) Actuarial increase starting
date. If an employee (other than a 5-per-
cent owner) retires after the calendar year
in which in the employee attains age 70
1/2, in order to satisfy section 401(a)(9)
(C)(iii), the employee's accrued benefit
under a defined benefit plan must be actu-
arially increased to take into account any
period after age 70 1/2 in which the
employee was not receiving any benefits
under the plan. The actuarial increase
required to satisfy section 401(a)(9)(C)(iii)
must be provided for the period starting on
the April 1 following the calendar year in
which the employee attains age 70 1/2.

(b) Actuarial increase ending date. The
period for which the actuarial increase
must be provided ends on the date on
which benefits commence after retirement
in an amount sufficient to satisfy section
401(a)(9).

(c) Nonapplication to plan providing
same required beginning date for all
employees. If as permitted under A-2(e)
of §1.401(a)(9)-2, a plan provides that the
required beginning date for purposes of
section 401(a)(9) for all employees is
April 1 of the calendar year following the
calendar year in which the employee

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attained age 70 1/2 (regardless of whether
the employee is a 5-percent owner) and
the plan makes distributions in an amount
sufficient to satisfy section 401(a)(9)
using that required beginning date, no
actuarial increase is required under sec-
tion 401(a)(9)(C)(iii).

(d) Nonapplication to defined contribu-
tion plans. The actuarial increase required
under this A-7 does not apply to defined
contribution plans.

(e) Nonapplication to governmental
and church plans. The actuarial increase
required under this A-7 does not apply to
a governmental plan (within the meaning
of section 414(d)) or a church plan. For
purposes of this paragraph, the term
church plan means a plan maintained by a
church for church employees, and the
term church means any church (as defined
in section 3121(w)(3)(A)) or qualified
church-controlled organization (as
defined in section 3121(w)(3)(B)).

Q-8. What amount of actuarial increase
is required under section 401(a)(9)
(C)(iii)?

A-8. In order to satisfy section
401(a)(9)(C)(iii), the retirement benefits
payable with respect to an employee as of
the end of the period for actuarial increas-
es (described in A-7 of this section) must
be no less than: the actuarial equivalent
of the employee's retirement benefits that
would have been payable as of the date
the actuarial increase must commence
under A-7(a) of this section if benefits had
commenced on that date; plus the actuari-
al equivalent of any additional benefits
accrued after that date; reduced by the
actuarial equivalent of any distributions
made with respect to the employee's
retirement benefits after that date.
Actuarial equivalence is determined using
the plan's assumptions for determining
actuarial equivalence for purposes of sat-
isfying section 411.

Q-9. How does the actuarial increase
required under section 401(a)(9)(C)(iii)
relate to the actuarial increase required
under section 411?

A-9. In order for any of an employee's
accrued benefit to be nonforfeitable as
required under section 411, a defined ben-
efit plan must make an actuarial adjust-
ment to an accrued benefit the payment of
which is deferred past normal retirement
age. The only exception to this rule is that

generally no actuarial adjustment is
required to reflect the period during which
a benefit is suspended as permitted under
section 203(a)(3)(B) of the Employee
Retirement Income Security Act of 1974
(ERISA). The actuarial increase required
under section 401(a)(9) for the period
described in A-7 of this section is general-
ly the same as, and not in addition to, the
actuarial increase required for the same
period under section 411 to reflect any
delay in the payment of retirement bene-
fits after normal retirement age.
However, unlike the actuarial increase
required under section 411, the actuarial
increase required under section
401(a)(9)(C) must be provided even dur-
ing the period during which an employ-
ee's benefit has been suspended in accor-
dance with ERISA section 203(a)(3)(B).

Q-10. What rule applies if distributions
commence to an employee on a date before
the employee's required beginning date
over a period permitted under section
401(a)(9)(A)(ii) and the distribution form
is an annuity under which distributions are
made in accordance with the provisions of
A-1 (and if applicable A-4) of this section?

A-10. (a) General rule. If distributions
irrevocably (except for acceleration) com-
mence to an employee on a date before
the employee's required beginning date
over a period permitted under section
401(a)(9)(A)(ii) and the distribution form
is an annuity under which distributions
are made in accordance with the provi-
sions of A-1 (and, if applicable, A-4) of
this section, the annuity starting date will
be treated as the required beginning date
for purposes of applying the rules of this
section and §1.401(a)(9)-3. Thus, for
example, the designated beneficiary dis-
tributions will be determined as of the
annuity starting date. Similarly, if the
employee dies after the annuity starting
date but before the required beginning
date determined under A-2 of
§1.401(a)(9)-2, after the employee's
death, the remaining portion of the
employee's interest must continue to be
distributed in accordance with this section
over the remaining period over which dis-
tributions commenced (single or joint
lives and, if applicable, period certain).
The rules in §1.401(a)(9)-3 and section
401(a)(9)(B)(ii) or (iii) and (iv) do not
apply.

(b) Period certain. If as of the employ-
ee's birthday in the year that contains the
annuity starting date, the age of the
employee is under 70, the following rule
applies in applying the rule in paragraph
(a)(2) of A-3 of this section. The applica-
ble distribution period for the employee
(determined in accordance with the table
in A-4(a)(2) of §1.401(a)(9)-5) is 26.2
plus the difference between 70 and the age
of the employee as of the employee's
birthday in the year that contains the
annuity starting date.

Q-11. What rule applies if distributions
commence irrevocably (except for accel-
eration) to the surviving spouse of an
employee over a period permitted under
section 401(a)(9)(B)(iii)(II) before the
date on which distributions are required to
commence and the distribution form is an
annuity under which distributions are
made as of the date distributions com-
mence in accordance with the provisions
of A-1 (and if applicable A-4) of this sec-
tion?

A-11. If distributions commence irrevo-
cably (except for acceleration) to the sur-
viving spouse of an employee over a period
permitted under section 401(a)(9)(B)
(iii)(II) before the date on which distribu-
tions are required to commence and the dis-
tribution form is an annuity under which
distributions are made as of the date distrib-
utions commence in accordance with the
provisions of A-1 (and if applicable A-4) of
this section, distributions will be consid-
ered to have begun on the actual com-
mencement date for purposes of section
401(a)(9)(B)(iv)(II). Consequently, in such
case, A-5 of §1.401(a)(9)-3 and section
401(a)(9)(B)(ii) and (iii) will not apply
upon the death of the surviving spouse as
though the surviving spouse were the em-
ployee. Instead, the annuity distributions
must continue to be made, in accordance
with the provisions of A-1 (and if applica-
ble A-4) of this section over the remaining
period over which distributions com-
menced (single life and, if applicable, pe-
riod certain).

§1.401(a)(9)-7 Rollovers and Transfers.

Q-1. If an amount is distributed by one
plan (distributing plan) and is rolled over
to another plan, is the benefit or the
required minimum distribution under the
distributing plan affected by the rollover?

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A-1. No. If an amount is distributed by
one plan and is rolled over to another
plan, the amount distributed is still treated
as a distribution by the distributing plan
for purposes of section 401(a)(9),
notwithstanding the rollover.

Q-2. If an amount is distributed by one
plan (distributing plan) and is rolled over
to another plan (receiving plan), how are
the benefit and the required minimum dis-
tribution under the receiving plan affect-
ed?

A-2. If an amount is distributed by one
plan (distributing plan) and is rolled over to
another plan (receiving plan), the benefit of
the employee under the receiving plan is
increased by the amount rolled over.
However, the distribution has no impact on
the required minimum distribution to be
made by the receiving plan for the calendar
year in which the rollover is received. But,
if a required minimum distribution is
required to be made by the receiving plan
for the following calendar year, the
rollover amount must be considered to be
part of the employee's benefit under the
receiving plan. Consequently, for purpos-
es of determining any required minimum
distribution for the calendar year immedi-
ately following the calendar year in which
the amount rolled over is received by the
receiving plan, in the case in which the
amount rolled over is received after the last
valuation date in the calendar year under
the receiving plan, the benefit of the
employee as of such valuation date, adjust-
ed in accordance with A-3 of
§1.401(a)(9)-5, will be increased by the
rollover amount valued as of the date of
receipt. For purposes of calculating the
benefit under the receiving plan pursuant to
the preceding sentence, if the amount
rolled over is received by the receiving
plan in a different calendar year from the
calendar year in which it is distributed by
the distributing plan, the amount rolled
over is deemed to have been received by
the receiving plan in the calendar year in
which it was distributed by the distributing
plan.

Q-3. In the case of a transfer of an
amount of an employee's benefit from one
plan (transferor plan) to another plan
(transferee plan), are there any special
rules for satisfying the required minimum
distribution requirement or determining
the employee's benefit under the transfer-
or plan?

A-3. (a) In the case of a transfer of an
amount of an employee's benefit from one
plan to another, the transfer is not treated
as a distribution by the transferor plan for
purposes of section 401(a)(9). Instead,
the benefit of the employee under the
transferor plan is decreased by the amount
transferred. However, if any portion of an
employee's benefit is transferred in a dis-
tribution calendar year with respect to that
employee, in order to satisfy section
401(a)(9), the transferor plan must deter-
mine the amount of the required minimum
distribution with respect to that employee
for the calendar year of the transfer using
the employee's benefit under the transfer-
or plan before the transfer. Additionally,
if any portion of an employee's benefit is
transferred in the employee's second dis-
tribution calendar year but on or before
the employee's required beginning date,
in order to satisfy section 401(a)(9), the
transferor plan must determine the
amount of the required minimum distribu-
tion requirement for the employee's first
distribution calendar year based on the
employee's benefit under the transferor
plan before the transfer. The transferor
plan may satisfy the required minimum
distribution requirement for the calendar
year of the transfer (and the prior year if
applicable) by segregating the amount
which must be distributed from the
employee's benefit and not transferring
that amount. Such amount may be
retained by the transferor plan and distrib-
uted on or before the date required.

(b) For purposes of determining any
required minimum distribution for the cal-
endar year immediately following the cal-
endar year in which the transfer occurs, in
the case of a transfer after the last valua-
tion date for the calendar year of the trans-
fer under the transferor plan, the benefit of
the employee as of such valuation date,
adjusted in accordance with A-3 of
§1.401(a)(9)-5, will be decreased by the
amount transferred, valued as of the date
of the transfer.

Q-4. If an amount of an employee's
benefit is transferred from one plan (trans-
feror plan) to another plan (transferee
plan), how are the benefit and the required
minimum distribution under the transferee
plan affected?

A-4. In the case of a transfer from one
plan (transferor plan) to another (transfer-
ee plan), the general rule is that the bene-

fit of the employee under the transferee
plan is increased by the amount trans-
ferred. The transfer has no impact on the
required minimum distribution to be made
by the transferee plan in the calendar year
in which the transfer is received.
However, if a required minimum distribu-
tion is required from the transferee plan
for the following calendar year, the trans-
ferred amount must be considered to be
part of the employee's benefit under the
transferee plan. Consequently, for pur-
poses of determining any required mini-
mum distribution for the calendar year
immediately following the calendar year
in which the transfer occurs, in the case of
a transfer after the last valuation date of
the transferee plan in the transfer calendar
year, the benefit of the employee under
the receiving plan valued as of such valu-
ation date, adjusted in accordance with
A-3 of §1.401(a)(9)-5, will be increased
by the amount transferred valued as of the
date of the transfer.

Q-5. How are a spinoff, merger or con-
solidation (as defined in §1.414(1)-1)
treated for purposes of determining an
employee's benefit and required mini-
mum distribution under section
401(a)(9)?

A-5. For purposes of determining an
employee's benefit and required mini-
mum distribution under section 401(a)(9),
a spinoff, a merger, or a consolidation (as
defined in §1.414([)-1) will be treated as
a transfer of the benefits of the employees
involved. Consequently, the benefit and
required minimum distribution of each
employee involved under the transferor
and transferee plans will be determined in
accordance with A-3 and A-4 of this sec-
tion.

§1.401(a)(9)-8 Special rules.

Q-1. What distribution rules apply if an
employee is a participant in more than one
plan?

A-1. If an employee is a participant in
more than one plan, the plans in which the
employee participates are not permitted to
be aggregated for purposes of testing
whether the distribution requirements of
section 401(a)(9) are met. The distribu-
tion of the benefit of the employee under
each plan must separately meet the
requirements of section 401(a)(9). For
this purpose, a plan described in section
414(k) is treated as two separate plans, a

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defined contribution plan to the extent
benefits are based on an individual
account and a defined benefit plan with
respect to the remaining benefits.

Q-2. If an employee's benefit under a
plan is divided into separate accounts (or
segregated shares in the case of a defined
benefit plan), do the distribution rules in
section 401(a)(9) and these regulations
apply separately to each separate account
(or segregated share)?

A-2. (a) Except as otherwise provided
in paragraphs (b) and (c) of this A-2, if an
employee's account under a defined con-
tribution plan is divided into separate
accounts (or if an employee's benefit
under a defined benefit plan is divided
into segregated shares in the case of a
defined benefit plan) under the plan, the
separate accounts (or segregated shares)
will be aggregated for purposes of satisfy-
ing the rules in section 401(a)(9). Thus,
except as otherwise provided in para-
graphs (b) and (c) of this A-2, all separate
accounts, including a separate account for
nondeductible employee contributions
(under section 72(d)(2)) or for qualified
voluntary employee contributions (as
defined in section 219(e)), will be aggre-
gated for purposes of section 401(a)(9).

(b) If, for lifetime distributions, as of an
employee's required beginning date (or
the beginning of any distribution calendar
year beginning after the employee's
required beginning date), or in the case of
distributions under section 401(a)(9)(B)
(ii) or (iii) and (iv), as of the end of the
year following the year containing the
employee's (or spouse's, where applica-
ble) date of death, the beneficiaries with
respect to a separate account (or segregat-
ed share in the case of a defined benefit
plan) under the plan differ from the bene-
ficiaries with respect to the other separate
accounts (or segregated shares) of the
employee under the plan, such separate
account (or segregated share) under the
plan need not be aggregated with other
separate accounts (or segregated shares)
under the plan in order to determine
whether the distributions from such sepa-
rate account (or segregated share) under
the plan satisfy section 401(a)(9).
Instead, the rules in section 401(a)(9) may
separately apply to such separate account
(or segregated share) under the plan. For
example, if, in the case of a distribution
described in section 401(a)(9)(B)(iii) and

(iv), the only beneficiary of a separate
account (or segregated share) under the
plan is the employee's surviving spouse,
and beneficiaries other than the surviving
spouse are designated with respect to the
other separate accounts of the employee,
distribution of the spouse's separate
account (or segregated share) under the
plan need not commence until the date
determined under the first sentence in
A-3(b) of §1.401(a)(9)-3, even if distrib-
ution of the other separate accounts (or
segregated shares) under the plan must
commence at an earlier date. In the case
of a distribution after the death of an
employee to which section
401(a)(9)(B)(i) does not apply, distribu-
tion from a separate account (or segregat-
ed share) of an employee may be made
over a beneficiary's life expectancy in
accordance with section 401(a)(9)(B)(iii)
and (iv) even though distributions from
other separate accounts (or segregated
shares) under the plan with different ben-
eficiaries are being made in accordance
with the five-year rule in section
401(a)(9)(B)(ii).

(c) A portion of an employee's account
balance under a defined contribution plan
is permitted to be used to purchase an
annuity contract with a remaining amount
maintained in the separate account. In that
case, the separate account under the plan
must be distributed in accordance with
§1.401(a)(9)-5 in order to satisfy section
401(a)(9) and the annuity payments under
the annuity contract must satisfy
§1.401(a)(9)-6 in order to satisfy section
401(a)(9).

Q-3. What is a separate account or seg-
regated share for purposes of section
401(a)(9)?

A-3. (a) For purposes of section
401(a)(9), a separate account in an individ-
ual account is a portion of an employee's
benefit determined by an acceptable sepa-
rate accounting including allocating invest-
ment gains and losses, and contributions
and forfeitures, on a pro rata basis in a rea-
sonable and consistent matter between
such portion and any other benefits.
Further, the amounts of each such portion
of the benefit will be separately determined
for purposes of determining the amount of
the required minimum distribution in
accordance with §1.401(a)(9)-5.

(b) A benefit in a defined benefit plan is
separated into segregated shares if it con-

sists of separate identifiable components
which may be separately distributed.

Q-4. Must a distribution that is
required by section 401(a)(9) to be made
by the required beginning date to an
employee or that is required by section
401(a)(9)(B)(iii) and (iv) to be made by
the required time to a designated benefi-
ciary who is a surviving spouse be made
notwithstanding the failure of the employ-
ee, or spouse where applicable, to consent
to a distribution while a benefit is imme-
diately distributable?

A-4. Yes. Section 411(a)(11) and sec-
tion 417(e) (see §§1.411(a)(11)-1(c)(2)
and 1.417(e)-1(c)) require employee and
spousal consent to certain distributions of
plan benefits while such benefits are
immediately distributable. If an employ-
ee's normal retirement age is later than the
required beginning date for the com-
mencement of distributions under section
401(a)(9) and, therefore, benefits are still
immediately distributable, the plan must,
nevertheless, distribute plan benefits to the
participant (or where applicable, to the
spouse) in a manner that satisfies the
requirements of section 401(a)(9). Section
401(a)(9) must be satisfied even though
the participant (or spouse, where applica-
ble) fails to consent to the distribution. In
such a case, the plan may distribute in the
form of a qualified joint and survivor
annuity (QJSA) or in the form of a quali-
fied preretirement survivor annuity
(QPSA) and the consent requirements of
sections 411(a)(11) and 417(e) are deemed
to be satisfied if the plan has made reason-
able efforts to obtain consent from the par-
ticipant (or spouse if applicable) and if the
distribution otherwise meets the require-
ments of section 417. If, because of sec-
tion 401(a)(11)(B), the plan is not required
to distribute in the form of a QJSA to a
participant or a QPSA to a surviving
spouse, the plan may distribute the
required minimum distribution amount
required at the time required to satisfy sec-
tion 401(a)(9) and the consent require-
ments of sections 411(a)(11) and 417(e)
are deemed to be satisfied if the plan has
made reasonable efforts to obtain consent
from the participant (or spouse if applica-
ble) and if the distribution otherwise meets
the requirements of section 417.

Q-5. Who is an employee's spouse or
surviving spouse for purposes of section
401(a)(9)?

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A-5. Except as otherwise provided in
A-6(a) (in the case of distributions of a
portion of an employee's benefit payable
to a former spouse of an employee pur-
suant to a qualified domestic relations
order), for purposes of section 401(a)(9),
an individual is a spouse or surviving
spouse of an employee if such individual
is treated as the employee's spouse under
applicable state law. In the case of distri-
butions after the death of an employee, for
purposes of determining whether, under
the life expectancy rule in section
401(a)(9)(B)(iii) and (iv), the provisions
of section 401(a)(9)(B)(iv) apply, the
spouse of the employee is determined as
of the date of death of the employee.

Q-6. In order to satisfy section
401(a)(9), are there any special rules
which apply to the distribution of all or a
portion of an employee's benefit payable
to an alternate payee pursuant to a quali-
fied domestic relations order as defined in
section 414(p) (QDRO)?

A-6. (a) A former spouse to whom all
or a portion of the employee's benefit is
payable pursuant to a QDRO will be treat-
ed as a spouse (including a surviving
spouse) of the employee for purposes of
section 401(a)(9), including the minimum
distribution incidental benefit require-
ment, regardless of whether the QDRO
specifically provides that the former
spouse is treated as the spouse for purpos-
es of sections 401(a)(11) and 417.

(b)(1) If a QDRO provides that an
employee's benefit is to be divided and a
portion is to be allocated to an alternate
payee, such portion will be treated as a
separate account (or segregated share)
which separately must satisfy the require-
ments of section 401(a)(9) and may not be
aggregated with other separate accounts
(or segregated shares) of the employee for
purposes of satisfying section 401(a)(9).
Except as otherwise provided in para-
graph(b)(2) of this A-6, distribution of
such separate account allocated to an
alternate payee pursuant to a QDRO must
be made in accordance with section
401(a)(9). For example, in general, distri-
bution of such account will satisfy section
401(a)(9)(A) if required minimum distrib-
utions from such account during the
employee's lifetime begin not later than
the employee's required beginning date
and the required minimum distribution is
determined in accordance with

§1.401(a)(9)-5 for each distribution cal-
endar year using an applicable distribu-
tion period determined under A-4 of
§1.401(a)(9)-5 using the age of the
employee in the distribution calendar year
for purposes of using the table in
A-4(a)(2) of §1.401(a)(9)-5 if applicable
or ages of the employee and spousal alter-
nate payee if their joint life expectancy is
longer than the distribution period using
that table. The determination of whether
distribution from such account after the
death of the employee to the alternate
payee will be made in accordance with
section 401(a)(9)(B)(i) or section
401(a)(9)(B)(ii) or (iii) and (iv) will
depend on whether distributions have
begun as determined under A-5 or
§1.401(a)(9)-2 (which provides, in gener-
al, that distributions are not treated as hav-
ing begun until the employee's required
beginning date even though payments
may actually have begun before that date).
For example, if the alternate payee dies
before the employee and distribution of
the separate account allocated to the alter-
nate payee pursuant to the QDRO is to be
made to the alternate payee's beneficiary,
such beneficiary may be treated as a des-
ignated beneficiary for purposes of deter-
mining the required minimum distribution
required from such account after the death
of the employee if the beneficiary of the
alternate payee is an individual and if
such beneficiary is a beneficiary under the
plan or specified to or in the plan.
Specification in or pursuant to the QDRO
will also be treated as specification to the
plan.

(2) Distribution of the separate account
allocated to an alternate payee pursuant to
a QDRO satisfy the requirements of sec-
tion 401(a)(9)(A)(ii) if such account is to
be distributed, beginning not later than the
employee's required beginning date, over
the life of the alternate payee (or over a
period not extending beyond the life
expectancy of the alternative payee).
Also, if the plan permits the employee to
elect whether distribution upon the death
of the employee will be made in accor-
dance with the five-year rule in section
401(a)(9)(B)(ii) or the life expectancy
rule in section 401(a)(9)(B)(iii) and (iv)
pursuant to A-4(c) of §1.401(a)(9)-3,
such election is to be made only by the
alternate payee for purposes of distribut-
ing the separate account allocated to the

alternate payee pursuant to the QDRO. If
the alternate payee dies after distribution
of the separate account allocated to the
alternate payee pursuant to a QDRO has
begun (determined under A-5 of
§1.401(a)(9)-2) but before the employee
dies, distribution of the remaining portion
of that portion of the benefit allocated to
the alternate payee must be made in
accordance with the rules in
§1.401(a)(9)-5 or §1.401(a)(9)-6 for dis-
tributions during the life of the employee.
Only after the death of the employee is the
amount of the required minimum distribu-
tion determined in accordance with the
rules that apply after the death of the
employee.

(c) If a QDRO does not provide that an
employee's benefit is to be divided but
provides that a portion of an employee's
benefit (otherwise payable to the employ-
ee) is to be paid to an alternate payee,
such portion will not be treated as a sepa-
rate account (or segregated share) of the
employee. Instead, such portion will be
aggregated with any amount distributed to
the employee and will be treated as hav-
ing been distributed to the employee for
purposes of determining whether the
required minimum distribution require-
ment has been satisfied with respect to
that employee.

Q-7. Will a plan fail to satisfy section
401(a)(9) where it is not legally permitted
to distribute to an alternate payee all or a
portion of an employee's benefit payable
to an alternate payee pursuant to a QDRO
within the period specified in section
414(p)(7)?

A-7. A plan will not fail to satisfy sec-
tion 401(a)(9) merely because it fails to
distribute a required amount during the
period in which the issue of whether a
domestic relations order is a QDRO is
being determined pursuant to section
414(p)(7), provided that the period does
not extend beyond the 18-month period
described in section 414(p)(7)(E). To the
extent that a distribution otherwise
required under section 401(a)(9) is not
made during this period, this amount and
any additional amount accrued during this
period will be treated as though it is not
vested during the period and any distribu-
tions with respect to such amounts must
be made under the relevant rules for non-
vested benefits described in either A-8 of
§1.401(a)(9)-5 or A-6 of §1.401(a)(9)-6.

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Q-8. Will a plan fail to satisfy section
401(a)(9) where an individual's distribu-
tion from the plan is less than the amount
otherwise required to satisfy section
401(a)(9) under §1.401(a)(9)-5 or
§1.401(a)(9)-6 because distributions were
being paid under an annuity contract
issued by a life insurance company in
state insurer delinquency proceedings and
have been reduced or suspended by rea-
sons of such state proceedings?

A-8. A plan will not fail to satisfy sec-
tion 401(a)(9) merely because an individ-
ual's distribution from the plan is less than
the amount otherwise required to satisfy
section 401(a)(9) under §1.401(a)(9)-5 or
§1.401(a)(9)-6 because distributions were
being paid under an annuity contract
issued by a life insurance company in
state insurer delinquency proceedings and
have been reduced or suspended by rea-
sons of such state proceedings. To the
extent that a distribution otherwise
required under section 401(a)(9) is not
made during the state insurer delinquency
proceedings, this amount and any addi-
tional amount accrued during this period
will be treated as though it is not vested
during the period and any distributions
with respect to such amounts must be
made under the relevant rules for nonvest-
ed benefits described in either A-8 of
§1.401(a)(9)-5 or A-6 of §1.401(a)(9)-6.

Q-9. Will a plan fail to qualify as a
pension plan within the meaning of sec-
tion 401(a) solely because the plan per-
mits distributions to commence to an
employee on or after April 1 of the calen-
dar year following the calendar year in
which the employee attains age 70 1/2
even though the employee has not retired
or attained the normal retirement age
under the plan as of the date on which
such distributions commence?

A-9. No. A plan will not fail to quali-
fy as a pension plan within the meaning of
section 401(a) solely because the plan
permits distributions to commence to an
employee on or after April 1 of the calen-
dar year following the calendar year in
which the employee attains age 70 1/2
even though the employee has not retired
or attained the normal retirement age
under the plan as of the date on which
such distributions commence. This rule
applies without regard to whether or not
the employee is a 5-percent owner with
respect to the plan year ending in the cal-

endar year in which distributions com-
mence.

Q-10. Is the distribution of an annuity
contract a distribution for purposes of sec-
tion 401(a)(9)?

A-10. No. The distribution of an annu-
ity contract is not a distribution for pur-
poses of section 401(a)(9).

Q-11. Will a payment by a plan after
the death of an employee fail to be treated
as a distribution for purposes of section
401(a)(9) solely because it is made to an
estate or a trust?

A-11. A payment by a plan after the
death of an employee will not fail to be
treated as a distribution for purposes of
section 401(a)(9) solely because it is
made to an estate or a trust. As a result,
the estate or trust which receives a pay-
ment from a plan after the death of an
employee need not distribute the amount
of such payment to the beneficiaries of the
estate or trust in accordance with section
401(a)(9)(B). However, pursuant to A-3
of §1.401(a)(9)-4, distribution to the
estate must satisfy the five-year rule in
section 401(a)(9)(B)(iii) if the distribution
to the employee had not begun (as defined
in A-6 of §1.401(a)(9)-2) as of the
employee's date of death, and pursuant to
A-3 of §1.401(a)(9)-4, an estate may not
be a designated beneficiary. See A-5 and
A-6 of §1.401(a)(9)-4 for provisions
under which beneficiaries of a trust with
respect to the trust's interest in an employ-
ee's benefit are treated as having been
designated as beneficiaries of the employ-
ee under the plan.

Q-12. Will a plan fail to satisfy section
411 if the plan is amended to eliminate
benefit options that do not satisfy section
401(a)(9)?

A-12. Nothing in section 401(a)(9)
permits a plan to eliminate for all partici-
pants a benefit option that could not oth-
erwise be eliminated pursuant to section
411(d)(6). However, a plan must provide
that, notwithstanding any other plan pro-
visions, it will not distribute benefits
under any option that does not satisfy sec-
tion 401(a)(9). See A-3 of
§1.401(a)(9)-1. Thus, the plan, notwith-
standing section 411(d)(6), must prevent
participants from electing benefit options
that do not satisfy section 401(a)(9).

Q-13. Is a plan disqualified merely
because it pays benefits under a designa-
tion made before January 1, 1984, in

accordance with section 242(b)(2) of the
Tax Equity and Fiscal Responsibility Act
(TEFRA)?

A-13. No. Even though the distribu-
tion requirements added by TEFRA were
retroactively repealed by the Tax Reform
Act of 1984 (TRA of 1984), the transi-
tional election rule in section 242(b) of
TEFRA was preserved. Satisfaction of
the spousal consent requirements of sec-
tion 4l7(a) and (e) (added by the
Retirement Equity Act of 1984) will not
be considered a revocation of the pre-
1984 designation. However, sections
401(a)(11) and 417 must be satisfied with
respect to any distribution subject to those
sections. The election provided in section
242(b) of TEFRA is hereafter referred to
as a section 242(b)(2) election.

Q-14. In the case in which an amount
is transferred from one plan (transferor
plan) to another plan (transferee plan),
may the transferee plan distribute the
amount transferred in accordance with a
section 242(b)(2) election made under
either the transferor plan or under the
transferee plan?

A-14. (a) In the case in which an
amount is transferred from one plan to
another plan, the amount transferred may
be distributed in accordance with a sec-
tion 242(b)(2) election made under the
transferor plan if the employee did not
elect to have the amount transferred and if
the amount transferred is separately
accounted for by the transferee plan.
However, only the benefit attributable to
the amount transferred, plus earnings
thereon, may be distributed in accordance
with the section 242(b)(2) election made
under the transferor plan. If the employee
elected to have the amount transferred, the
transfer will be treated as a distribution
and rollover of the amount transferred for
purposes of this section.

(b) In the case in which an amount is
transferred from one plan to another plan,
the amount transferred may not be distrib-
uted in accordance with a section
242(b)(2) election made under the trans-
feree plan. If a section 242(b)(2) election
was made under the transferee plan, the
amount transferred must be separately
accounted for. If the amount transferred is
not separately accounted for under the
transferee plan, the section 242(b)(2)
election under the transferee plan is
revoked and section 401(a)(9) will apply

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to subsequent distributions by the trans-
feree plan.

(c) A merger, spinoff, or consolidation,
as defined in §1.414(1)-1(b), will be treat-
ed as a transfer for purposes of the section
242(b)(2) election.

Q-15. If an amount is distributed by
one plan (distributing plan) and rolled
over into another plan (receiving plan),
may the receiving plan distribute the
amount rolled over in accordance with a
section 242(b)(2) election made under
either the distributing plan or the receiv-
ing plan?

A-15. No. If an amount is distributed
by one plan and rolled over into another
plan, the receiving plan must distribute
the amount rolled over in accordance with
section 401(a)(9) whether or not the
employee made a section 242(b)(2) elec-
tion under the distributing plan. Further,
if the amount rolled over was not distrib-
uted in accordance with the election, the
election under the distributing plan is
revoked and section 401(a)(9) will apply
to all subsequent distributions by the dis-
tributing plan. Finally, if the employee
made a section 242(b)(2) election under
the receiving plan and such election is still
in effect, the amount rolled over must be
separately accounted for under the receiv-
ing plan and distributed in accordance
with section 401(a)(9). If amounts rolled
over are not separately accounted for, any
section 242(b)(2) election under the
receiving plan is revoked and section
401(a)(9) will apply to subsequent distrib-
utions by the receiving plan.

Q-16. May a section 242(b)(2) election
be revoked after the date by which distri-
butions are required to commence in order
to satisfy section 401(a)(9) and this sec-
tion of the regulations?

A-16. Yes. A section 242(b)(2) elec-
tion may be revoked after the date by
which distributions are required to com-
mence in order to satisfy section 401(a)(9)
and this section of the regulations.
However, if the section 242(b)(2) election
is revoked after the date by which distrib-
utions are required to commence in order
to satisfy section 401(a)(9) and this sec-
tion of the regulations and the total
amount of the distributions which would
have been required to be made prior to the
date of the revocation in order to satisfy
section 401(a)(9), but for the section
242(b)(2) election, have not been made,

the trust must distribute by the end of the
calendar year following the calendar year
in which the revocation occurs the total
amount not yet distributed which was
required to have been distributed to satis-
fy the requirements of section 401(a)(9)
and continue distributions in accordance
with such requirements.

Par. 4. Section 1.403(b)-2 is added to
read as follows:

§1.403(b)-2 Required minimum
distributions from annuity contracts
purchased, or custodial accounts or
retirement income accounts established,
by a section 501(c)(3) organization or a
public school.

Q-1. Are section 403(b) contracts sub-
ject to the distribution rules provided in
section 401(a)(9)?

A-1. (a) Yes. Section 403(b) contracts
are subject to the distribution rules pro-
vided in section 401(a)(9). For purposes
of this section the term section 403(b)
contract means an annuity contract
described in section 403(b)(1), custodial
account described in section 403(b)(7), or
a retirement income account described in
section 403(b)(9).

(b) For purposes of applying the distri-
bution rules in section 401(a)(9), section
403(b) contracts will be treated as indi-
vidual retirement annuities described in
section 408(b) and individual retirement
accounts described in section 408(a)
(IRAs). Consequently, except as other-
wise provided in paragraph (c), the distri-
bution rules in section 401(a)(9) will be
applied to section 403(b) contracts in
accordance with the provisions in
§1.408-8.

(c)(1) The required beginning date for
purposes of section 403(b)(9) is April 1, of
the calendar year following the later of the
calendar year in which the employee attains
70 1/2 or the calendar year in which the
employee retires from employment with the
employer maintaining the plan. The con-
cept of 5-percent owner has no application
in the case of employees of employers
described in section 403(b)(1)(A).

(2) The rule in A-5 of §1.408-8 does
not apply to section 403(b) contracts.
Thus, the surviving spouse of an employ-
ee is not permitted to treat a section
403(b) contract of which the spouse is the
sole beneficiary as the spouse's own sec-
tion 403(b) contract.

Q-2. To what benefits under section
403(b) contracts, do the distribution rules
provided in section 401(a)(9) apply?

A-2. (a) The distribution rules provid-
ed in section 401(a)(9) apply to all benefits
under section 403(b) contracts accruing
after December 31, 1986 (post-'86
account balance). The distribution rules
provided in section 401(a)(9) do not apply
to the balance of the account balance
under the section 403(b) contract valued as

of December 31, 1986, exclusive of subse-
quent earnings (pre-'87 account balance).
Consequently, the post-'86 account bal-
ance includes earnings after December 31,
1986, on contributions made before
January 1, 1987, in addition to the contri-
butions made after December 31, 1986,
and earnings thereon. The issuer or custo-
dian of the section 403(b) contract must
keep records that enable it to identify the
pre-'87 account balance and subsequent
changes as set forth in paragraph (b) of
this A-2 and provide such information
upon request to the relevant employee or
beneficiaries with respect to the contract.
If the issuer does not keep such records,
the entire account balance will be treated
as subject to section 401(a)(9).

(b) In applying the distribution rules in
section 401(a)(9), only the post-'86
account balance is used to calculate the
required minimum distribution required
for a calendar year. The amount of any
distribution required to satisfy the
required minimum distribution require-
ment for a calendar year will be treated as
being paid from the post-'86 account bal-
ance. Any amount distributed in a calen-
dar year in excess of the required mini-
mum distribution requirement for a
calendar year will be treated as paid from
the pre-'87 account balance. The pre-'87
account balance for the next calendar year
will be permanently reduced by the
deemed distributions from the account.

(c) The pre-'87 account balance and the
post-'86 account balance have no rele-
vance for purposes of determining the
amount includible in income under sec-
tion 72.

Q-3. Must the value of the account bal-
ance under a section 403(b) contract as of
December 31, 1986, be distributed in
accordance with the minimum distribu-
tion incidental benefit requirement?

A-3. Distributions of the entire ac-
count balance of a section 403(b) con-

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tract, including the value of the account
balance under the contract or account as
of December 31, 1986, must satisfy the
minimum distribution incidental benefit
requirement. However, distributions at-
tributable to the value of the account bal-
ance under contract or account as of De-
cember 31, 1986, is treated as satisfying
the minimum distribution incidental ben-
efit requirement if such distributions sat-
isfy the rules in effect as of July 27, 1987,
interpreting §1.401-1(b) (1)(i).

Q-4. Is the required minimum distribu-
tion from one section 403(b) contract of
an employee permitted to be distributed
from another section 403(b) contract in
order to satisfy section 401(a)(9)?

A-4. Yes. The required minimum dis-
tribution must be separately determined
for each section 403(b) contract of an
employee. However, such amounts may
then be totaled and the total distribution
taken from any one or more of the indi-
vidual section 403(b) contracts.
However, under this rule, only amounts
in section 403(b) contracts that an indi-
vidual holds as an employee may be
aggregated. Amounts in section 403(b)
contracts that an individual holds as a
beneficiary of the same decedent may be
aggregated, but such amounts may not be
aggregated with amounts held in section
403(b) contracts that the individual holds
as the employee or as the beneficiary of
another decedent. Distributions from
section 403(b) contracts or accounts will
not satisfy the distribution requirements
from IRAs, nor will distributions from
IRAs satisfy the distribution require-
ments from section 403(b) contracts or
accounts.

Par. 5. Section 1.408-8 is added to read
as follows:

§1.408-8 Distribution requirements for
individual retirement plans.

The following questions and answers
relate to the distribution rules for IRAs
provided in sections 408(a)(6) and
408(b)(3).

Q-1. Are individual retirement plans
(IRAs) subject to the distribution rules
provided in section 401(a)(9) and
§§1.401(a)(9)-1 through 1.401(a)(9)-8
for qualified plans?

A-1. (a) Yes. Except as otherwise pro-
vided in this section, IRAs are subject to
the required minimum distribution rules

provided in section 401(a)(9) and
§§1.401(a)(9)-1 through 1.401(a)(9)-8
for qualified plans. For example, whether
the five year rule or the life expectancy
rule applies to distribution after death
occurring before the IRA owner's
required beginning date will be deter-
mined in accordance with §1.401(a)(9)-3,
the rules of §1.401(a)(9)-4 apply for pur-
poses of determining an IRA owner's des-
ignated beneficiary, the amount of the
required minimum distribution required
for each calendar year from an individual
account will be determined in accordance
with §1.401(a)(9)-5, and whether annuity
payments from an individual retirement
annuity satisfy section 401(a)(9) will be
determined under §1.401(a)(9)-6. For
this purpose the term IRA means an indi-
vidual retirement account or annuity
described in section 408(a) or (b).

(b) For purposes of applying the
required minimum distribution rules in
§§1.401(a)(9)-1 through 1.401(a)(9)-8
for qualified plans, the IRA trustee, custo-
dian, or issuer is treated as the plan
administrator, and the IRA owner is sub-
stituted for the employee.

Q-2. Are employer contributions under
a simplified employee pension (defined in
section 408(k)) or a SIMPLE IRA
(defined in section 408(p)) treated as con-
tributions to an IRA?

A-2. Yes. IRAs that receive employer
contributions under a simplified employee
pension (defined in section 408(k)) or a
SIMPLE plan (defined in section 408(p))
are treated as IRAs for purposes of section
401(a) and are, therefore, subject to the
distribution rules in this section.

Q-3. In the case of distributions from
an IRA, what does the term required
beginning date mean?

A-3. In the case of distributions from
an IRA, the term required beginning date
means April 1 of the calendar year fol-
lowing the calendar year in which the
individual attains age 70 1/2.

Q-4. When is the amount of a distribu-
tion from a IRA not eligible for rollover
because the amount is a required mini-
mum distribution?

A-4. The amount of a distribution that
is a required minimum distribution from
an IRA and thus not eligible for rollover is
determined in the same manner as provid-
ed in Q&A-7 of §1.402(c)-2 for distribu-
tions from qualified plans. For example,

if a required minimum distribution is
required for a calendar year, the amounts
distributed during a calendar year from an
IRA are treated as required minimum dis-
tributions under section 401(a)(9) to the
extent that the total required minimum
distribution for the year under section
401(a)(9) for that IRA has not been satis-
fied. This requirement may be satisfied
by a distribution from the IRA or, as per-
mitted under A-9 of this section, from
another IRA.

Q-5. May an individual's surviving
spouse elect to treat such spouse's entire
interest as a beneficiary in an individual's
IRA upon the death of the individual (or
the remaining part of such interest if dis-
tribution to the spouse has commenced) as
the spouse's own account?

A-5. (a) The surviving spouse of an
individual may elect in the manner
described in paragraph (b) of this A-5 to
treat the spouse's entire interest as a ben-
eficiary in an individual's IRA (or the
remaining part of such interest if distribu-
tion thereof has commenced to the
spouse) as the spouse's own IRA. This
election is permitted to be made at any
time after the distribution of the required
minimum amount for the account for the
calendar year containing the individual's
date of death. In order to make this elec-
tion, the spouse must be the sole benefi-
ciary of the IRA and have an unlimited
right to withdrawal amounts from the
IRA. This requirement is not satisfied if a
trust is named as beneficiary of the IRA
even if the spouse is the sole beneficiary
of the trust. If the surviving spouse makes
such an election, the surviving spouse's
interest in the IRA would then be subject
to the distribution requirements of section
401(a)(9)(A) applicable to the spouse as
the IRA owner rather than those of section
401(a)(9)(B) applicable to the surviving
spouse as the decedent IRA owner's ben-
eficiary. Thus, the required minimum dis-
tribution for the year of the election and
each subsequent year would be deter-
mined under section 401(a)(9)(A) with
the spouse as IRA owner and not section
401(a)(9)(B).

(b) The election described in paragraph
(a) of this A-5 is made by the surviving
spouse redesignating the account as the
account in the name of the surviving
spouse as IRA owner rather than as bene-
ficiary. Alternatively, a surviving spouse

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eligible to make the election is deemed to
have made the election if, at any time,
either of the following occurs:

(1) Any required amounts in the
account (including any amounts that have
been rolled over or transferred, in accor-
dance with the requirements of section
408(d)(3)(A)(i), into an individual retire-
ment account or individual retirement
annuity for the benefit of such surviving
spouse) have not been distributed within
the appropriate time period applicable to
the surviving spouse as beneficiary under
section 401(a)(9)(B); or

(2) Any additional amounts are con-
tributed to the account (or to the account
or annuity to which the surviving spouse
has rolled such amounts over, as
described in (1) above) which are subject,
or deemed to be subject, to the distribu-
tion requirements of section 401(a)(9)(A).

(c) The result of an election described
in paragraph (b) of this A-5 is that the sur-
viving spouse shall then be considered the
IRA owner for whose benefit the trust is
maintained for all purposes under the
Code (e.g., section 72(t)).

Q-6. How is the benefit determined for
purposes of calculating the required mini-
mum distribution from an IRA?

A-6. For purposes of determining the
required minimum distribution required to
be made from an IRA in any calendar
year, the account balance of the IRA as of
December 31 of the calendar year imme-
diately preceding the calendar year for
which distributions are being made will
be substituted in A-3 of §1.401(a)(9)-5
for the account of the employee. The
account balance as of December 31 of
such calendar year is the value of the IRA
upon close of business on such December
31. However, for purposes of determining
the required minimum distribution for the
second distribution calendar year for an
individual, the account balance as of
December 31 of such calendar year must
be reduced by any distribution (as
described in A-3(c)(2) of §1.401(a)(9)-5)
made to satisfy the required minimum dis-
tribution requirements for the individual's
first distribution calendar year after such
date.

Q-7. What rules apply in the case of a
rollover to an IRA of an amount distrib-
uted by a qualified plan or another IRA?

A-7. If the surviving spouse of an
employee rolls over a distribution from a

qualified plan, such surviving spouse
may elect to treat the IRA as the spouse's
own IRA in accordance with the provi-
sions in A-5 of this section. In the event
of any other rollover to an IRA of an
amount distributed by a qualified plan or
another IRA, the rules in §1.401(a)(9)-3
will apply for purposes of determining
the account balance for the receiving IRA
and the required minimum distribution
from the receiving IRA. However,
because the value of the account balance
is determined as of December 31 of the
year preceding the year for which the
required minimum distribution is being
determined and not as of a valuation date
in the preceding year, the account balance
of the receiving IRA need not be adjusted
for the amount received as provided in
A-2 of §1.401(a)(9)-7 in order to deter-
mine the required minimum distribution
for the calendar year following the calen-
dar year in which the amount rolled over
is received, unless the amount received is
deemed to have been received in the
immediately preceding year, pursuant to
A-2 of §1.401(a)(9)-7. In that case, for
purposes of determining the required
minimum distribution for the calendar
year in which such amount is actually
received, the account balance of the
receiving IRA as of December 31 of the
preceding year must be adjusted by the
amount received in accordance with A-2
of §1.401(a)(9)-7.

Q-8. What rules apply in the case of a
transfer from one IRA to another?

A-8. In the case of a transfer from one
IRA to another IRA, the rules in A-3 or
A-4 of §1.401(a)(9)-7 will apply for pur-
poses of determining the account balance
of, and the required minimum distribu-
tion from, the IRAs involved. Thus, the
transferor IRA must distribute in the year
of the transfer any amount required
determined without regard to the trans-
fer. For purposes of determining the
account balance of the transferee IRA
and the transferor IRA, the account bal-
ance need not be adjusted for the amount
transferred as provided in A-4 of
§1.401(a)(9)-7 in order to calculate the
required minimum distribution for the
calendar year following the calendar year
of the transfer, because the account bal-
ance is determined as of December 31 of
the calendar year immediately preceding
the calendar year for which the required

minimum distribution is being deter-
mined.

Q-9. Is the required minimum distribu-
tion from one IRA of an owner permitted
to be distributed from another IRA in
order to satisfy section 401(a)(9)?

A-9. Yes. The required minimum dis-
tribution must be calculated separately for
each IRA. However, such amounts may
then be totaled and the total distribution
taken from any one or more of the indi-
vidual IRAs. However, under this rule,
only amounts in IRAs that an individual
holds as the IRA owner may be aggregat-
ed. Amounts in IRAs that an individual
holds as a beneficiary of the same dece-
dent may be aggregated, but such amounts
may not be aggregated with amounts held
in IRAs that the individual holds as the
IRA owner or as the beneficiary of anoth-
er decedent. Distributions from section
403(b) contracts or accounts will not sat-
isfy the distribution requirements from
IRAs, nor will distributions from IRAs
satisfy the distribution requirements from
section 403(b) contracts or accounts.
Distributions from Roth IRAs (defined in
section 408A) will not satisfy the distrib-
ution requirements applicable to IRAs or
section 403(b) accounts or contracts and
distributions from IRAs or section 403(b)
contracts or accounts will not satisfy the
distribution requirements from Roth
IRAs.

Q-10. Is the trustee, custodian, or
issuer of an IRA required to report the
amount that is required to be distributed
from that IRA?

A-10. Yes. The trustee, custodian, or
issuer of an IRA is required to report to
the Internal Revenue Service and to the
IRA owner the amount required to be dis-
tributed from the IRA for each calendar
year at the time and in the manner pre-
scribed in the instructions to the applica-
ble Federal tax forms, as well as any addi-
tional information as required by such
forms or such instructions.

PART 54 - PENSION EXCISE TAXES

Par. 6. The authority citation for part
54 is amended by adding the following
citation to read as follows:

Authority: 26 U.S.C. 7805 ***

§54.4974-2 is also issued under 26
U.S.C. 4974.

Par. 7. Section after §54.4974-2 is
added to read as follows:

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§54.4974-2 Excise tax on accumulations
in qualified retirement plans.

Q-1. Is any tax imposed on a payee
under any qualified retirement plan or any
eligible deferred compensation plan (as
defined in section 457(b)) to whom an
amount is required to be distributed for a
taxable year if the amount distributed dur-
ing the taxable year is less than the
required minimum distribution?

A-1. Yes. If the amount distributed to
a payee under any qualified retirement
plan or any eligible deferred compensa-
tion plan (as defined in section 457(b)) for
a calendar year is less than the required
minimum distribution for such year, an
excise tax is imposed on such payee under
section 4974 for the taxable year begin-
ning with or within the calendar year dur-
ing which the amount is required to be
distributed. The tax is equal to 50 percent
of the amount by which such required
minimum distribution exceeds the actual
amount distributed during the calendar
year. Section 4974 provides that this tax
shall be paid by the payee. For purposes
of section 4974, the term required mini-
mum distribution means the required min-
imum distribution amount required to be
distributed pursuant to section 401(a)(9),
403(b)(10), 408(a)(6), 408(b)(3), or
457(d)(2), as the case may be, and the reg-
ulations thereunder. Except as otherwise
provided in Q&A-6, the required mini-
mum distribution for a calendar year is the
required minimum distribution amount
required to be distributed during the cal-
endar year. Q&A-7 provides a special
rule for amounts required to be distributed
by an employee's (or individual's)
required beginning date.

Q-2. For purposes of section 4974,
what is a qualified retirement plan?

A-2. For purposes of section 4974,
each of the following is a qualified retire-
ment plan - -

(a) A plan described in section 401(a)
which includes a trust exempt from tax
under section 501(a);

(b) An annuity plan described in section
403(a);

(c) An annuity contract, custodial
account, or retirement income account
described in section 403(b);

(d) An individual retirement account
described in section 408(a);

(e) An individual retirement annuity
described in section 408(b); or

(f) Any other plan, contract, account, or
annuity that, at any time, has been treated
as a plan, account, or annuity described in
(a) through (e) of this A-2, whether or not
such plan, contract, account, or annuity
currently satisfies the applicable require-
ments for such treatment.

Q-3. If a payee's interest under a qual-
ified retirement plan is in the form of an
individual account, how is the required
minimum distribution for a given calendar
year determined for purposes of section
4974?

A-3. (a) General rule. If a payee's
interest under a qualified retirement plan
is in the form of an individual account and
distribution of such account is not being
made under an annuity contract purchased
in accordance with A-4 of §1.401(a)(9)-6,
the amount of the required minimum dis-
tribution for any calendar year for purpos-
es of section 4974 is the required mini-
mum distribution amount required to be
distributed for such calendar year in order
to satisfy the required minimum distribu-
tion requirements in §1.401(a)(9)-5 as
provided in the following (whichever is
applicable) - -

(1) Section 401(a)(9) and §§1.401(a)
(9)-1 through 1.401(a)(9)-8 (in the case
of a plan described in section 401(a)
which includes a trust exempt under sec-
tion 501(a) or an annuity plan described
in section 403(a));

(2) Section 403(b)(10) and §1.403(b)-2
(in the case of an annuity contract, custo-
dial account, or retirement income
account described in section 403(b)); or

(3) Section 408(a)(6) or (b)(3) and
§1.408-8 (in the case of an individual
retirement account or annuity described in
section 408(a) or (b)).

(b) Default provisions. Unless other-
wise provided under the qualified retire-
ment plan (or, if applicable, the governing
instrument of the qualified retirement
plan), the default provisions in A-4(a) of
§1.401(a)(9)-3 apply in determining the
required minimum distribution for pur-
poses of section 4974.

(c) Five-year rule. If the five-year rule
in section 401(a)(9)(B)(ii) applies to the
distribution to a payee, no amount is
required to be distributed for any calendar
year to satisfy the applicable enumerated
section in paragraph (a) of this A-3 until
the calendar year which contains the date
five years after the date of the employee's
death. For the calendar year which con-

tains the date five years after the employ-
ee's death, the required minimum distrib-
ution amount required to be distributed to
satisfy the applicable enumerated section
is the payee's entire remaining interest in
the qualified retirement plan.

Q-4. If a payee's interest in a qualified
retirement plan is being distributed in the
form of an annuity, how is the amount of
the required minimum distribution deter-
mined for purposes of section 4974?

A-4. If a payee's interest in a qualified
retirement plan is being distributed in the
form of an annuity (either directly from
the plan, in the case of a defined benefit
plan, or under an annuity contract pur-
chased from an insurance company), the
amount of the required minimum distribu-
tion for purposes of section 4974 will be
determined as follows:

(a) Permissible annuity distribution
option. A permissible annuity distribution
option is an annuity contract (or, in the
case of annuity distributions from a
defined benefit plan, a distribution option)
which specifically provides for distribu-
tions which, if made as provided, would
for every calendar year equal or exceed
the required minimum distribution
amount required to be distributed to satis-
fy the applicable section enumerated in
paragraph (a) of A-2 of this section for
every calendar year. If the annuity con-
tract (or, in the case of annuity distribu-
tions from a defined benefit plan, a distri-
bution option) under which distributions
to the payee are being made is a permissi-
ble annuity distribution option, the
required minimum distribution for a given
calendar year will equal the amount which
the annuity contract (or distribution
option) provides is to be distributed for
that calendar year.

(b) Impermissible annuity distribution
option. An impermissible annuity distrib-
ution option is an annuity contract (or, in
the case of annuity distributions from a
defined benefit plan, a distribution option)
under which distributions to the payee are
being made that specifically provides for
distributions which, if made as provided,
would for any calendar year be less than
the required minimum distribution
amount required to be distributed to satis-
fy the applicable section enumerated in
paragraph (a) of A-3 of this section. If the
annuity contract (or, in the case of annuity
distributions from a defined benefit plan,
the distribution option) under which dis-

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2001-11 I.R.B.

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tributions to the payee are being made is
an impermissible annuity distribution
option, the required minimum distribution
for each calendar year will be determined
as follows:

(1) If the qualified retirement plan
under which distributions are being made
is a defined benefit plan, the required min-
imum distribution amount required to be
distributed each year will be the amount
which would have been distributed under
the plan if the distribution option under
which distributions to the payee were
being made was the following permissible
annuity distribution option:

(i) In the case of distributions com-
mencing before the death of the employ-
ee, if there is a designated beneficiary
under the impermissible annuity distrib-
ution option for purposes of section
401(a)(9), the permissible annuity distri-
bution option is the joint and survivor
annuity option under the plan for the
lives of the employee and the designated
beneficiary which provides for the great-
est level amount payable to the employ-
ee determined on an annual basis. If the
plan does not provide such an option or
there is no designated beneficiary under
the impermissible distribution option for
purposes of section 401(a)(9), the per-
missible annuity distribution option is
the life annuity option under the plan
payable for the life of the employee in
level amounts with no survivor benefit.

(ii) In the case of distributions com-
mencing after the death of the employee,
if there is a designated beneficiary under
the impermissible annuity distribution
option for purposes of section 401(a)(9),
the permissible annuity distribution
option is the life annuity option under the
plan payable for the life of the designat-
ed beneficiary in level amounts. If there
is no designated beneficiary, the five-
year rule in section 401(a)(9)(B)(ii)
applies. See paragraph (b)(3) of this
A-4. The determination of whether or
not there is a designated beneficiary and
the determination of which designated
beneficiary's life is to be used in the case
of multiple beneficiaries will be made in
accordance with §1.401(a)(9)-4 and A-7
of §1.401(a)(9)-5. If the defined benefit
plan does not provide for distribution in
the form of the applicable permissible
distribution option, the required mini-
mum distribution for each calendar year

will be an amount as determined by the
Commissioner.

(2) If the qualified retirement plan
under which distributions are being made
is a defined contribution plan and the
impermissible annuity distribution option
is an annuity contract purchased from an
insurance company, the required mini-
mum distribution amount required to be
distributed each year will be the amount
which would have been distributed in the
form of an annuity contract under the per-
missible annuity distribution option under
the plan determined in accordance with
paragraph (b)(1) of this A-4 for defined
benefit plans. If the defined contribution
plan does not provide the applicable per-
missible annuity distribution option, the
required minimum distribution for each
calendar year will be the amount which
would have been distributed under an
annuity described below in paragraph
(b)(2)(i) or (ii) of this A-4 purchased with
the employee's or individual's account
used to purchase the annuity contract
which is the impermissible annuity distri-
bution option.

(i) In the case of distributions com-
mencing before the death of the employ-
ee, if there is a designated beneficiary
under the impermissible annuity distribu-
tion option for purposes of section
401(a)(9), the annuity is a joint and sur-
vivor annuity for the lives of the employ-
ee and the designated beneficiary which
provides level annual payments and
which would have been a permissible
annuity distribution option. However, the
amount of the periodic payment which
would have been payable to the survivor
will be the applicable percentage under
the table in A-2(b) of §1.401(a)(9)-6 of
the amount of the periodic payment which
would have been payable to the employee
or individual. If there is no designated
beneficiary under the impermissible dis-
tribution option for purposes of section
401(a)(9), the annuity is a life annuity for
the life of the employee with no survivor
benefit which provides level annual pay-
ments and which would have been a per-
missible annuity distribution option.

(ii) In the case of a distribution com-
mencing after the death of the employee, if
there is a designated beneficiary under the
impermissible annuity distribution option
for purposes of section 401(a)(9), the annu-
ity option is a life annuity for the life of the

designated beneficiary which provides
level annual payments and which would
have been permissible annuity distribution
option. If there is no designated beneficia-
ry, the five-year rule in section
401(a)(9)(B)(ii) applies. See paragraph
(b)(3) of this A-4. The amount of the pay-
ments under the annuity contract will be
determined using the interest rate and actu-
arial tables prescribed under section 7520
determined using the date determined under
A-3 of § 1.401(a)(9)-3 when distributions
are required to commence and using the age
of the beneficiary as of the beneficiary's
birthday in the calendar year that contains
that date. The determination of whether or
not there is a designated beneficiary and the
determination of which designated benefi-
ciary's life is to be used in the case of mul-
tiple beneficiaries will be made in accor-
dance with §1.401(a)(9)-3 and A-7 of
§1.401(a)(9)-5.

(3) If the five-year rule in section
401(a)(9)(B)(ii) applies to the distribu-
tion to the payee under the contract (or
distribution option), no amount is
required to be distributed to satisfy the
applicable enumerated section in para-
graph (a) of this A-4 until the calendar
year which contains the date five years
after the date of the employee's death.
For the calendar year which contains the
date five years after the employee's
death, the required minimum distribution
amount required to be distributed to sat-
isfy the applicable enumerated section is
the payee's entire remaining interest in
the annuity contract (or under the plan in
the case of distributions from a defined
benefit plan).

Q-5. If there is any remaining benefit
with respect to an employee (or IRA
owner) after any calendar year in which
the entire remaining benefit is required to
be distributed under section 401(a)(9),
what is the amount of the required mini-
mum distribution for each calendar year
subsequent to such calendar year?

A-5. If there is any remaining benefit
with respect to an employee (or IRA
owner) after the calendar year in which
the entire remaining benefit is required to
be distributed, the required minimum dis-
tribution for each calendar year subse-
quent to such calendar year is the entire
remaining benefit.

Q-6. If a payee has an interest under an
eligible deferred compensation plan (as

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defined in section 457(b)), how is the
required minimum distribution for a given
taxable year of the payee determined for
purposes of section 4974?

A-6. If a payee has an interest under an
eligible deferred compensation plan (as
defined in section 457(b)), the required
minimum distribution for a given taxable
year of the payee determined for purposes
of section 4974 is determined under sec-
tion 457(d).

Q-7. With respect to which calendar
year is the excise tax under section 4974
imposed in the case in which the amount
not distributed is an amount required to be
distributed by April 1 of a calendar year
(by the employee's or individual's
required beginning date)?

A-7. In the case in which the amount
not paid is an amount required to be paid
by April 1 of a calendar year, such amount
is a required minimum distribution for the
previous calendar year, i.e., for the
employee's or the individual's first distri-
bution calendar year. However, the excise
tax under section 4974 is imposed for the
calendar year containing the last day by
which the amount is required to be dis-
tributed, i.e., the calendar year containing
the employee's or individual's required
beginning date, even though the preced-
ing calendar year is the calendar year for
which the amount is required to be dis-
tributed. Pursuant to A-2 of §1.401
(a)(9)-5, amounts distributed in the
employee's or individual's first distribu-
tion calendar year will reduce the amount
required to be distributed in the next cal-
endar year by the employee's or individ-
ual's required beginning date. There is
also a required minimum distribution for
the calendar year which contains the
employee's or individual's required
beginning date. Such distribution is also
required to be made during the calendar
year which contains the employee's or
individual's required beginning date.

Q-8. Are there any circumstances when
the excise tax under section 4974 for a
taxable year may be waived?

A-8. (a) Reasonable cause. The tax
under section 4974(a) may be waived if
the payee described in section 4974(a)
establishes to the satisfaction of the
Commissioner the following - -

(1) The shortfall described in section
4974(a) in the amount distributed in any

taxable year was due to reasonable error;
and

(2) Reasonable steps are being taken to
remedy the shortfall.

(b) Automatic Waiver. The tax under
section 4974 will be automatically
waived, unless the Commissioner deter-
mines otherwise, if-

(1) The payee described in section
4974(a) is an individual who is the sole
beneficiary and whose required minimum
distribution amount for a calendar year is
determined under the life expectancy rule
described in §1.401(a)(9)-3 A-3 in the
case of an employee's or individual's
death before the employee's or individ-
ual's required beginning date; and

(2) The employee's or individual's
entire benefit to which that beneficiary is
entitled is distributed by the end of the
fifth calendar year following the calendar
year that contains the employee's or indi-
vidual's date of death.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

(Filed by the Office of the Federal Register on Janu-
ary 11, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 17, 2001, 66 F.R.
3928)

## Change of Address for Submission of Art Valuation Requests

Announcement 2001-22

Rev. Proc. 96-15, 1996-1 C.B. 627,
informs taxpayers how to request from the
Internal Revenue Service a Statement of
Value that can be used to substantiate the
value of art for income, estate, or gift tax
purposes. Section 10 of Rev. Proc. 96-15
sets forth the address for submission of
requests for Statements of Value. The
address has been changed, and the new
address, effective immediately, is as fol-
lows:

Internal Revenue Service, POB 27720
McPherson Station, Washington, DC
20038, Attn: C:AP:AS:ART.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 96-15 is modified.

Rev. Proc. 2001-3, Areas in
Which Rulings Will Not be
Issued; Correction

## Announcement 2001-25

This document contains corrections to
Rev. Proc. 2001-3, 2001-1 I.R.B. 111, the
annual revised list of those provisions of
the Internal Revenue Code under the
jurisdiction of the Associate Chief
Counsel (Corporate), the Associate Chief
Counsel (Financial Institutions &
Products), the Associate Chief Counsel
(Income Tax & Accounting), the
Associate Chief Counsel (Passthroughs &
Special Industries), the Associate Chief
Counsel (Procedure and Administration),
and the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities) relating to issues on which the
Internal Revenue Service will not issue
letter rulings or determination letters. As
published in the Internal Revenue Bulletin
on January 2, 2001, Rev. Proc. 2001-3
contains errors that may prove to be mis-
leading and are in need of clarification.
Accordingly, the below sections of Rev.
Proc. 2001-3 are corrected to read as fol-
lows:

* * *

SECTION 1.02 * *

(7) New section 3.01(9), dealing with
§115 and income of states, municipalities,
etc., is moved from old section 5.09, and
a new provision is added to indicate the
Service's unwillingness to rule as to
whether income of certain state estab-
lished membership organizations is
excluded from gross income.
* * *

SECTION 1.02 * * *

(9) New section 3.01(29) combines old
sections 3.01(22)-(24), (26) and (27)
(which include type A, B, E and F reorga-
nizations, and § 351 and § 1036
exchanges), adds § 332 liquidations and
type C reorganizations, expands the no-
rule concerning § 351 to include all asset
transfers and expands the no-rule con-
cerning § 1036, eliminates the overlap
prohibition (i.e., the Service previously
would not rule under any Code section if
the transaction is described under both
one of the enumerated no-rule sections
and a section that is not included in the
no-rule provisions), and provides that the

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Service will now rule on an entire trans-
action (not just the narrow significant
issue) if there is a significant issue in the
transaction.

* * *

### SECTION 3.01 * * *

(9) Section 115 .- Income of states,
municipalities, etc .- Whether the results
of transactions pursuant to a plan or
arrangement created by state statute a pri-
mary objective of which is to enable par-
ticipants to pay for the costs of a post-sec-
ondary education for themselves or a
designated beneficiary, including: (i)
whether the plan or arrangement, itself, is
an entity separate from a state and, if so,
how the plan or arrangement is treated for
federal tax purposes; and (ii) whether any
contract under the plan or arrangement is a
debt instrument and, if so, how interest or
original issue discount attributable to the
contract is treated for federal tax purposes.
(Also §§ 61, 163, 1275, 2501, and 7701.)

-Whether the income of membership
organizations established by states exclu-
sively to reimburse members for losses
arising from workmen's compensation
claims is excluded from gross income
under § 115.

* * *

#### SECTION 3.01 ***

(29) Sections 332, 351, 368(a)(1)(A),
(B), (C), (E) and (F), and 1036. Complete
Liquidations of Subsidiaries; Transfer to
Corporation Controlled by Transferor;
Definitions Relating to Corporate Reorga-
nizations; and Stock for Stock of Same
Corporation .- Whether a transaction
qualifies under § 332, § 351 or § 1036 for
nonrecognition treatment, or whether it
constitutes a corporate reorganization
within the meaning of § 368(a)(1)(A) (in-
cluding a transaction that qualifies under
§ 368(a)(1)(A) by reason of § 368
(a)(2)(D) or § 368(a)(2)(E)), § 368
(a)(1)(B), § 368(a)(1)(C), § 368(a)(1)(E)
or § 368(a)(1)(F), and whether various
consequences (such as nonrecognition
and basis) result from the application of
that section, unless the Service deter-
mines that there is a significant issue that
must be resolved in order to decide those
matters. Notwithstanding the foregoing,
and to the extent the transaction is not de-
scribed in another no-rule section: (1) the
Service will rule on the entire transaction,
and not just the significant issue; and (2)
the Service will rule on the application of

§ 351 to a controlled corporation when
the transaction is undertaken prior to the
distribution of the stock of the controlled
corporation in a transaction qualifying
under § 355.

SIGNIFICANT ISSUE: A significant
issue is an issue of law that meets the three
following tests: (1) the issue is not clearly
and adequately addressed by a statute, reg-
ulation, decision of a court, tax treaty, rev-
enue ruling, revenue procedure, notice, or
other authority published in the Internal
Revenue Bulletin; (2) the resolution of the
issue is not essentially free from doubt;
and (3) the issue is legally significant and
germane to determining the major tax con-
sequences of the transaction.

OBTAINING A RULING: To obtain a
ruling on a transaction involving a signif-
icant issue, the taxpayer must in its ruling
request explain the significance of the
issue, set forth the authorities most close-
ly related to the issue, and explain why the
issue is not resolved by these authorities.

As a pilot program to better serve taxpay-
ers the No-Rule for §§ 368(a)(1) (A), (B),
(C), (E) and (F), and §§ 332, 351 and 1036
were combined, simplified and expanded.
Our objective is to encourage taxpayers to
seek rulings on transactions involving these
provisions where there are significant issues
that are not essentially free from doubt, and
to prevent expending limited Service
resources on the tax consequences of trans-
actions that are clear under controlling
authorities. In addition, the Service will
now rule on an entire transaction if there is a
significant issue, and the Service eliminated
the overlap provision which prohibited the
Service from issuing rulings under any
Code section if the transaction qualifies
under both one of the sections listed in this
revenue procedure and under a section not
listed in this revenue procedure.

* * *

FOR FURTHER INFORMATION CON-
TACT: Michael Danbury of the Office of
Associate Chief Counsel (Corporate) at
(202) 622-7978 (not a toll-free number).

Guidance Under Section 355(d);
Recognition of Gain on Certain
Distributions of Stock or
Securities; Corrections

Announcement 2001-26

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Corrections to final regula-
tions.

SUMMARY: This document contains cor-
rections to final regulations (T.D. 8913,
2001-3, I.R.B. 300) that were published
in the Federal Register on Wednesday,
December 20, 2000 (65 F.R. 79719), pro-
viding guidance relating to section
355(d), and recognition of gain on certain
distributions of stock and securities.

DATES: This correction is effective
December 20, 2000.

FOR FURTHER INFORMATION CON-
TACT: Michael N. Kaibni (202) 622-7550
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

##### Background

The final regulations that are the sub-
ject of these corrections are under section
355 of the Internal Revenue Code.

##### Need for Correction

As published, final regulations (T.D.
8913) contains errors that may prove to be
misleading and are in need of clarification.

##### Correction of Publication

Accordingly, the publication of the
final regulations (T.D. 8913), which were
the subject of FR Doc. 00-32041, is cor-
rected as follows:

1\. On page 79721, column 2, in the
preamble under the heading "Transferred
With Respect to an Active Trade or
Business.", line 11 from the bottom of the
paragraph, the language "§1.355-6
(d)(3)(iv)(4)(E), the final" is corrected to
read "§1.355-6(d)(3)(iv)(E), the final".

2\. On page 79722, column 1, in the
preamble, under the heading "Options",
the second paragraph, line 5, the language
"rights, and national principal contracts."
is corrected to read "rights, and notional
principal contracts.".

## §1.355-6 [Corrected]

3\. On page 79733, column 3,
§1.355-6(e)(3)(i), line 19, the language
"only to exchanges that are not treated" is
corrected to read "only to exchanges that
are not".

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Cynthia E. Grigsby,
Chief, Regulations Unit,
Office of Special Counsel
(Modernization & Strategic Planning).

(Filed by the Office of the Federal Register on Feb-
ruary 5, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 6, 2001, 66 F.R.
9034)

### Stock Transfer Rules: Supplemental Rules

#### Announcement 2001-27

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Withdrawal of notice of pro-
posed rulemaking.

SUMMARY: This document withdraws
proposed regulations (REG-116048-99,
2000-6 I.R.B 584) relating to an election
available to certain taxpayers under sec-
tion 367(b). The withdrawal corresponds
to the upcoming expiration of the avail-
ability of the election.

FOR FURTHER INFORMATION CON-
TACT: Mark Harris at (202) 622-3860
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

## Background

On January 24, 2000, the IRS and
Treasury published in the Federal Register
proposed regulations (65 FR 3629) (the
proposed regulations), temporary regula-
tions (65 FR 3586) (the temporary regula-
tions), and final regulations (65 FR 3589)
(the final regulations) under section 367(b)
of the Internal Revenue Code. The pro-
posed and temporary regulations provide a
modified version of an election contained in
the proposed section 367(b) regulations
issued on August 26, 1991 (1991 proposed
regulations), which was not adopted in the
final regulations. This election allows cer-
tain taxpayers to recognize the gain (but not
the loss) realized in certain section 367(b)
exchanges, rather than including the all
earnings and profits amount in income.
The preamble to the final regulations
explains the reasons for not including the
taxable exchange election in the final regu-
lations (65 FR 3589 at 3592).

The IRS and Treasury issued the pro-
posed and temporary regulations in order
to provide taxpayers with an opportunity
to comment on the decision not to include
the taxable exchange election in the final
regulations. Section 1.367(b)-3(b)(4)(ii)
of the proposed and temporary regulations
provide that the taxable exchange election

is applicable for transactions that occur
between February 23, 2000, and February
24, 2001. A public hearing was scheduled
for April 20, 2000, and written comments
were to be received by April 24, 2000. No
one requested to speak at the public hear-
ing, and no comments were submitted. In
particular, the IRS and Treasury have not
received any comments suggesting revi-
sions to the effective date articulated in
§1.367(b)-3(b)(4)(ii). Accordingly, this
document withdraws §1.367(b)-3(b)(4)
of the proposed regulations published in
the Federal Register on January 24, 2000
(65 FR 3629).

\*
\*
\*
\*
\*

## Withdrawal of Proposed Amendments to the Regulations

Accordingly, under the authority of 26
U.S.C. 7805, proposed amendments to 26
CFR part 1 relating to §1.367(b)-3(b)(4),
published January 24, 2000 (65 FR 6329),
are withdrawn.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.

(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R.
2373)

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings")
that have an effect on previous rulings
use the following defined terms to 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.

Distinguished describes 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-

# 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.

GP-General Partner.

Ct.D .- Court Decision.

GR-Grantor.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

DISC-Domestic International Sales Corporation.

DR-Donor.

E-Estate.

EE-Employee.

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.

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.

CY-County.

D-Decedent.

DC-Dummy Corporation.

DE-Donee.

Del. Order-Delegation Order.

LP-Limited Partner.

LR-Lessor.

M-Minor.

U.S.C .- United States Code.

Nonacq .- Nonacquiescence.

X-Corporation.

O-Organization.

Y-Corporation.

<!-- PageFooter="March 12, 2001" -->

<!-- PageFooter="2001-11 I.R.B." -->

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.

IC-Insurance Company.

I.R.B .- Internal Revenue Bulletin.

LE-Lessee.

<!-- PageBreak -->

## Numerical Finding List1 Bulletins 2001-1 through 2001-10

Announcements:

2001-1, 2001-2 I.R.B. 277

2001-2, 2001-2 I.R.B. 277

2001-3, 2001-2 I.R.B. 278

2001-4, 2001-2 I.R.B. 286

2001-5, 2001-2 I.R.B. 286
2001-6, 2001-3 I.R.B. 357
2001-7, 2001-3 I.R.B. 357
2001-8, 2001-3 I.R.B. 357

2001-9, 2001-3 I.R.B. 357
2001-10, 2001-4 I.R.B. 431
2001-11, 2001-4 I.R.B. 432
2001-12, 2001-6 I.R.B. 526
2001-13, 2001-96 I.R.B. 752
2001-14, 2001-7 I.R.B. 648
2001-15, 2001-8 I.R.B. 715
2001-16, 2001-8 I.R.B. 715
2001-17, 2001-8 I.R.B. 716

2001-18, 2001-10 I.R.B. 791
2001-19, 2001-10 I.R.B. 791

2001-20, 2001-8 I.R.B. 716
2001-21, 2001-9 I.R.B. 752
2001-23, 2001-10 I.R.B. 791
2001-24, 2001-10 I.R.B. 793

Notices:

2001-1, 2001-2 I.R.B. 261

2001-2, 2001-2 I.R.B. 265

2001-3, 2001-2 I.R.B. 267

2001-4, 2001-2 I.R.B. 267

2001-5, 2001-3 I.R.B. 327
2001-6, 2001-3 I.R.B. 327
2001-7, 2001-4 I.R.B. 374
2001-8, 2001-4 I.R.B. 374
2001-9, 2001-4 I.R.B. 375
2001-10, 2001-5 I.R.B. 459
2001-11, 2001-5 I.R.B. 464
2001-12, 2001-3 I.R.B. 328
2001-13, 2001-6 I.R.B. 514
2001-14, 2001-6 I.R.B. 516
2001-15, 2001-7 I.R.B. 589

2001-16, 2001-9 I.R.B. 730

2001-17, 2001-9 I.R.B. 730
2001-18, 2001-9 I.R.B. 731
2001-19, 2001-10 I.R.B. 784

### Proposed Regulations:

REG-209461-79, 2001-8, I.R.B. 712
REG-246256-96, 2001-8, I.R.B. 713
REG-251701-96, 2001-4, I.R.B. 396
REG-106542-98, 2001-5, I.R.B. 473
REG-121928-98, 2001-6, I.R.B. 520
REG-103320-00, 2001-8, I.R.B. 714
REG-104683-00, 2001-4, I.R.B. 407
REG-106702-00, 2001-4, I.R.B. 424
REG-106791-00, 2001-6, I.R.B. 521
REG-107176-00, 2001-4, I.R.B. 428
REG-107566-00, 2001-3, I.R.B. 346
REG-114082-00, 2001-7, I.R.B. 629
REG-114083-00, 2001-7, I.R.B. 630
REG-114084-00, 2001-7, I.R.B. 633
REG-116468-00, 2001-6, I.R.B. 522
REG-119352-00, 2001-6, I.R.B. 525

## Railroad Retirement Quarterly Rates: 2001-2, I.R.B. 258

Revenue Procedures:

2001-1, 2001-1 I.R.B. 1

2001-2, 2001-1 I.R.B. 79
2001-3, 2001-1 I.R.B. 111
2001-4, 2001-1 I.R.B. 121

2001-5, 2001-1 I.R.B. 164
2001-6, 2001-1 I.R.B. 194
2001-7, 2001-1 I.R.B. 236
2001-8, 2001-1 I.R.B. 239
2001-9, 2001-3 I.R.B. 328
2001-10, 2001-2 I.R.B. 272
2001-11, 2001-2 I.R.B. 275
2001-12, 2001-3 I.R.B. 335

2001-13, 2001-3 I.R.B. 337
2001-14, 2001-3 I.R.B. 343
2001-15, 2001-5 I.R.B. 465
2001-16, 2001-4 I.R.B. 376

2001-17, 2001-7 I.R.B. 589
2001-18, 2001-8 I.R.B. 708
2001-19, 2001-9 I.R.B. 732
2001-20, 2001-9 I.R.B. 738

2001-21, 2001-9 I.R.B. 742

2001-22, 2001-9 I.R.B. 745

2001-23, 2001-10 I.R.B. 784
2001-24, 2001-10 I.R.B. 788

### Revenue Rulings:

2001-1, 2001-9 I.R.B. 726
2001-2, 2001-2 I.R.B. 255

2001-3, 2001-3 I.R.B. 319

2001-4, 2001-3 I.R.B. 295

2001-5, 2001-5 I.R.B. 451

2001-6, 2001-6 I.R.B. 491
2001-7, 2001-7 I.R.B. 541

2001-8, 2001-9 I.R.B. 726
2001-9, 2001-8 I.R.B. 652
2001-10, 2001-10 I.R.B. 755
2001-11, 2001-10 I.R.B. 780

### Treasury Decisions:

8910, 2001-2 I.R.B. 258

8911, 2001-3 I.R.B. 321

8912, 2001-5 I.R.B. 452

8913, 2001-3 I.R.B. 300
8914, 2001-8 I.R.B. 653
8915, 2001-4 I.R.B. 359
8916, 2001-4 I.R.B. 360
8917, 2001-7 I.R.B. 538
8918, 2001-4 I.R.B. 372
8919, 2001-6 I.R.B. 505
8920, 2001-8 I.R.B. 654
8921, 2001-7 I.R.B. 532

8922, 2001-6 I.R.B. 508

8923, 2001-6 I.R.B. 485

8924, 2001-6 I.R.B. 489
8925, 2001-6 I.R.B. 496
8926, 2001-6 I.R.B. 492
8928, 2001-8 I.R.B. 685

8929, 2001-10 I.R.B. 756

8930, 2001-5 I.R.B. 433
8931, 2001-7 I.R.B. 542

8935, 2001-8 I.R.B. 702

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.

<!-- PageFooter="2001-11 I.R.B." -->

<!-- PageFooter="March 12, 2001" -->
<!-- PageBreak -->

### Finding List of Current Actions on Previously Published Items1

Bulletins 2001-1 through 2001-10

Announcement:

98-99
Modified by
Ann. 2001-9, 2001-3 I.R.B. 357

99-79
Superseded by
Ann. 2001-3, 2001-2 I.R.B. 278

2000-97
Corrected by
Ann. 2001-7, 2001-3 I.R.B. 357

Cumulative Bulletin:

1998-2
Corrected by
Ann. 2001-5, 2001-2 I.R.B. 286

Notices:

98-39
Modified by
Notice 2001-9, 2001-4 I.R.B. 375

98-40
Modified by
Notice 2001-9, 2001-4 I.R.B. 375
99-53
Modified and superseded by
Notice 2001-7, 2001-4 I.R.B. 374
2000-21
Superseded by
Notice 2001-1, 2001-2 I.R.B. 261
2000-22
Modified and superseded by
Notice 2001-8, 2001-4 I.R.B. 374
2000-43
Extended by
Notice 2001-13, 2001-6 I.R.B. 514

Proposed Regulations:

EE-130-86
Partially withdrawn by
REG-209461-79, 2001-8 I.R.B. 712

REG-116733-98
Withdrawn by
Ann. 2001-11, 2001-4 I.R.B. 432

Revenue Procedures:

83-87
Superseded by
Rev. Proc. 2001-15, 2001-5 I.R.B. 465
90-18
Amplified and superseded by
Rev. Proc. 2001-18, 2001-8 I.R.B. 708
92-19
Superseded by
Rev. Proc. 2001-15, 2001-5 I.R.B. 465

96-17
Modified by
Rev. Proc. 2001-9, 2001-3 I.R.B. 328

Revenue Procedures-continued:
99-18
Modified and superseded by
Rev. Proc. 2001-21, 2001-9 I.R.B. 742
99-47
Superseded by
Rev. Proc. 2001-16, 2001-4 I.R.B. 376
99-49
Modified and amplified by

Rev. Proc. 2001-10, 2001-2 I.R.B. 272
Rev. Proc. 2001-23, 2001-10 I.R.B. 784
Rev. Proc. 2001-24, 2001-10 I.R.B. 788
Rev. Rul. 2001-8, 2001-9 I.R.B. 762
2000-1
Superseded by
Rev. Proc. 2001-1, 2001-1 I.R.B. 1
2000-2
Superseded by
Rev. Proc. 2001-2, 2001-1 I.R.B. 79
2000-3
Superseded by
Rev. Proc. 2001-3, 2001-1 I.R.B. 111
2000-4
Superseded by
Rev. Proc. 2001-4, 2001-1 I.R.B. 121
2000-5
Superseded by
Rev. Proc. 2001-5, 2001-1 I.R.B. 164
2000-6
Superseded by
Rev. Proc. 2001-6, 2001-1 I.R.B. 194
2000-7
Superseded by
Rev. Proc. 2001-7, 2001-1 I.R.B. 236
2000-8
Superseded by
Rev. Proc. 2001-8, 2001-1 I.R.B. 239
2000-16
Modified and superseded by
Rev. Proc. 2001-17, 2001-7 I.R.B. 589
2000-22
Modified and superseded by
Rev. Proc. 2001-10, 2001-2 I.R.B. 272
2001-13
Clarified by
Notice 2001-12, 2001-3 I.R.B. 328

Revenue Rulings:

64-328
Modified by
Notice 2001-10, 2001-5 I.R.B. 459

66-110
Modified by
Notice 2001-10, 2001-5 I.R.B. 459
85-30
Clarified by
Rev. Rul. 2001-8, 2001-9 I.R.B. 762
88-95
Clarified by
Rev. Rul. 2001-8, 2001-9 I.R.B. 762

Revenue Rulings-continued:

92-19
Supplemented in part by
Rev. Rul. 2001-11, 2001-10 I.R.B. 780

2000-56

Corrected by
Ann. 2001-19, 2001-10 I.R.B. 791

Treasury Decisions:

8889
Corrected by
Ann. 2001-14, 2001-2 I.R.B. 286

<!-- PageFooter="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." -->
<!-- PageFooter="March 12, 2001" -->

<!-- PageFooter="2001-11 I.R.B." -->
<!-- PageBreak -->

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# INTERNAL REVENUE BULLETIN

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# CUMULATIVE BULLETINS

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# ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET

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# 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)
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