Internal Revenue Bulletin 2000-44 (PDF rendition): IRS Revenue Procedures

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INCOME TAX
T.D. 8905, page 435.
Final regulations relate to preparer due diligence require-
ments under section 6695(g) of the Code for determining
earned income credit (EIC) eligibility.
REG–246249–96, page 439.
Proposed regulations under sections 6041 and 6045 of the
Code provide guidance on information returns for persons
that make payments on behalf of another person or jointly to
two or more payees, or in connection with certain sales
involving investment advisers. A public hearing is scheduled
for February 7, 2001.
REG–105235–99, page 447.
Proposed regulations under section 121 of the Code relate
to the exclusion of gain from the sale or exchange of a tax-
payer’s principal residence. A public hearing is scheduled for
January 23, 2001.
REG–108553–00, page 452.
Proposed regulations under section 7701 of the Code relate
to the classification of certain pension and employee benefit
trusts and certain investment trusts as domestic trusts for
federal tax purposes. A public hearing is scheduled for
January 31, 2001.
EMPLOYEE PLANS
Announcement 2000–71, page 456.
Qualified plans; amendments; section 411(d)(6).This
announcement assists practitioners and plan sponsors in
requesting determination letters with respect to certain
amendments to qualified plans made as a result of regula-
tions that were published under section 411(d)(6) of the
Code on September 6, 2000.
Announcement 2000–86, page 456.
The Service announces a change to the distribution codes to
be used on Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.,when making distributions from IRAs.
EXEMPT ORGANIZATIONS
Rev. Rul. 2000–49, page 430.
Reporting requirements for section 527 organizations.
This ruling provides questions and answers regarding the
notice and reporting requirements of section 527 of the
Code.
Announcement 2000–87, page 457.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Rev. Proc. 2000–46, page 438.
This procedure provides that the Service will not rule on the
question of whether an undivided fractional interest in real
property is an interest in a partnership. Rev. Proc. 2000–3
amplified.
Announcement 2000–88, page 460.
This document contains corrections to a removal of final reg-
ulations (T.D. 8897, 2000–36 I.R.B. 234) relating to the
application of section 263A of the Code to property produc-
tion in the trade or business of farming.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2000–44
October 30, 2000
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
Actions Relating to Court Decisions is on the page following the introduction.

October 30, 20002000–44 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
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dures must be considered, and Service personnel and oth-
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clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
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Tax Conventions, and Subpart B, Legislation and Related
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To the extent practicable, pertinent cross references to
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annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2000–44 I.R.B.October 30, 2000
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
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tive statement of Service position. It is not
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Actions on Decisions shall be relied
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sions applying the law to the facts in the
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tion of the Action on Decision to similar
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over, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.
Prior to 1991, the Service published ac-
quiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may ac-
quiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
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or nonacquiescence. Both “acquies-
cence” and “acquiescence in result only”
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will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
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nifies that, although no further review
was sought, the Service does not agree
with the holding of the court and, gener-
ally, will not follow the decision in dis-
posing of cases involving other taxpay-
ers. In reference to an opinion of a circuit
court of appeals, a “nonacquiescence” in-
dicates that the Service will not follow
the holding on a nationwide basis. How-
ever, the Service will recognize the
precedential impact of the opinion on
cases arising within the venue of the de-
ciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the
year. A semiannual consolidation also ap-
pears in the first Bulletin for the follow-
ing January and in the Cumulative Bul-
letin for the last half of the year.
The Commissioner does NOT ACQUI-
ESCE in the following decision:
John D. Shea v. Commissioner,
1
112 T.C. 183 (1999)
Actions Relating to Decisions of the Tax Court
1
Nonacquiescence relating to whether the burden of proof will be placed on the Commissioner for any issue where the statutory notice of deficiency fails to meet
the standards set forth in I.R.C. section 7522.

October 30, 20004302000–44 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 527.—Political
Organizations
26 CFR 1.527–2: Definitions.
(Also §§ 6012, 6033, 6104, and 6652.)
Reporting requirements for section 527
organizations.This ruling provides ques-
tions and answers regarding the notice
and reporting requirements for section
527.
Rev. Rul. 2000–49
ISSUES
On July 1, 2000, Pub. L. 106–230 was
enacted, amending § 527 of the Code.
The new law imposes three reporting and
disclosure requirements on political orga-
nizations described in § 527: (1) an initial
notice of status, (2) periodic reports of
contributions and expenditures, and
(3) annual returns. This revenue ruling
provides questions and answers relating
to the reporting and disclosure require-
ments for political organizations de-
scribed in § 527.
QUESTIONS AND ANSWERS
I. Notice of Status
1. Q. What is the notice of status require-
ment for an organization described in
§ 527?
A. Under § 527(i)(1)(A), a political or-
ganization is required to give notice both
electronically and in writing to the Ser-
vice that it is a political organization de-
scribed in § 527.
2.Q. What is the required notice form?
A. The required notice form is
Form 8871, Political Organization Notice
of Section 527 Status.
3. Q. Are all political organizations re-
quired to file the Form 8871 notice?
A. No. Under § 527(i)(5) and
§ 527(i)(6), three types of organizations
are not required to file the Form 8871 no-
tice:
(a) Persons required to report under
the Federal Election Campaign Act of
1971 (FECA) as a political committee
(see 2 U.S.C. § 431(4));
(b) Organizations that reasonably
anticipate that their annual gross receipts
will always be less than $25,000; and
(c) Organizations described in
§ 501(c) that are subject to § 527(f)(1) be-
cause they have made an “exempt func-
tion” expenditure.
All other political organizations, in-
cluding state and local candidate commit-
tees, are required to file the notice.
4. Q. Is a political organization required
to file Form 8871 if it does not know
whether it will have annual gross re-
ceipts of $25,000 or more for any tax-
able year?
A. A newly established political orga-
nization is not required to file Form 8871
if it reasonably anticipates that its annual
gross receipts will be less than $25,000
for its first six taxable years. However, if
an organization, in fact, does have annual
gross receipts of $25,000 or more for any
taxable year, it is required to file
Form 8871 within 30 days of receiving
$25,000.
5.Q. Is the separate segregated fund es-
tablished under § 527(f)(3) by a
§ 501(c) organization required to file
Form 8871?
A. A § 501(c) organization that is not
prohibited from participating in political
campaign activity has the option of con-
ducting the activity itself or setting up a
separate segregated fund. If the § 501(c)
organization conducts the activity itself, it
is subject to tax under § 527(f)(1) on the
lesser of its investment income or the
amount of its political expenditures, but it
is not required to file Form 8871 pursuant
to § 527(i)(5)(A). If the § 501(c) organi-
zation establishes a separate segregated
fund, the fund is treated as a separate po-
litical organization under § 527(f)(3) and
does not qualify for the exception under
§ 527(i)(5)(A). Therefore, unless it meets
one of the other exceptions, the separate
segregated fund is required to file
Form 8871.
6. Q. Is an organization that finances
both federal and non-federal election
activity required to file the Form 8871
notice?
A. As a general rule, any political or-
ganization (whether or not separately in-
corporated) that is organized and operated
primarily for an exempt function under
§ 527(e)(2) (see Q&A-17) must file
Form 8871 unless it meets one of the ex-
ceptions discussed above (see Q&A-3),
one of which is being required to report
under FECA as a political committee. An
organization that finances election activ-
ity (within the meaning of FECA) for
both federal and non-federal elections
may establish a political committee to re-
ceive contributions and make expendi-
tures for both federal and non-federal
election activity. In that case, the organi-
zation must register as a political commit-
tee and comply with the FECA contribu-
tion limitations and reporting
requirements. 11 C.F.R. 102.5(a)(1)(ii).
Such an organization is, therefore, not re-
quired to file Form 8871.
If, however, the organization sets up
separate accounts to conduct its federal
election activity and its non-federal elec-
tion activity, the federal account is treated
as a separate political committee that is
required to register and report under
FECA. 11 C.F.R. 102.5(a)(1)(i). The
treatment of the federal account as a sepa-
rate committee is consistent with the or-
ganizational requirements for political or-
ganizations under § 527, as discussed
below in Q&A-12. Accordingly, the sep-
arate federal account is not required to file
Form 8871. However, a separate non-
federal account is not required to register
and report under FECA as a political com-
mittee. Therefore, a separate non-federal
account that is described in § 527(e)(1) is
required to file Form 8871.
7. Q. Are political organizations that are
required to report to state or local elec-
tion agencies excepted from the notice
requirement?
A. Section 527(i) does not except po-
litical organizations that file reports with
state or local election agencies from the
notice of status requirement. Therefore,
unless the political organization meets
one of the exceptions discussed above in
Q&A-3, it must file Form 8871 with the
Service.
8. Q. When must the organization file
Form 8871?
A. Form 8871 must be filed within 24
hours after the date on which the organiza-
tion was established. See Notice
2000–36, 2000–33 I.R.B. 173 for informa-
tion about filing requirements for organi-
zations in existence before July 30, 2000.
9. Q. What are the methods of filing
Form 8871?

2000–44 I.R.B.431October 30, 2000
A. Section 527(i)(1)(A) requires that
the organization file Form 8871 both elec-
tronically and in writing. Therefore, the
methods for filing Form 8871 are as fol-
lows:
(a) Electronically via the Internal
Revenue Service Internet Web Site (IRS
Web Site) at www.irs.gov./polorgs, and
(b) In writing by sending a signed
copy of Form 8871 to the Internal Rev-
enue Service Center, Ogden, UT 84201.
An organization can fill in and print out
the form from the IRS Web Site.
10. Q. Must an organization take any ad-
ditional steps before filing
Form 8871?
A. Before filing Form 8871, the polit-
ical organization must have its own em-
ployer identification number (EIN) even
if it has no employees. To obtain an EIN,
an organization must file Form SS-4, Ap-
plication for Employer Identification
Number, with the Service (see Q&A-52).
11.Q. What information must be provid-
ed in the Form 8871 notice?
A. Under § 527(i)(3), an organization
must provide in its Form 8871 notice its
name and address (including any business
address, if different) and electronic mail-
ing address; its purpose; the names and
addresses of its officers, highly compen-
sated employees, contact person, custo-
dian of records, and members of its Board
of Directors; and the name and address of,
and relationship to, any related entities
(within the meaning of § 168(h)(4)).
12. Q. Does § 527(i) change the organi-
zational requirements for § 527 orga-
nizations?
A. No. Section 527 does not require
an organization to have formal organiza-
tional documents, such as articles of in-
corporation. Under § 1.527–2(a)(2) of the
Income Tax Regulations, a political orga-
nization meets the organizational test if it
is organized for the primary purpose of
carrying on exempt function activities as
defined in § 527. The regulation specifi-
cally states that the organization need not
be formally chartered or established as a
corporation, trust, or association. For ex-
ample, a separate bank account can qual-
ify as a political organization. See Rev.
Rul. 79–11, 1979–1 C.B. 207.
The requirement that a § 527 organiza-
tion include the names and addresses of
its officers, highly compensated employ-
ees, and members of its Board of Direc-
tors does not change the organizational
test for § 527. Section 527(i) does not re-
quire political organizations to be orga-
nized with Boards of Directors, officers
and highly compensated employees. It
merely requires the organization to pro-
vide their names and addresses if it is so
organized.
13. Q. What is a “related entity” for this
purpose?
A. An entity is a “related entity”
within the meaning of § 168(h)(4), which
provides that an organization is related to
another entity as follows:
(a) The two entities have (i) signifi-
cant common purposes and substantial
common membership or (ii) directly or
indirectly substantial common direction
or control; or
(b) Either entity owns (directly or
through one or more entities) a 50 percent
or greater interest in the capital or profits
of the other. For this purpose, entities
treated as related entities under (a) above
shall be treated as one entity.
14. Q. What are “highly compensated
employees” for this purpose?
A.Highly compensated employees for
this purpose are the five employees (other
than officers and directors) who are rea-
sonably expected to have the highest an-
nual compensation over $50,000. Com-
pensation includes both cash and noncash
amounts, whether paid currently or de-
ferred, for the 12-month period that began
with the date the organization was formed
(if the organization was formed after June
30, 2000). If the organization was already
in existence on June 30, 2000, it must use
the accounting period that includes July 1,
2000.
15. Q. What if an organization described
in § 527(e)(1) does not file the
Form 8871 notice?
A. An organization described in
§ 527(e)(1) must file Form 8871 unless it
is an organization described in § 527(i)(5)
or § 527(i)(6) (see Q&A-3). If the organi-
zation fails to file Form 8871 on a timely
basis, § 527(i)(4) provides that until the
organization satisfies the notice require-
ment, the taxable income of the organiza-
tion includes its exempt function income
(including contributions received, mem-
bership dues, and political fundraising re-
ceipts), minus any deductions directly
connected with the production of that in-
come. For purposes of computing its tax-
able income, the organization may not
deduct its exempt function expenditures
because § 162(e) denies a deduction for
political campaign expenditures.
Under § 527(b), the tax is computed by
multiplying the organization’s taxable in-
come (including its net investment in-
come) by the highest corporate tax rate,
currently 35 percent. The organization
must file a Form 1120-POL to report the
income and pay the tax.
16. Q. When is an organization
described in § 527(e)(1)?
A. An organization is described in
§ 527(e)(1) if it meets both the organiza-
tional and operational tests, that is, it must
be organized and operated primarily for
the purpose of accepting contributions or
making expenditures for an exempt func-
tion under § 527(e)(2). See § 1.527–2(a).
17. Q. What is an “exempt function”
under § 527(e)(2)?
A. “Exempt function” means, under
§ 527(e)(2), influencing or attempting to
influence the selection, nomination, elec-
tion, or appointment of any individual to
any federal, state, or local public office or
office in a political organization, or the
election of Presidential or Vice-Presiden-
tial electors, whether or not such individ-
ual or electors are selected, nominated,
elected, or appointed.
18. Q. Are transfers to political organi-
zations that fail to file Form 8871
subject to the gift tax?
A. Section 2501(a)(5) provides that
the gift tax does not apply to transfers of
money or other property to political orga-
nizations within the meaning of
§ 527(e)(1). Therefore, transfers to an or-
ganization described in § 527(e)(1) (see
Q&A-16) are not subject to the gift tax,
regardless of whether the organization has
filed Form 8871.
19. Q. Is the Form 8871 notice publicly
available?
A. Yes. Under § 6104(a), Form 8871
(including any supporting papers), and
any letter or other document the Service
issues with regard to Form 8871, will be
open to public inspection. Copies of
Form 8871 that have been filed are cur-
rently available at the IRS Web Site at
www.irs.gov/polorgs and are considered
widely available under § 301.6104(d)–3
of the Procedure and Administration Reg-
ulations, as long as the organization pro-
vides the IRS Web Site address to the per-

October 30, 20004322000–44 I.R.B.
son making the request. In addition, the
organization is required to make a copy of
these materials available for public in-
spection during regular business hours at
the organization’s principal office (and at
each of its regional or district offices hav-
ing at least three paid employees) in the
same manner as applications for exemp-
tion of § 501(c) organizations are made
available. § 6104(d).
20. Q. What is the penalty on the organiza-
tion for failure to comply with the pub-
lic inspection requirement?
A. Under § 6652(c)(1)(D), a penalty of
$20 per day may be imposed on any person
with a duty to comply with the public in-
spection requirement for each day a failure
to comply continues.
II. Periodic Reporting Requirements
21. Q. What are the periodic reporting re-
quirements imposed upon political or-
ganizations?
A. Under § 527(j), a political organiza-
tion is required to periodically report cer-
tain contributions it receives and expendi-
tures it makes.
22. Q. What is the required periodic re-
porting form?
A. The required periodic reporting
form is Form 8872, Political Organization
Report of Contributions and Expenditures.
23. Q. When are political organizations re-
quired to file periodic reports on
Form 8872?
A. Under § 527(j)(2), political organi-
zations that accept contributions or make
expenditures for an exempt function under
§ 527 (see Q&A-17) during a calendar
year are required to file periodic reports on
Form 8872, beginning with the first month
or quarter in which they accept contribu-
tions or make expenditures. In addition,
organizations that make contributions or
expenditures with respect to an election for
federal office (as defined in § 527(j)(6))
may be required to file pre-election reports
for that election.
24. Q. Are all political organizations re-
quired to file periodic reports on
Form 8872?
A. No, § 527(j)(5) provides that some
organizations are not subject to this re-
quirement. The organizations excepted
from the filing requirements are as fol-
lows:
a) Organizations excepted from the
requirement to file a Form 8871 (see
Q&A-3);
b) Political committees of a state or
local candidate, including political com-
mittees of state or local officeholders; and
c) State and local committees of po-
litical parties.
All other political organizations, includ-
ing state and local political action commit-
tees, are subject to the reporting require-
ments of § 527(j), even if they file reports
with state or local election agencies.
25. Q. Must a state or local candidate or
officeholder organize a formal commit-
tee to be excepted from the Form 8872
filing requirements?
A. No. As discussed in Q&A-12,
§ 527 does not require organizations to
have formal organizational documents.
Therefore, a candidate or officeholder does
not need to organize a formal committee to
qualify for the exception under § 527(j)(5)
for committees of state or local candidates.
26. Q. Are political organizations that en-
gage in exempt function activities (as
defined in § 527(e)(2)) solely with re-
spect to elections for state or local of-
fices excepted from the Form 8872 fil-
ing requirements?
A. No. Although the timing of the re-
ports is based upon federal elections (see
Q&A-34), the requirement to file the re-
ports is based on accepting contributions
or making expenditures for an exempt
function under § 527(e)(2) (see Q&A-17).
Therefore, unless a political organization
meets one of the exceptions discussed
above in Q&A-24, it must file Form 8872
with the Service.
27. Q. Is an organization that reasonably
anticipated it would not have annual
gross receipts of $25,000 or more re-
quired to file Form 8872 if it, in fact,
receives $25,000 or more in any tax-
able year?
A. An organization that receives
$25,000 in any taxable year no longer
qualifies for the exception in
§ 527(j)(5)(C) and, therefore, must begin
filing Form 8872 unless it meets one of the
other exceptions discussed in Q&A-24.
The organization must file, within 30 days
of receiving $25,000, any Form 8872 that
would otherwise have been due during the
calendar year prior to that date.
28. Q. How often must the Form 8872 be
filed?
A. A political organization subject to
the periodic reporting requirement may
choose to file Form 8872 on a monthly
basis or on a quarterly/semi-annual basis,
but it must file on the same basis for the
entire calendar year.
29. Q. What is an election year and non-
election year for purposes of determin-
ing the due dates for filing Form 8872?
A. An election year is any year in
which a regularly scheduled general elec-
tion for federal office is held, i.e., any
even-numbered year. A non-election year
is therefore any odd-numbered year.
30. Q. If an organization chooses to file on
a monthly basis, when is Form 8872
due in a non-election year?
A. Pursuant to § 527(j)(2)(B), a politi-
cal organization that chooses to file
monthly must file Form 8872 reports not
later than the 20th day after the end of the
month, which must be complete as of the
last day of the month. December activity
is included in the year-end report which
is due not later than January 31 of the fol-
lowing year.
31. Q. If an organization chooses to file
on a monthly basis, when is
Form 8872 due during an election
year?
A. Pursuant to § 527(j)(2)(B), in any
election year (i.e., even-numbered years),
monthly reports are due not later than the
20th day after the end of the month (see
Q&A-30), except the organization shall
not file the reports regularly due in No-
vember and December (i.e., the monthly
reports for activity in October and No-
vember). Instead, the organization must
file a Form 8872 report not later than 12
days before the general election (or 15
days before the general election if posted
by registered or certified mail) that con-
tains information through the 20th day
before the general election. The organi-
zation must also file a report no more
than 30 days after the general election
which shall contain information through
the 20th day after the election. The De-
cember activity is included in the year-
end report due not later than January 31
of the following year.
32. Q. If an organization chooses not to
file on a monthly basis, when is
Form 8872 due in a non-election
year?
A. Pursuant to § 527(j)(2)(A), a polit-
ical organization that chooses not to file
monthly must file semi-annual reports in
non-election years (i.e., odd-numbered
years). These reports are due not later

2000–44 I.R.B.433October 30, 2000
than July 31 for the first half of the year
and, for the second half of the year, not
later than January 31 of the following
year.
33. Q. If an organization chooses not to
file on a monthly basis, when is
Form 8872 due during an election
year?
A. Pursuant to § 527(j)(2)(A), in an
election year (even-numbered years), an
organization that chooses not to file
monthly reports must file quarterly re-
ports not later than the 15th day after the
last day of the quarter, except that the re-
turn for the final quarter shall be due not
later than January 31 of the following
year. The organization must also file a
post-general election report not later than
30 days after the general election that
contains information through the 20th day
after the election. In addition, the organi-
zation must file a pre-election report for
any election for federal office with re-
spect to which the organization makes a
contribution or expenditure. These re-
ports shall be filed not later than 12 days
before the election (15 days before if
posted by registered or certified mail) and
must contain information through the
20th day before the election.
34. Q. What is an election for purposes of
the reporting deadlines under
§ 527(j)?
A. For purposes of determining what
is an election year and what elections trig-
ger the pre-election and post-general elec-
tion reports, § 527(j)(6) provides that an
“election” is a general, special, primary,
or runoff election for a federal office; a
convention or caucus of a political party
with authority to nominate a candidate for
federal office; a primary election to select
delegates to a national nominating con-
vention of a political party; or a primary
election to express a preference for the
nomination of individuals for election to
the office of President. Thus, an election
for purpose of these reporting deadlines
does not include a purely state or local
election. When an election involves both
candidates for federal office and candi-
dates for state or local offices, it is an
election for purposes of the reporting
deadlines, but only those organizations
that make contributions or expenditures
with respect to the candidates for federal
office are required to file the pre-election
reports for those elections under
§ 527(j)(2)(A)(i)(II). However, all reports
filed under § 527(j) must contain informa-
tion about the contributions and expendi-
tures within the reporting period, regard-
less of whether they were accepted or
made with respect to candidates for fed-
eral, state or local office.
35. Q. What is a general election?
A. A general election is either one of
the following:
a) an election for federal office held
in even numbered years on the Tuesday
following the first Monday in November
or
b) an election held to fill a vacancy
in a federal office (i.e., a special election)
that is intended to result in the final selec-
tion of a single individual to the office at
stake. See 11 C.F.R. 100.2(b).
36. Q. How will “election” under
§ 527(j)(6) be interpreted?
A. The definition of “election” under
§ 527(j)(6) is virtually identical to the def-
inition of “election” under FECA (2
U.S.C. § 431(1)). Organizations may rely
on FEC interpretations of the FECA defi-
nition in the absence of further guidance
from the Service. The FEC publishes in-
formation concerning the filing require-
ments under FECA and the dates for filing
those reports, including information on
the dates of elections, on its Web Site at
http://www.fec.gov/pages/report.htm.
37. Q. What must a Form 8872 report
contain?
A. The report must include the name,
address, and (if an individual) the occupa-
tion and employer, of any person to whom
expenditures are made that aggregate
$500 or more in a calendar year and the
amount of such expenditure. The report
must also include the name, address, and
(if an individual) the occupation and em-
ployer, of any person that contributes in
the aggregate $200 or more in a calendar
year and the amount of such contribution.
However, an organization is not required
to report independent expenditures, as de-
fined in § 301 of FECA. Only expendi-
tures made or contributions received after
July 1, 2000, that are not made or re-
ceived pursuant to binding contracts en-
tered into before July 2, 2000, must be re-
ported.
38. Q. What is an independent expendi-
ture under § 301 of FECA?
A. An independent expenditure is an
expenditure by a person expressly advo-
cating the election or defeat of a clearly
identified candidate for federal office
which is made without cooperation or
consultation with any candidate for fed-
eral office, or any authorized committee
or agent of such candidate, and which is
not made in concert with, or at the request
or suggestion of, any candidate for federal
office, or authorized committee or agent
of such candidate. See 2 U.S.C.
§ 431(17).
39. Q. Where is the Form 8872 filed?
A. The report is filed by sending a
signed copy of Form 8872 to the Internal
Revenue Service Center, Ogden, UT
84201. The form must be signed by an
official authorized by the organization to
sign the report.
40. Q. What if a political organization
that has filed Form 8871 does not file
the required Form 8872?
A. Under § 527(j)(1), a political orga-
nization that does not file the required
Form 8872 or which fails to include the
information required on the Form 8872 is
subject to a penalty equal to the amount of
contributions and expenditures that are
not disclosed multiplied by the highest
corporate tax rate, currently 35 percent.
41. Q. Is the Form 8872 filed by political
organizations publicly available?
A. Yes. Under § 6104(b) and
§ 6104(d)(6), Form 8872 will be made
available for public inspection by the Ser-
vice. Copies of Form 8872 that have been
filed are currently available at the IRS
Web Site at www.irs.gov/polorgs and are
considered widely available under
§ 301.6104(d)–3, as long as the organiza-
tion provides the IRS Web Site address to
the person making the request. In addi-
tion, under § 6104(d)(1)(A), the organiza-
tion is required to make a copy of these
reports available for public inspection
during regular business hours at the orga-
nization’s principal office (and at each of
its regional or district offices having at
least three paid employees) in the same
manner as applications for exemption of
§ 501(c) organizations are made avail-
able. Pursuant to § 6104(b) and
§ 6104(d)(3)(A), contributor information
must be disclosed to the public.
42. Q. What if the political organization
does not make its Form 8872 publicly
available?
A. Under § 6652(c)(1)(C), a penalty
of $20 per day may be imposed on any

person with a duty to comply with the
public inspection requirement for each
day a failure to comply continues. The
maximum penalty that may be incurred
for any failure to disclose any one report
is $10,000.
III. Annual Return Requirements
43. Q. Which political organizations are
required to file annual income tax re-
turns?
A. A political organization that has
taxable income in excess of the $100 spe-
cific deduction allowed under § 527 is re-
quired to file an annual income tax return
on Form 1120-POL, U.S. Income Tax Re-
turn for Certain Political Organizations.
In addition, for taxable years beginning
after June 30, 2000, a political organiza-
tion that has $25,000 or more in gross re-
ceipts for the taxable year is also required
to file Form 1120-POL, without regard to
whether it has taxable income.
§ 6012(a)(6).
44. Q. When is the Form 1120-POL due?
A. The Form 1120-POL is due on or
before the 15th day of the third month
after the close of the organization’s tax-
able year. § 6072(b). Thus, for a calen-
dar-year taxpayer, Form 1120-POL is due
on March 15 of the following year.
45. Q. Which political organizations are
required to file an annual information
return?
A. A political organization that is re-
quired under § 6012(a)(6) to file an in-
come tax return is also required to file
Form 990, Return of Organization Ex-
empt from Income Tax, for taxable years
beginning after June 30, 2000. § 6033(g).
Organizations with gross receipts less
than $100,000 and assets less than
$250,000 may file Form 990-EZ, Short
Form Return of Organization Exempt
from Income Tax. Organizations with
gross receipts of less than $25,000 are not
required to file Form 990 or Form 990-
EZ.
46. Q. When is the Form 990 due?
A. The Form 990 (or Form 990-EZ) is
due on or before the 15th day of the fifth
month after the close of the organization’s
taxable year. Thus, for a calendar-year
taxpayer, Form 990 is due on May 15 of
the following year.
47. Q. What if the political organization
fails to file Form 1120-POL or
Form 990?
A. A political organization that fails
to file a required Form 1120-POL or
Form 900 or fails to include required in-
formation on those returns is subject to a
penalty of $20 per day for every day
such failure continues. The maximum
penalty imposed regarding any one re-
turn is the lesser of $10,000 or 5 percent
of the gross receipts of the organization
for the year. In the case of an organiza-
tion having gross receipts exceeding
$1,000,000 for any year, the penalty is
increased to $100 per day with a maxi-
mum penalty of $50,000.
§ 6652(c)(1)(A).
48. Q. Are the Forms 1120-POL and
Forms 990 filed by political organi-
zations publicly available?
A. Yes, the Forms 1120-POL and the
Forms 990 filed for taxable years begin-
ning after June 30, 2000 will be made
available for public inspection by the
Service. § 6104(b). In addition, each
political organization must make a copy
of its returns available for public inspec-
tion during regular business hours at its
principal office (and any regional or dis-
trict offices having at least three paid
employees) in the same manner as an-
nual information returns of § 501(c) or-
ganizations are made available. It must
also provide a copy of the returns to any
person requesting a copy in person or in
writing without charge other than a rea-
sonable charge for reproduction and
postage in the same manner that § 501(c)
organizations provide copies of their an-
nual returns. § 6104(d)(1). If an organi-
zation’s returns are widely available
under § 301.6104(d)–3 (such as on the
Internet), the organization need not re-
spond to requests for copies so long as it
provides the web site address where the
returns are available to the person mak-
ing the request. Returns only need to be
made available for three years after fil-
ing. § 6104(d)(2). Contributor informa-
tion must be disclosed to the public.
§ 6104(d)(3)(A).
49. Q. What if the political organization
does not make its Forms 1120-POL
and Forms 990 publicly available?
A. A penalty of $20 per day may be
imposed on any person with a duty to
comply with the public inspection re-
quirement for each day a failure to com-
ply continues. The maximum penalty
that may be incurred for any failure to
disclose any one return is $10,000.
§ 6652(c) (1)(C).
IV. General
50. Q. What if the filing date for any of
these forms falls on Saturday, Sun-
day or a holiday?
A. If any due date falls on a Satur-
day, Sunday or legal holiday, the organi-
zation may file the report on the next
business day.
51. Q. Where can organizations get
copies of the various forms?
A. The various forms (Form SS-4,
Form 8871, Form 8872, Form 1120-
POL, and Form 990) and their instruc-
tions are available by calling 1-800-
TAX-FORM (1-800-829-3676) or via
the Internet at the IRS Web Site at
www.irs.gov in the “Forms and Publica-
tions” section.
52. Q. What if an organization has ques-
tions regarding the notice and report-
ing requirements or has any problem
obtaining an EIN?
A. For more information or if an or-
ganization has any problem obtaining an
EIN, organizations may call the TE/GE
Customer Service Center at 1-877-829-
5500.
DRAFTING INFORMATION
The principal author of this announce-
ment is Judith E. Kindell of Exempt Or-
ganizations. For further information re-
garding this announcement contact
Judith E. Kindell at (202) 622-6494 (not
a toll-free call).
Section 6012.—Persons
Required to Make Returns of
Income
Questions and answers relating to the reporting
and disclosure requirements for political organiza-
tions described in § 527. See Rev. Rul. 2000–49,
page 430.
Section 6033.—Returns by
Exempt Organizations
Questions and answers relating to the reporting
and disclosure requirements for political organiza-
tions described in § 527. See Rev. Rul. 2000–49,
page 430.
October 30, 20004342000–44 I.R.B.

2000–44 I.R.B.435October 30, 2000
Section 6104.—Publicity of
Information Required From
Certain Exempt Organizations
and Certain Trusts
Questions and answers relating to the reporting
and disclosure requirements for political organiza-
tions described in § 527. See Rev. Rul. 2000–49,
page 430.
Section 6652.—Failure to File
Certain Information Returns,
Registration Statements, Etc.
Questions and answers relating to the reporting
and disclosure requirements for political organiza-
tions described in § 527. See Rev. Rul. 2000–49,
page 430.
Section 6695.— Other
Assessable Penalties With
Respect to the Preparation of
Income Tax Returns for Other
Persons
26 CFR 1.6695–2: Preparer due diligence
requirements for determining earned income credit
eligibility.
T.D. 8905
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Preparer Due Diligence
Requirements for Determining
Earned Income Credit Eligibility
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations relating to the due diligence re-
quirements under section 6695(g) of the In-
ternal Revenue Code for paid preparers of
Federal income tax returns or claims for re-
fund involving the earned income credit
(EIC). These regulations reflect changes to
the law made by the Taxpayer Relief Act of
1997. The regulations provide guidance to
paid preparers who prepare Federal income
tax returns or claims for refund claiming
the earned income credit.
DATES: Effective Date. These regula-
tions are effective October 17, 2000.
Applicability Date. For dates of ap-
plicability, see §1.6695–2(d) of these reg-
ulations.
FOR FURTHER INFORMATION CON-
TACT: Andrea Tucker, (202) 622-4940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these
final regulations has been reviewed and
approved by the Office of Management
and Budget in accordance with the Pa-
perwork Reduction Act of 1995 (44
U.S.C. 3507) under control number
1545-1570. This information is re-
quired by the IRS to determine preparer
due diligence compliance for purposes
of the penalty imposed under section
6695(g). Responses to this collection of
information are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information
unless the collection of information dis-
plays a valid control number assigned
by the Office of Management and Bud-
get.
The estimated annual burden per
recordkeeper varies depending on indi-
vidual circumstances. The estimated
total annual recordkeeping burden:
507,136 hours with the estimated aver-
age annual burden hours per record-
keeper: 5 hours 4 minutes (40 minutes
per return or claim for refund, 7.6 re-
turns per preparer). The estimated num-
ber of recordkeepers: 100,000.
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,
OP:FS:FP, Washington, DC 20224, and
to the Office of Management and
Budget, Attn: Desk Officer for the De-
partment of the Treasury, Office of In-
formation and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this col-
lection of information must be retained
as long as their contents may become
material in the administration of any in-
ternal revenue law. Generally, tax re-
turns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Background
Section 6695(g) was added by section
1085(a)(2) of the Taxpayer Relief Act of
1997, Public Law 105–34 (11 Stat. 788,
955 (1997)) (the Act), effective for tax-
able years beginning after December 31,
1996. Section 6695(g) imposes a $100
penalty for each failure by an income tax
return preparer to meet the due diligence
requirements set forth in regulations pre-
scribed by the Secretary.
On December 22, 1997, the IRS pub-
lished Notice 97–65 (1997–2 C.B. 326), in
which the IRS set forth the preparer due
diligence requirements for 1997 returns
and claims for refund involving the EIC.
To avoid the imposition of the penalty
under section 6695(g) for 1997 returns and
claims for refund, Notice 97–65 required
preparers to meet four requirements: (1)
complete the Earned Income Credit Eligi-
bility Checklist attached to Notice 97–65
(Eligibility Checklist), or otherwise record
the information necessary to complete the
Eligibility Checklist; (2) complete the
Earned Income Credit Worksheet (Compu-
tation Worksheet), as contained in the 1997
Form 1040 instructions, or otherwise
record the computation and information
necessary to complete the Computation
Worksheet; (3) not know or have reason to
know that any information used by the pre-
parer in determining eligibility for, and the
amount of, the EIC is incorrect; and (4) re-
tain for three years the Eligibility Checklist
and Computation Worksheet (or alternative
records), and a record of how and when the
information used to determine eligibility
for, and the amount of, the EIC was ob-
tained by the preparer. This information
may be retained as a paper record, in mag-
netic media format, or in an electronic stor-
age media system, consistent with applica-
ble IRS revenue procedures.
On December 21, 1998, temporary reg-
ulations (TD 8798, 1999–1 C.B. 804)
under section 6695(g) were published in
the Federal Register(63 F.R. 70339). A
notice of proposed rulemaking (REG–
120168–97, 1999–1 C.B. 809) cross-refer-
encing the temporary regulations was pub-
lished in the Federal Register(63 F.R.
70357) on that same date. The text of the
temporary regulations served as the text of
the proposed regulations. The require-
ments set forth in the temporary regula-
tions were substantially similar to those in
Notice 97–65.

October 30, 20004362000–44 I.R.B.
The notice of proposed rulemaking so-
licited comments from the public. One
comment was received, but no public
hearing was requested or held. After con-
sideration of the comment received, the
proposed regulations under section
6695(g) are adopted by this Treasury de-
cision, and the corresponding temporary
regulations are removed.
Summary of Comments
The commentator expressed concern
that requiring the completion of an eligi-
bility checklist and a computation work-
sheet impose additional recordkeeping
burdens on tax return preparers. The
commentator did not suggest alternative
due diligence requirements.
The additional recordkeeping required
by the regulations is necessary to imple-
ment congressional intent with respect to
section 6695(g). The legislative history
accompanying the Act explains that Con-
gress “believes that more thorough efforts
by return preparers are important to im-
proving EIC compliance.” H.R. Rep. No.
148, 105
th
Cong., 1
st
Sess. 512 (1997) and
S. Rep. No. 29, 105
th
Cong., 1
st
Sess. 125
(1997). The additional information gath-
ering and recordkeeping required by these
regulations are intended to ensure that
preparers are thorough when determining
whether a taxpayer qualifies to claim the
EIC credit. Further, the regulations allow
preparers the flexibility to use either the
prescribed forms or alternative records
containing the same information as the
prescribed forms to meet the due dili-
gence requirements.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Further, it is hereby certified, pur-
suant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act, that the col-
lection of information in these regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. This certification is based upon the
fact that the amount of time necessary to
record and retain the required information
will be nominal for those income tax re-
turn preparers that choose to use the Al-
ternative Eligibility Record and Alterna-
tive Computation Record. 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, the notice of proposed rulemaking
that preceded these regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Andrea Tucker, Office of Associ-
ate Chief Counsel, Procedure and Admin-
istration (Administrative Provisions and
Judicial Practice Division). However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for “Section 1.6695–2T” and adding an
entry in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6695–2 also issued under 26
U.S.C. 6695(g). * * *
Par. 2. Section 1.6695–2 is added to
read as follows:
§1.6695–2 Preparer due diligence
requirements for determining earned
income credit eligibility.
(a) Penalty for failure to meet due dili-
gence requirements. A person who is an
income tax return preparer (preparer) of
an income tax return or claim for refund
under subtitle A of the Internal Revenue
Code with respect to determining the eli-
gibility for, or the amount of, the earned
income credit (EIC) under section 32 and
who fails to satisfy the due diligence re-
quirements of paragraph (b) of this sec-
tion will be subject to a penalty of $100
for each such failure. However, no
penalty will be imposed under section
6695(g) on a person who is an income tax
return preparer solely by reason of—
(1) Section 301.7701–15(a)(2) and (b)
of this chapter, on account of having
given advice on specific issues of law; or
(2) Section 301.7701–15(b)(3) of this
chapter, on account of having prepared
the return solely because of having pre-
pared another return that affects amounts
reported on the return.
(b) Due diligence requirements. A pre-
parer must satisfy the following due dili-
gence requirements:
(1) Completion of eligibility checklist.
(i) The preparer must either—
(A) Complete Form 8867, “Paid Pre-
parer’s Earned Income Credit Checklist,”
or such other form and such other infor-
mation as may be prescribed by the Inter-
nal Revenue Service (IRS)(Eligibility
Checklist); or
(B) Otherwise record in the preparer’s
paper or electronic files the information
necessary to complete the Eligibility
Checklist (Alternative Eligibility
Record). The Alternative Eligibility
Record may consist of one or more docu-
ments containing the required informa-
tion.
(ii) The preparer’s completion of the
Eligibility Checklist or Alternative Eligi-
bility Record must be based on informa-
tion provided by the taxpayer to the pre-
parer or otherwise reasonably obtained by
the preparer.
(2) Computation of credit. (i) The pre-
parer must either—
(A) Complete the Earned Income
Credit Worksheet in the Form 1040 in-
structions or such other form and such
other information as may be prescribed by
the IRS (Computation Worksheet); or
(B) Otherwise record in the preparer’s
paper or electronic files the preparer’s
EIC computation, including the method
and information used to make the compu-
tation (Alternative Computation Record).
The Alternative Computation Record may
consist of one or more documents con-
taining the required information.
(ii) The preparer’s completion of the
Computation Worksheet or Alternative
Computation Record must be based on in-
formation provided by the taxpayer to the
preparer or otherwise reasonably obtained
by the preparer.
(3) Knowledge. The preparer must not
know, or have reason to know, that any in-

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved October 6, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Octo-
ber 16, 2000, 8:45 a.m., and published in the issue of
the Federal Register for October 17, 2000, 65 F.R.
61268)
2000–44 I.R.B.437October 30, 2000
formation used by the preparer in deter-
mining the taxpayer’s eligibility for, or
the amount of, the EIC is incorrect. The
preparer may not ignore the implications
of information furnished to, or known by,
the preparer, and must make reasonable
inquiries if the information furnished to,
or known by, the preparer appears to be
incorrect, inconsistent, or incomplete.
(4) Retention of records. (i) The pre-
parer must retain—
(A) A copy of the completed Eligibility
Checklist or Alternative Eligibility
Record;
(B) A copy of the Computation Work-
sheet or Alternative Computation
Record; and
(C) A record of how and when the in-
formation used to complete the Eligibil-
ity Checklist or Alternative Eligibility
Record and the Computation Worksheet
or Alternative Computation Record was
obtained by the preparer, including the
identity of any person furnishing the in-
formation.
(ii) The items in paragraph (b)(4) of
this section must be retained for three
years after the June 30th following the
date the return or claim for refund was
presented to the taxpayer for signature,
and may be retained on paper or electron-
ically in the manner prescribed in applic-
able regulations, revenue rulings, rev-
enue procedures, or other appropriate
guidance (see §601.601(d)(2) of this
chapter).
(c) Exception to penalty. The section
6695(g) penalty will not be applied with
respect to a particular income tax return
or claim for refund if the preparer can
demonstrate to the satisfaction of the IRS
that, considering all the facts and circum-
stances, the preparer’s normal office pro-
cedures are reasonably designed and rou-
tinely followed to ensure compliance
with the due diligence requirements of
paragraph (b) of this section, and the fail-
ure to meet the due diligence require-
ments of paragraph (b) of this section
with respect to the particular return or
claim for refund was isolated and inad-
vertent.
(d) Effective date. This section applies
to income tax returns and claims for re-
fund due on or after October 17, 2000.
§1.6695–2T [Removed]
Par. 3. Section 1.6695–2T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is
amended by removing the entry for
“1.6695–2T” and adding the following
entry in numerical order to the table to
read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section whereCurrent OMB
identified and described control No.
* * * * *
1.6695–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545-1570
* * * * *

October 30, 20004382000–44 I.R.B.
26 CFR 601.201: Rulings and determination letters.
Rev. Proc. 2000–46
SECTION 1. PURPOSE
This revenue procedure amplifies Rev.
Proc. 2000–3, 2000–1 I.R.B. 103, which
sets forth areas of the Internal Revenue
Code under the jurisdiction of the Associ-
ate Chief Counsel in which the Internal
Revenue Service will not issue advance
rulings or determination letters.
SECTION 2. BACKGROUND
Section 5 of Rev. Proc. 2000–3 sets
forth those areas under extensive study in
which rulings or determination letters will
not be issued until the Service resolves
the issue through publication of a revenue
ruling, revenue procedure, regulations, or
otherwise.
Section 301.7701–1(a)(1) provides that
whether an organization is an entity sepa-
rate from its owners for federal tax pur-
poses is a matter of federal tax law and
does not depend on whether the entity is
recognized as an entity under local law.
Section 301.7701–1(a)(2) provides that
a joint undertaking or other contractual
arrangement may create a separate entity
for federal tax purposes if the participants
carry on a trade, business, financial opera-
tion, or venture and divide the profits
therefrom. If such an entity is a business
entity (i.e., is not a trust) with two or more
members, the entity is classified for fed-
eral tax purposes either as a partnership or
a corporation.
Section 1031(a)(1) provides that no
gain or loss shall be recognized on the ex-
change of property held for productive
use in a trade or business or for invest-
ment if such property is exchanged solely
for property of like kind which is to be
held either for productive use in a trade or
business or for investment. Sections
1031(a)(2)(B) and 1031(a)(2)(D) provide
exceptions from the application of section
1031(a)(1) for stock and interests in a
partnership, respectively.
The Service recently has become
aware, in part through several requests for
advance rulings, that taxpayers are taking
the position that certain arrangements
where taxpayers acquire undivided frac-
tional interests in real property do not
constitute separate entities for federal tax
purposes and therefore the fractional in-
terests may be the subject of tax-free ex-
changes under section 1031(a)(1). The
Service intends to study further the facts
and circumstances relevant to the deter-
mination of whether such arrangements
are separate entities for federal tax pur-
poses.
SECTION 3. PROCEDURE
Rev. Proc. 2000–3 is amplified by
adding the following to section 5.10.
Section 1031. - Exceptions. - Whether
an undivided fractional interest in real
property is an interest in an entity that is
not eligible for tax-free exchange under
section 1031(a)(1).
Section 7701. - Definitions. - Whether
arrangements where taxpayers acquire
undivided fractional interests in real prop-
erty constitute separate entities for federal
tax purposes.
SECTION 4. EFFECTIVE DATE
This revenue procedure applies to all
ruling requests, including any pending in
the National Office and any submitted
after the date of this publication.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2000–3 is amplified.
SECTION 6. REQUEST FOR
COMMENTS
The Service requests comments con-
cerning this revenue procedure. In partic-
ular, comments are requested with respect
to the relevance and impact of the follow-
ing factors to the determination of
whether arrangements where taxpayers
acquire undivided fractional interests in
real property constitute separate entities
for federal tax purposes: (1) the terms of
any leasing or management agreements
entered into with respect to the property
and the relationships between the parties
to such agreements and the promoter or
organizer of the arrangement; (2) the
terms of any agreements between the pro-
moter or organizer of the arrangement and
the holders of the fractional interests or
among the holders of the fractional inter-
ests, including any contractual restrictions
to which the fractional interests are sub-
ject, such as waivers of the right to parti-
tion, rights of first refusal, and options to
put and/or call the fractional interests; and
(3) the overall economics of the arrange-
ments, including the sharing of profits
and losses from operating the property as
well as of appreciation and depreciation
in the value of the property. An original
and eight copies of written comments
should be sent to:
Internal Revenue Service
Attn: CC:MSP:R (Rev. Proc.
2000–46)
Room 5228 (PSI:Br1)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand delivered between the hours of 8
a.m. and 5 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:MSP:R (Rev. Proc.
2000–46)
Room 5228 (PSI:Br1)
1111 Constitution Avenue, NW
Washington, DC
Alternatively, taxpayers may submit
comments electronically at: Joel.S.Rut-
stein@M1.IRSCounsel.treas.gov.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jeanne Sullivan of the Office
of the Associate Chief Counsel,
Passthroughs & Special Industries. How-
ever, other personnel from the IRS and
Treasury participated in its development.
For further information, contact Jeanne
Sullivan at (202) 622-3050 (not a toll-free
number).
Part III. Administrative, Procedural, and Miscellanous

2000–44 I.R.B.439October 30, 2000
Withdrawal of Previous
Proposed Rulemaking, Notice of
Proposed Rulemaking, and
Notice of Public Hearing
Information Reporting
Requirements for Certain
Payments Made on Behalf of
Another Person, Payments to
Joint Payees, and Payments of
Gross Proceeds From Sales
Involving Investment Advisers
REG–246249–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of previous notice
of proposed rulemaking; notice of pro-
posed rulemaking; and notice of public
hearing.
SUMMARY: This document withdraws
a previous notice of proposed rulemaking
(LR–62–84 [1984–2 C.B. 900]) pub-
lished May 29, 1984 (49 F.R. 22343).
This document contains proposed regula-
tions under section 6041 that clarify who
is the payee for information reporting
purposes if a check or other instrument is
made payable to joint payees, provide in-
formation reporting requirements for es-
crow agents and other persons making
payments on behalf of another person,
and clarify that the amount to be reported
paid is the gross amount of the payment.
This document also contains proposed
regulations under section 6045 that re-
move investment advisers from the list of
exempt recipients. In addition, this docu-
ment provides notice of a public hearing
on these proposed regulations.
DATES: Written or electronic comments
must be received by January 17, 2001.
Requests to speak (with outlines of oral
comments) at a public hearing scheduled
for February 7, 2001, at 10 a.m. must be
submitted by January 24, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–246249–96), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to: CC:M&SP:RU
(REG–246249–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent
electronically via the IRS Internet site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in the IRS
Auditorium, Seventh Floor, Internal Rev-
enue Service Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Nancy L. Rose, (202) 622-4910; con-
cerning submission of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, Guy
R. Traynor, (202) 622-7190 (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(d)). Comments on
the collection of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the Depart-
ment of Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503, with copies to the Internal Rev-
enue 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 De-
cember 19, 2000. Comments are specifi-
cally requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper oper-
ation of the functions of the Internal Rev-
enue Service, 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 en-
hanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collection of information in these
proposed regulations is in §§1.6041–1(e)
and 1.6045–1(c)(3). This information is
required to determine if taxpayers have
properly reported amounts received as
income. The collection of information is
mandatory. The likely respondents are
businesses and other for-profit institu-
tions.
The estimate of the reporting burden
in proposed §1.6041–1 is reflected in the
burden of Form 1099-MISC, Miscella-
neous Income, which is currently 14
minutes per form. The estimate of the
reporting burden in proposed §1.6045–1
is reflected in the burden of Form 1099-
B, Proceeds of Broker and Barter Ex-
change Transactions, which is currently
15 minutes per form.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to the col-
lection of information must be retained
as long as their contents may become
material in the administration of any in-
ternal revenue law. Generally tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background and Explanation of
Provisions
1. Proposed Regulations Under Section
6041
Section 6041 provides that all persons
engaged in a trade or business that make
certain payments in the course of that
trade or business to another person of
$600 or more in a taxable year must re-
port the amount of the payments and the
name and address of the recipient.
Section 3406(a) provides that a payor
must withhold tax from reportable pay-
ments under certain circumstances, for
example, if the payee has failed to furnish
Part IV. Items of General Interest

October 30, 20004402000–44 I.R.B.
a valid taxpayer identification number to
the payor in the manner required. “Re-
portable payments” include payments that
are required to be reported under sections
6041 and 6045. Section 3406(b)(3)(A)
and (C). The party that is responsible for
reporting the payments under sections
6041 and 6045 is also responsible for any
backup withholding required under sec-
tion 3406.
These proposed regulations address
certain issues identified by the Commis-
sioner’s Information Reporting Program
Advisory Committee (IRPAC) and take
into account comments and information
provided by IRPAC members represent-
ing the banking, real estate, insurance,
and securities industries.
a. Payments to Joint Payees
The proposed regulations clarify the
definition of fixed and determinable in-
come in §1.6041–1(c) when a payment is
made payable to joint payees. This issue
was discussed in papers presented at
IRPAC meetings in May 1994 and May
1995. The regulations provide that a pay-
ment made jointly to two or more payees
may be fixed and determinable income to
one payee even though the payment is not
fixed and determinable income to another
payee. For example, when a payment in
consideration for services is made
payable to joint payees, one of whom is
the service provider, an information re-
turn must be made showing the service
provider as the payee if the payment is
fixed and determinable income to the ser-
vice provider, even if the payment is not
fixed and determinable income to the
other payee. See, e.g., Situation 2 of Rev.
Rul. 70–608 (1970–2 C.B. 286).
b. Identification of Payor
A payment reportable under section
6041 may be made by a person on behalf
of another person that is the actual source
of the funds. Under certain circumstances
this so-called middleman, and not the per-
son that provided the funds, is the payor
obligated to report the payment under sec-
tion 6041. See, e.g., Rev. Rul. 93–70
(1993–2 C.B. 294).
Consistent with Rev. Rul. 93–70, the
proposed regulations add a new paragraph
(e)(1) to §1.6041–1 that provides that a
person that makes a payment on behalf of
another person and performs a manage-
ment or oversight function in connection
with, or has a significant economic inter-
est in, the payment must report under sec-
tion 6041. A management or oversight
function is an activity that is more than
merely administrative or ministerial. For
example, a person that merely writes
checks at the direction of others in con-
nection with a transaction, sometimes re-
ferred to as a paying agent, is performing
only an administrative or ministerial func-
tion and is not a payor. In contrast, a per-
son that exercises discretion or supervi-
sion in connection with a payment is
performing a management or oversight
function and is a payor. A significant eco-
nomic interest in a payment is an eco-
nomic interest that would be compro-
mised if the payment were not made. For
example a bank has a significant eco-
nomic interest in a payment to a contrac-
tor when damage occurs to property se-
curing a mortgage held by the bank. With
this standard, which was also discussed in
the IRPAC papers of May 1994 and May
1995, the proposed regulations attempt to
replace disparate revenue rulings with a
consistent and easily administrable rule
that can be applied to a variety of factual
situations involving middlemen.
Section 1.6041–1(e)(2) of the proposed
regulations provides an exception to the
general rule of §1.6041–1(e)(1) by refer-
encing the procedures in Rev. Proc. 84–33
(1984–1 C.B. 502) for an optional method
for payors to designate a paying agent to
file information returns and backup with-
hold.
The proposed regulations include ex-
amples, derived primarily from revenue
rulings and private letter rulings, which
are intended to be all-inclusive. Rulings
that are factually encompassed by the pro-
posed regulations will be obsoleted.
Comments are requested identifying other
factually relevant rulings or suggesting
appropriate additional examples.
The proposed regulations make two
changes to §1.6041–3 (to be effective Jan-
uary 1, 2001). They revise §1.6041–3(d)
to conform the cross-reference to
§1.6041–1 to the language effective Janu-
ary 1, 2001, and to clarify the current rule
that real estate agents who manage rental
property and make payments of rent to
landlords are payors and continue to be
subject to the general requirements of
§1.6041–1. The proposed regulations
also remove §1.6041–3(n), which pro-
vides an exception to the information re-
porting requirements of section 6041 for
amounts that a bank or similar institution
collects on behalf of, and pays over or
credits to the account of, the actual owner
of the funds, but only if it does not collect
the items on a regular and continuing
basis. Rev. Rul. 77–53 (1977–1 C.B.
368) further restricted this limitation to
banks that collect items on a regular and
continuing basis and also assume a man-
agement function or perform more than
the mere collection and payment or cred-
iting of funds to a customer’s account.
This holding is consistent with the “man-
agement and oversight” standard of the
proposed regulations. Accordingly, Ex-
ample 11of the proposed regulations pre-
serves the holding of Rev. Rul. 77–53.
Section 1.6041–3(n) is removed to avoid
confusion and redundancy. However, its
removal will change current requirements
by imposing a reporting requirement on a
bank that collects and pays or credits
funds on behalf of a customer on an infre-
quent or isolated basis if it performs a
management or oversight function in con-
nection with the payment, a transaction
that is currently within the §1.6041–3(n)
exception.
The proposed regulations also remove
paragraphs (b) and (c) of §31.3406(a)–2.
These paragraphs provide a standard for
information reporting by a so-called mid-
dleman that is inconsistent with the stan-
dard in the proposed regulations. As
amended, §31.3406(a)–2 reiterates the
general rule of section 3406(h) (also
stated in §35a.9999-3, Q & A 1) that the
definition of payor for information report-
ing purposes determines who is the payor
for backup withholding purposes as well.
c. Amount to be Reported When Fees,
Expenses or Commissions are Deducted
From a Payment
The proposed regulations add a new
paragraph (f) to §1.6041– 1 that clarifies
that the amount to be reported as paid to a
payee is the gross amount of the payment
or payments before fees, commissions,
expenses, or other amounts owed by the
payee to another person have been de-

2000–44 I.R.B.441October 30, 2000
ducted. See, e.g., Rev. Rul. 67–197
(1967–1 C.B. 319); Rev. Rul. 54–571
(1954–2 C.B. 235). The rule, which ap-
plies whether the payment is made jointly
or separately to the payee and another
person, is also cross-referenced in Exam-
ple 6and Example 8of §1.6041–1(e)(3).
The rule of §1.6041–1(f) is illustrated
by two examples involving payment of
taxable damages by a defendant to a plain-
tiff. These examples, read with Example 8
of §1.6041– 1(e)(3), are, in part, inconsis-
tent with Example 2of the proposed regu-
lations at §1.6045–5(f), published on May
21, 1999 (64 FR 27730). Example 2states
that a defendant that pays a settlement to a
plaintiff and knows the amount of the
plaintiff’s attorney fees included in the
payment is required to report the payment
of the attorney fees under section 6041
and not the gross proceeds under section
6045(f). However, under §1.6041–1(e) of
these regulations, the defendant is not ex-
ercising management or oversight in con-
nection with, and therefore is not required
to make an information return under sec-
tion 6041 for, the payment to the attorney.
The plaintiff, not the defendant, is re-
quired to report the payment of attorney
fees to plaintiff’s attorney under section
6041 (assuming that the payment is made
in the course of the plaintiff’s trade or
business and that the other requirements
of section 6041 apply). Accordingly, Ex-
ample 2in the final regulations under sec-
tion 6045(f) will be revised to provide that
the defendant is not required to make an
information return under section 6041 but
is required to make an information return
under section 6045(f), even if the defen-
dant knows the amount of plaintiff’s attor-
ney fees.
d. Revenue Rulings to Become Obsolete
As discussed above, the proposed reg-
ulations apply to the factual situations ad-
dressed in the following revenue rulings,
which will become obsolete:
Rev. Rul. 93–70 (1993–2 C.B. 294)
Rev. Rul. 85–50 (1985–1 C.B. 345)
Rev. Rul. 77–53 (1977–1 C.B. 368)
Rev. Rul. 73–232 (1973–1 C.B. 541)
Rev. Rul. 70–608, Situations 1, 2, and 5
(1970–2 C.B. 286)
Rev. Rul. 69–595 (1969–2 C.B. 242)
Rev. Rul. 67–197 (1967–1 C.B. 319)
Rev. Rul. 65–129 (1965–1 C.B. 519)
Rev. Rul. 64–36 (1964–1 C.B. 446)
Rev. Rul. 59–328 (1959–2 C.B. 379)
Rev. Rul. 55–606 (1955–2 C.B. 489)
Rev. Rul. 54–571 (1954–2 C.B. 235)
2. Proposed Regulations Under Section
6045
Section 6045 provides that a broker
must file an information return showing
the name and address of the broker’s cus-
tomer and other details, such as the
amount of the gross proceeds of the
transaction, as the Secretary may require.
Section 6045(c) defines a broker as a
dealer, a barter exchange, or any other
person who, for a consideration, regu-
larly acts as a middleman with respect to
property or services.
Section 1.6045–1(a)(2) provides that a
customer is the person who makes a sale
effected by a broker, if the broker acts as
(i) an agent for the customer in the sale,
(ii) a principal in the sale, or (iii) the
party in the sale responsible for paying or
crediting the proceeds to the customer.
Under §1.6045–1(h), a broker must treat
the person whose name appears on the
broker’s books and records as the princi-
pal.
Section 5f.6045–1(c)(3), also pub-
lished as proposed regulations (49 F.R.
22343), provides that no return of infor-
mation is required with respect to a sale
effected for a customer that is an exempt
recipient. Among the categories of ex-
empt recipients is a person registered
under the Investment Advisers Act of
1940 who regularly acts as a broker (an
investment adviser).
Section 5f.6045–1(c)(3)(iii) provides
that, in a cash on delivery or similar trans-
action, only the broker that receives the
gross proceeds against delivery of the se-
curities sold is required to report a sale,
unless the broker’s customer is another
broker (a second-party broker) that is an
exempt recipient. In that case, only the
second-party broker is required to report.
One effect of these provisions is to shift
the reporting requirement in a cash on de-
livery transaction from the broker that re-
ceives the gross proceeds against delivery
of the securities to an investment adviser.
For example, in §5f.6045–1(c)(4) Exam-
ple (4), an investment adviser instructs a
broker/dealer to sell securities owned by
the investment adviser’s customer and to
pay the proceeds of the sale to a custodian
bank. The custodian bank is instructed to
deliver the securities to the broker/dealer
against delivery of the proceeds of the
sale. The investment adviser, and not the
broker/dealer or the custodian bank, is
required to report the payment of the pro-
ceeds of the sale to the investment ad-
viser’s customer, because (1) the
broker/dealer paid the gross proceeds of
the sale to the custodian bank against de-
livery of the securities sold, and (2) the
custodian bank’s customer was the invest-
ment adviser, an exempt recipient.
Commentators on the proposed regula-
tions objected to the imposition of the re-
porting obligation under section 6045(a)
on investment advisers because (1) in-
vestment advisers generally do not have
first-hand knowledge that a sale has been
completed, and (2) investment advisers
generally do not handle the proceeds of a
sale and, consequently, cannot comply
with the backup withholding require-
ments of section 3406. Investment ad-
viser reporting issues were also the sub-
ject of IRPAC papers presented at
meetings in November 1995 and October
1997.
These proposed regulations withdraw
the 1984 proposed regulations. In gen-
eral, they propose to incorporate the
provisions of §5f.6045–1 into
§1.6045–1(c)(3) and (4). The proposed
regulations also remove investment advis-
ers from the list of exempt recipients and
revise current §5f.6045–1(c)(4) Examples
4and 5to clarify that, under the revised
rules, an investment adviser that initiates
a sale on behalf of a customer is required
to make a return of information only if the
sale relates to an investment account in
the investment adviser’s name (i.e., the
identity of the customer is not disclosed to
the account custodian).
Proposed Effective Date
The provisions of these regulations
under sections 6041 and 3406 are pro-
posed to be applicable for payments made
on or after the beginning of the first calen-
dar year that begins after these regulations
are published in the Federal Registeras
final regulations. The provisions of these
regulations under section 6045 are pro-
posed to be applicable for sales effected
on or after the beginning of the first calen-
dar year that begins after the date these
regulations are published in the Federal
Registeras final regulations.

October 30, 20004422000–44 I.R.B.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. An initial regulatory flexibility
analysis has been prepared for the collec-
tion of information in this notice of pro-
posed rulemaking under 5 U.S.C. section
603. The analysis is set forth in this pre-
amble under the heading “Initial Regula-
tory Flexibility Analysis.” 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 Admin-
istration for comment on its impact on
small business.
Initial Regulatory Flexibility Analysis
The collection of information pro-
posed in §1.6041–1(e) is needed to clar-
ify the requirements for filing an infor-
mation return under section 6041 when a
person makes a payment on behalf of an-
other person or to joint payees. The ob-
jectives of the proposed regulations are
to provide uniform, practicable, and ad-
ministrable rules under section 6041 for
persons making payments on behalf of
another person or to joint payees. The
types of small entities to which the pro-
posed regulations may apply are small
businesses. An estimate of the number
of small entities affected is not feasible
because of the large variety of entities
and transactions to which the proposed
regulations may apply. However, in
1997 a total of 73,273,621 Forms 1099-
MISC were filed with the IRS. The
number of 1997 Forms 1099-MISC that
related to transactions that involved pay-
ments made on behalf of another person
or to joint payees cannot be determined.
The current estimated reporting burden
relating to Form 1099-MISC is 14 min-
utes per form. No special professional
skills are necessary for preparation of the
reports or records. There are no known
Federal rules that duplicate, overlap, or
conflict with these proposed regulations.
The regulations proposed are considered
to have the least economic impact on
small entities of all alternatives consid-
ered.
The collection of information in pro-
posed §1.6045–1(c)(3) will not have a
significant economic impact on a substan-
tial number of small entities. The pro-
posed regulations will relieve investment
advisers of the requirement to make infor-
mation returns under section 6045(a), and
few, if any, financial custodians that may
be affected by the regulations are small
entities.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic or
written comments (a signed original and
eight (8) copies) that are submitted
timely (in the manner described in the
ADDRESSES caption) to the IRS. The
IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they may be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for February 7, 2001, beginning at 10
a.m. in the IRS Auditorium, Seventh
Floor, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC. Due to building security procedures,
visitors must enter at the 10th Street en-
trance, located between Constitution and
Pennsylvania Avenues, NW. In addition,
all visitors must present photo identifica-
tion to enter the building. Because of ac-
cess restrictions, visitors will not be ad-
mitted 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
CONTACT” section of the preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.Persons who wish to
present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
January 24, 2001. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be pre-
pared after the deadline for receiving out-
lines has passed. Copies of the agenda
will be available free of charge at the
hearing.
Drafting Information
The principal author of these regula-
tions is Donna M. Crisalli, Office of the
Associate Chief Counsel (Income Tax &
Accounting). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed rule-
making (LR–62–84) amending 26 CFR
part 1 that was published in the Federal
Registeron May 29, 1984 (49 F.R.
22343) is withdrawn. In addition, 26
CFR parts 1, 5f, and 31 are proposed to be
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 1.6041–1 also issued under 26
U.S.C. 6041(a). * * *
Par. 2. Section 1.6041–1 is amended
by:
1. Removing the language “paragraph
(g)” in the second sentence of paragraph
(b)(1) and adding the language “para-
graph (i)” in its place.
2. Adding two sentences after the
fourth sentence of paragraph (c).
3. Redesignating paragraphs (e)
through (g) as paragraphs (g) through (i).
4. Adding new paragraphs (e) and (f),
and (j).
The additions and revisions read as
follows:
§1.6041–1 Return of information as to
payments of $600 or more.
* * * * *
(c) * * * A payment made jointly to
two or more payees may be fixed and de-
terminable income to one payee even
though the payment is not fixed and deter-
minable income to another payee. For ex-
ample, property insurance proceeds paid
jointly to the owner of damaged property
and to a contractor that repairs the prop-

erty may be fixed and determinable in-
come to the contractor but not fixed and
determinable income to the owner. * * *
* * * * *
(e) Payment made on behalf of another
person—(1) In general. A person that
makes a payment in the course of its trade
or business on behalf of another person is
the payor that must make a return of in-
formation under this section with respect
to that payment if the payment is de-
scribed in paragraph (a) of this section
and, under all the facts and circumstances,
that person—
(i) Performs management or oversight
functions (i.e., performs more than mere
administrative or ministerial functions) in
connection with the payment; or
(ii) Has a significant economic interest
in the payment.
(2) Optional method to report. A per-
son that makes a payment on behalf of an-
other person but is not required to make
an information return under paragraph
(e)(1) of this section may elect to do so
pursuant to the procedures established in
Rev. Proc. 84–33 (1984–1 C.B. 502) (op-
tional method for a paying agent to report
and deposit amounts withheld for payors
under the statutory provisions of backup
withholding) (see §601.601(d)(2) of this
chapter).
(3) Examples. The provisions of this
paragraph (e) are illustrated by the fol-
lowing examples:
Example 1. Bank B provides financing to C, a
real estate developer, for a construction project. B
puts the funds in an escrow account and makes dis-
bursements from the account for labor, materials,
services, and other expenses related to the construc-
tion project. In connection with the payments, B
performs the following functions on behalf of C: ap-
proves payments to the general contractor or sub-
contractors; ensures that loan proceeds are properly
applied and that all approved bills are properly paid
to avoid mechanics or materialmen’s liens; conducts
site inspections to determine whether work has been
completed (but does not check the quality of the
work); evaluates and assesses the cost of the project,
including costs of changes; and communicates re-
sulting concerns to C or to the general contractor so
that modifications can be made or additional fund-
ing obtained. B is performing management or over-
sight functions in connection with the payment and
is subject to the information reporting requirements
of section 6041 with respect to payments from the
escrow fund.
Example 2. Mortgage company D holds a mort-
gage on business property owned by E. When the
property is damaged by a storm E’s insurance com-
pany issues a check payable to both D and E in set-
tlement of E’s claim. Pursuant to the contract be-
tween D and E, D holds the insurance proceeds in an
escrow account and makes disbursements according
to E’s instructions to contractors and subcontractors
performing repairs on the property. D is not per-
forming management or oversight functions, but D
has a significant economic interest in the payments
because the purpose of the arrangement is to ensure
that property on which D holds a mortgage is re-
paired or replaced. D is subject to the information
reporting requirements of section 6041 with respect
to the payments to contractors.
Example 3. Settlement agent F provides real es-
tate closing services to real estate brokers and
agents. F deposits money received from the buyer
or lender in an escrow account and makes payments
from the account to real estate agents or brokers, ap-
praisers, land surveyors, building inspectors, or sim-
ilar service providers according to the provisions of
the real estate contract and written instructions from
the lender. F may also make disbursements pursuant
to verbal instructions of the seller or purchaser at
closing. F is not performing management or over-
sight functions and does not have a significant eco-
nomic interest in the payments, and is not subject to
the information reporting requirements of section
6041. For the rules relating to F’s obligation to re-
port the gross proceeds of the sale, see section
6045(e) and §1.6045–4.
Example 4. Assume the same facts as in Example
3, except that the seller instructs F to hire a contrac-
tor to perform repairs on the property. F selects the
contractor, negotiates the cost, monitors the progress
of the project, and inspects the work to ensure it
complies with the contract. With respect to the pay-
ments to the contractor, F is performing manage-
ment or oversight functions and is subject to the in-
formation reporting requirements of section 6041.
Example 5. Real estate agent G manages certain
rental property on behalf of property owner H. In ad-
dition to collecting the rent G arranges for various
services that are needed to maintain the property
(e.g., painting, repairs, lawn mowing, etc.), deter-
mines that the services have been satisfactorily per-
formed, and pays the service providers. G is per-
forming management or oversight functions and is
subject to the information reporting requirements of
section 6041 with respect to the payments to the ser-
vice providers. With respect to the payments of rent
to H, see §1.6041–3(d).
Example 6. Literary agent J receives a payment
from publisher L of fees earned by J’s client, author
K. J deposits the payment into a bank account in J’s
name and pays K the net amount after subtracting J’s
commission. From time to time and as directed by
K, J also makes payments to attorneys, managers,
and other third parties from these funds for services
rendered to K. J does not order or direct the provi-
sion of services by the third parties to K, and J exer-
cises no discretion in making the payments to them.
J is not performing management or oversight func-
tions and does not have a significant economic inter-
est in the payments, and is not subject to the infor-
mation reporting requirements of section 6041 in
connection with the payments to K or to the third
parties. For the rules relating to L’s obligation to re-
port the payment of the fees to K, see paragraphs
(a)(1)(i) and (f) of this section. For the rules relating
to K’s obligation to report the payment of the com-
mission to J and the payments to the third parties for
services, see paragraphs (a)(1)(i) and (d)(2) of this
section.
Example 7. Attorney P deposits into a client
trust fund a settlement payment from R, the defen-
dant in a breach of contract action for lost profits
in which P represented plaintiff Q. P makes pay-
ments from the client trust fund to service
providers such as expert witnesses and private in-
vestigators for expenses incurred in the litigation.
P decides whom to hire, negotiates the amount of
payment, and determines that the services have
been satisfactorily performed. In the event of a
dispute with a service provider, P withholds pay-
ment until the dispute is settled. With respect to
payments to the service providers P is performing
management or oversight functions and is subject
to the information reporting requirements of sec-
tion 6041.
Example 8. Assume the same facts as in Exam-
ple 7, except that after paying the service
providers and deducting his legal fee, P pays Q the
remaining funds that P had received from the set-
tlement with R. With respect to the payment to Q,
P is not performing management or oversight
functions and does not have a significant eco-
nomic interest in the payment, and is not subject to
the information reporting requirements of section
6041. For the rules relating to R’s obligation to re-
port the payment of the settlement proceeds to P,
see section 6045(f) and §1.6045–5. For the rules
relating to R’s obligation to report the payment of
the settlement proceeds to Q, see paragraphs
(a)(1)(i) and (f) of this section. For the rules relat-
ing to Q’s obligation to report the payment of at-
torney fees to P, see paragraphs (a)(1)(i) and (d)(2)
of this section.
Example 9. Medical insurer S operates as the ad-
ministrator of a health care program under a contract
with a state. S makes payments of government
funds to health care providers who provide care to
eligible patients. S receives and reviews claims sub-
mitted by patients or health care providers, deter-
mines if the claims meet all the requirements of the
program (e.g., that the care is authorized and that the
patients are eligible beneficiaries), and determines
the amount of payment. S is performing manage-
ment or oversight functions and is subject to the in-
formation reporting requirements of section 6041
with respect to the payments.
Example 10. Race track employee T holds de-
posits made by horse owner U in a special escrow
account in U’s name. U enters into a contract with
jockey V to ride U’s horse in a race at the track. As
directed by U, T pays V the fee for riding U’s horse
from U’s escrow account. T is not performing man-
agement or oversight functions and does not have a
significant economic interest in the payment, and is
not subject to the information reporting require-
ments of section 6041. For the rules relating to U’s
obligation to report the payment of the fee to V, see
paragraph (a)(1)(i) of this section.
Example 11. Bank W collects payments from
mortgagors and remits the amounts to the mort-
gagees or credits their accounts. W performs no
other task with respect to the mortgage payments
and has no other interest in the accounts. Al-
though W collects payments on a regular and con-
tinuing basis, W is not performing management or
oversight functions and does not have a significant
economic interest in the payments, and is not sub-
ject to the information reporting requirements of
section 6041 with respect to the payments.
2000–44 I.R.B.443October 30, 2000

(f) Amount to be reported when fees,
expenses or commissions are deducted—
(1) In general. The amount to be re-
ported as paid to a payee is the gross
amount of the payment or payments be-
fore fees, commissions, expenses, or
other amounts owed by the payee to an-
other person have been deducted, whether
the payment is made jointly or separately
to the payee and the other person.
(2) Examples. The provisions of this
paragraph (f) are illustrated by the follow-
ing examples:
Example 1. Attorney P represents client Q in a
breach of contract action for lost profits against de-
fendant R. R settles the case for $100,000 damages
and $40,000 for attorney fees. R issues a check
payable to P and Q in the amount of $140,000. R is
required to make an information return reporting a
payment to Q in the amount of $140,000.
Example 2. Assume the same facts as in Example
1, except that R issues a check to Q for $100,000
and a separate check to P for $40,000. R is required
to make an information return reporting a payment
to Q in the amount of $140,000.
* * * * *
(j) Effective date. The provisions of
paragraphs (b), (c), (e), and (f) apply to
payments made on or after the beginning
of the first calendar year that begins after
these regulations are published in the
Federal Registeras final regulations.
§1.6041–3 [Amended]
Par. 3. Section 1.6041–3, as in effect on
January 1, 2001, is amended as follows:
1. In paragraph (d), removing the lan-
guage “(but the agent is subject to the re-
quirements of paragraph (a)(1)(ii) and
(2)(ii) of §1.6041–1)” and adding the lan-
guage “(but the agent is required to report
payments of rent to the landlord in accor-
dance with §1.6041–1)(a)(1)(i)(B) and
(2)” in its place.
2. Removing paragraph (n) and redes-
ignating paragraphs (o) through (q) as
paragraphs (n) through (p).
Par. 4. Section 1.6045–1, as in effect on
January 1, 2001, is amended as follows:
1. Revising paragraph (a) introductory
text.
2. Revising paragraphs (c)(3) and
(c)(4).
3. Removing the language “5f.6045–1
(c)(3)(ii) of this chapter” and adding the
language “paragraph (c)(3)(iii) of this
section” in its place in each place it ap-
pears in paragraph (g)(4) Examples 1, 4,
5, 6, and 7(i).
The revisions read as follows:
§1.6045–1 Returns of information of
brokers and barter exchanges.
(a) Definitions. The following defini-
tions apply for purposes of this section
and §1.6045–2:
* * * * *
(c) * * *
(3) Exceptions—(i) Sales effected for
exempt recipients— (A) In general. No
return of information is required with re-
spect to a sale effected for a customer that
is an exempt recipient under paragraph
(c)(3)(i)(B) of this section.
(B) Exempt recipient defined. The
term exempt recipientmeans—
(1) A corporation as defined in section
7701(a)(3), whether domestic or foreign;
(2) An organization exempt from taxa-
tion under section 501(a) or an individual
retirement plan;
(3) The United States or a State, the
District of Columbia, a possession of the
United States, a political subdivision of
any of the foregoing, a wholly-owned
agency or instrumentality of any one or
more of the foregoing, or a pool or part-
nership composed exclusively of any of
the foregoing;
(4) A foreign government, a political
subdivision thereof, an international orga-
nization, or any wholly-owned agency or
instrumentality of the foregoing;
(5) A foreign central bank of issue as
defined in §1.895–1(b)(1) (i.e., a bank
that is by law or government sanction the
principal authority, other than the govern-
ment itself, issuing instruments intended
to circulate as currency);
(6) A dealer in securities or commodi-
ties registered as such under the laws of
the United States or a State;
(7) A futures commission merchant
registered as such with the Commodity
Futures Trading Commission;
(8) A real estate investment trust (as
defined in section 856);
(9) An entity registered at all times
during the taxable year under the Invest-
ment Company Act of 1940 (15 U.S.C.
80a-1, et seq.);
(10) A common trust fund (as defined
in section 584(a)); or
(11) A financial institution such as a
bank, mutual savings bank, savings and
loan association, building and loan asso-
ciation, cooperative bank, homestead as-
sociation, credit union, industrial loan as-
sociation or bank, or other similar organi-
zation.
(C) Exemption certificate. A broker
may treat a person described in paragraph
(c)(3)(i)(B) of this section as an exempt
recipient based on a properly completed
exemption certificate (as provided in
§31.3406(h)–3) of this chapter or on the
broker’s actual knowledge that the payee
is a person described in paragraph
(c)(3)(i)(B) of this section. A broker may
require an exempt recipient to file a prop-
erly completed exemption certificate and
may treat an exempt recipient that fails to
do so as a recipient that is not exempt.
(ii) Excepted sales. No return of infor-
mation is required with respect to a sale
effected by a broker for a customer if the
sale is an excepted sale. For this purpose,
a sale is an excepted sale if it is so desig-
nated by the Internal Revenue Service in a
revenue ruling or revenue procedure (see
§601.601(d)(2) of this chapter).
(iii) Multiple brokers. If a broker is in-
structed to initiate a sale by a person that
is an exempt recipient described in para-
graph (c)(3)(i)(B)(6), (7), or (11) of this
section, no return of information is re-
quired with respect to the sale by that bro-
ker. In a redemption of stock or retire-
ment of securities, only the broker
responsible for paying the holder re-
deemed or retired, or crediting the gross
proceeds on the sale to that holder’s ac-
count, is required to report the sale.
(iv) Cash on delivery transactions. In
the case of a sale of securities through a
cash on delivery account, a delivery ver-
sus payment account, or other similar ac-
count or transaction, only the broker that
receives the gross proceeds from the sale
against delivery of the securities sold is
required to report the sale. If, however,
the broker’s customer is another broker
(second-party broker) that is an exempt
recipient, then only the second-party bro-
ker is required to report the sale.
(v) Fiduciaries and partnerships. No
return of information is required with re-
spect to a sale effected by a custodian or
trustee in its capacity as such or a redemp-
tion of a partnership interest by a partner-
ship provided the sale is otherwise re-
ported by the custodian or trustee on a
properly filed Form 1041, or the redemp-
October 30, 20004442000–44 I.R.B.

tion is otherwise reported by the partner-
ship on a properly filed Form 1065, and
all Schedule K-1 reporting requirements
are satisfied.
(vi) Sales at issue price. No return of
information is required with respect to a
sale of an interest in a regulated invest-
ment company (within the meaning of
section 851) that computes its current
price per share for purposes of distribu-
tions, redemptions, and purchases so as
to stabilize the price per share at a con-
stant amount that approximates its issue
price or the price at which it was origi-
nally sold to the public.
(vii) Obligor payments on certain
obligations. No return of information is
required with respect to payments repre-
senting obligor payments on—
(A) Nontransferable obligations (includ-
ing savings bonds, savings accounts,
checking accounts, and NOW accounts);
(B) Obligations as to which the entire
gross proceeds are reported by the broker
on Form 1099 under provisions of the In-
ternal Revenue Code other than section
6045 (including stripped coupons issued
prior to July 1, 1982); or
(C) Retirement of short-term obligations
(i.e., obligations with a fixed maturity date
not exceeding 1 year from the date of issue)
that have original issue discount, as defined
in section 1273(a)(1).
(viii) Callable obligations. No return of
information is required with respect to pay-
ments representing obligor payments on
demand obligations that also are callable by
the obligor and that have no premium or
discount.
(ix) Foreign currency. No return of in-
formation is required with respect to a sale
of foreign currency other than a sale pur-
suant to a forward contract or regulated fu-
tures contract that requires delivery of for-
eign currency.
(x) Fractional share. No return of infor-
mation is required with respect to a sale of a
fractional share of stock if the gross pro-
ceeds on the sale of the fractional share are
less than $20.
(xi) Certain retirements. No return of
information is required from an issuer or its
agent with respect to the retirement of book
entry or registered form obligations as to
which the relevant books and records indi-
cate that no interim transfers have occurred.
(xii) Cross reference. For an exception
for certain sales of agricultural commodi-
ties and certificates issued by the Com-
modity Credit Corporation after January
1, 1993, see paragraph (c)(7) of this sec-
tion.
(xiii) Effective date. The provisions of
this paragraph (c)(3) apply for sales ef-
fected on or after the beginning of the first
calendar year that begins after the date
these regulations are published in the
Federal Registeras final regulations.
(4) Examples. The following examples
illustrate the application of the rules in
paragraph (c)(3) of this section:
Example 1. P, an individual who is not an exempt
recipient, places an order with B, a person generally
known in the investment community to be a feder-
ally registered broker/dealer, to sell P’s stock in a
publicly traded corporation. B, in turn, places an
order to sell the stock with C, a second broker,
which will execute the sale. B discloses to C the
identity of the customer placing the order. C is not
required to make a return of information with re-
spect to the sale because C was instructed by B, an
exempt recipient as defined in paragraph
(c)(3)(i)(B)(6
) of this section, to initiate the sale. B
is required to make a return of information with re-
spect to the sale because P is B’s customer and is not
an exempt recipient.
Example 2. Assume the same facts as in Example
1except that B has an omnibus account with C so
that B does not disclose to C whether the transaction
is for a customer of B or for B’s own account. C is
not required to make a return of information with re-
spect to the sale because C was instructed by B, an
exempt recipient as defined in paragraph
(c)(3)(i)(B)(6) of this section, to initiate the sale. B
is required to make a return of information with re-
spect to the sale because P is B’s customer and is not
an exempt recipient.
Example 3. D, an individual who is not an ex-
empt recipient, enters into a cash on delivery stock
transaction by instructing K, a federally registered
broker/dealer, to sell stock owned by D, and to de-
liver the proceeds to L, a custodian bank. Concur-
rently with the above instructions, D instructs L to
deliver D’s stock to K (or K’s designee) against de-
livery of the proceeds from K. The records of both
K and L with respect to this transaction show an ac-
count in the name of D. Pursuant to paragraph
(h)(1) of this section, D is considered the customer
of K and L. Under paragraph (c)(3)(iv) of this sec-
tion, K is not required to make a return of informa-
tion with respect to the sale because K will pay the
gross proceeds to L against delivery of the securities
sold. L is required to make a return of information
with respect to the sale because D is L’s customer
and is not an exempt recipient.
Example 4. Assume the same facts as in Example
3except that E, a federally registered investment ad-
viser, instructs K to sell stock owned by D and to de-
liver the proceeds to L. Concurrently with the above
instructions, E instructs L to deliver D’s stock to K
(or K’s designee) against delivery of the proceeds
from K. The records of both K and L with respect to
the transaction show an account in the name of D.
Pursuant to paragraph (h)(1) of this section, D is
considered the customer of K and L. Under para-
graph (c)(3)(iv) of this section, K is not required to
make a return of information with respect to the sale
because K will pay the gross proceeds to L against
delivery of the securities sold. L is required to make
a return of information with respect to the sale be-
cause D is L’s customer and is not an exempt recipi-
ent.
Example 5. Assume the same facts as in Exam-
ple 4except that the records of both K and L with
respect to the transaction show an account in the
name of E. Pursuant to paragraph (h)(1) of this
section, E is considered the customer of K and L.
Under paragraph (c)(3)(iv) of this section, K is not
required to make a return of information with re-
spect to the sale because K will pay the gross pro-
ceeds to L against delivery of the securities sold. L
is required to make a return of information with re-
spect to the sale because E is L’s customer and is
not an exempt recipient. E is required to make a re-
turn of information with respect to the sale because
D is E’s customer and is not an exempt recipient.
Example 6. F, an individual who is not an ex-
empt recipient, owns bonds that are held by G, a
federally registered broker/dealer, in an account for
F with G designated as nominee for F. Upon the re-
tirement of the bonds, the gross proceeds are auto-
matically credited to the account of F. G is re-
quired to make a return of information with respect
to the retirement because G is the broker responsi-
ble for making payments of the gross proceeds to F.
* * * * *
§1.6045–2 [Amended]
Par. 5. In §1.6045–2, paragraph
(b)(2)(ii), is amended by removing the
language “§5f.6045–1(c)(3)(i)(B) of the
Temporary Income Tax Regulations
under the Tax Equity and Fiscal Respon-
sibility Act of 1982” and adding the lan-
guage “§1.6045– 1(c)(3)(i)(B)” in its
place.
Par. 6. In §1.6049–4, as in effect on
January 1, 2001, paragraph (a)(2) is re-
vised 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.
(a) * * *
(2) Payor. For payments made on or
after the beginning of the first calendar
year that begins after the date these regu-
lations are published in the Federal Reg-
isteras final regulations, a payor is a
person described in paragraph (a)(2)(i) or
(ii) of this section.
(i) Every person who makes a payment
of the type and of the amount subject to
reporting under this section (or under an
applicable section under this chapter) to
any other person during a calendar year.
2000–44 I.R.B.445October 30, 2000

October 30, 20004462000–44 I.R.B.
(ii) Every person who collects on be-
half of another person payments of the
type and of the amount subject to report-
ing under this section (or under an applic-
able section under this chapter), or who
otherwise acts as a middleman (as de-
fined in paragraph (f)(4) of this section)
with respect to such payment.
* * * * *
PART 5f—TEMPORARY INCOME
TAX REGULATIONS UNDER THE
TAX EQUITY AND FISCAL
RESPONSIBILITY ACT OF 1982
Par. 7. The authority citation for part
5f is amended by removing the authority
citation for Sec. 5f.6045–1 to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
§5f.6045–1 [Removed]
Par. 8. Section 5f.6045–1 is removed.
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Par. 9. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. Section 31.3406–0 is
amended by:
1. Revising the entry for
§31.3406(a)–2, paragraph (b).
2. Adding an entry for §31.3406(a)–2,
paragraph (d).
The revision and addition read as fol-
lows:
§31.3406–0 Outline of the backup
withholding regulations.
* * * * *
§31.3406(a)–2 Definition of payors
obligated to backup withhold.
* * * * *
(b) Persons treated as payors.
* * * * *
(d) Effective date.
* * * * *
Par. 11. Section 31.3406(a)–2 is re-
vised to read as follows:
§31.3406(a)–2 Definition of payors
obligated to backup withhold.
(a) In general. Payormeans the per-
son that is required to make an informa-
tion return under section 6041, 6041A(a),
6042, 6044, 6045, 6049, 6050A, or
6050N, with respect to any reportable
payment (as described in section
3406(b)), or that is described in para-
graph (b) of this section.
(b) Persons treated as payors. The fol-
lowing persons are treated as payors for
purposes of section 3406—
(1) A grantor trust established after De-
cember 31, 1995, all of which is owned
by two or more grantors, and for this pur-
pose spouses filing a joint return are con-
sidered to be one grantor;
(2) A grantor trust with ten or more
grantors established on or after January
1, 1984 but before January 1, 1996;
(3) A common trust fund; and
(4) A partnership or an S corporation
that makes a reportable payment.
(c) Persons not treated as payors. The
following persons are not treated as pay-
ors for purposes of section 3406 if the
person does not have a reporting obliga-
tion under the section on information re-
porting to which the payment relates—
(1) A trust (other than a grantor trust as
described in paragraph (b)(1) or (2) of
this section) that files a Form 1041 con-
taining information required to be shown
on an information return, including
amounts withheld under section 3406; or
(2) A partnership making a payment of
a distributive share or an S corporation
making a similar distribution.
(d) Effective date. The provisions of
this section apply to payments made on
or after the beginning of the first calendar
year that begins after these regulations
are published in the Federal Registeras
final regulations.
§31.3406(a)–4 [Amended]
Par. 12. Section 31.3406(a)–4 is
amended as follows:
1. In paragraph (c)(1), first sentence,
removing the language “Any middleman
(as defined in §31.3406(a)–2(b))” and
adding the language “A middleman payor
(as defined in §31.3406(a)–2(b) or in the
section on information reporting to which
the payment relates)” in its place.
2. In paragraph (c)(3), first sentence,
removing the language Ҥ31.3406(a)
–2(b)(4)” and adding the language
“§31.3406(a)–2(b)(1) or (2)” in its place.
§31.3406(b)(3)–2 [Amended]
Par. 13. In §31.3406(b)(3)–2, para-
graph (b)(5) is amended by removing the
language “§5f.6045–1(c)(3)(ix)” and
adding the language “§1.6045–1
(c)(3)(x)” in its place.
§31.3406(d)–4 [Amended]
Par. 14. In §31.3406(d)–4, paragraph
(a)(1) introductory text is amended by re-
moving the language “the payor of the in-
strument (as defined in §31.3406(a)
–2(b)(3)),” and adding the language “a
broker holding a security (including
stock) for a customer in street name,” in
its place.
§31.3406(h)–1 [Amended]
Par. 15. In §31.3406(h)–1, paragraph
(c), second sentence, is amended by re-
moving the language “§5f.6045–1
(c)(3)(ii) and (iii)” and adding the lan-
guage “§1.6045–1(c)(3)(iii) and (iv)” in
its place.
§31.3406(h)–2 [Amended]
Par. 16. Section 31.3406(h)–2 is
amended as follows:
1. In paragraph (c), third sentence, re-
moving the language “with two or more
grantors described in §31.3406(a)
–2(b)(4), which is treated as a middleman
payor” and adding the language “de-
scribed in §31.3406(a)–2(b)(1) or (2),
which is treated as a payor” in its place.
2. In paragraph (d), first sentence, re-
moving the language “A middleman
payor (as defined in §31.3406(a)–2(b)”
and adding the language “A middleman
payor (as defined in §31.3406(a)–2(b) or
in the section on information reporting to
which the payment relates)” in its place.
3. In paragraph (f)(6), removing the
language “§31.3406(a)– 2(a)” and adding
the language “§31.3406(a)–2” in its
place.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Octo-
ber 16, 2000, 8:45 a.m., and published in the issue of
the Federal Register for October 17, 2000, 65 F.R.
61292)

2000–44 I.R.B.447October 30, 2000
Notice of Proposed Rulemaking
and Notice of Public Hearing
Exclusion of Gain From Sale or
Exchange of a Principal
Residence
REG–105235–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the exclu-
sion of gain from the sale or exchange of
a taxpayer’s principal residence. These
proposed regulations reflect changes to
the law made by the Taxpayer Relief Act
of 1997, as amended by the Internal Rev-
enue Service Restructuring and Reform
Act of 1998. These proposed regulations
generally affect taxpayers who sell or ex-
change their principal residences.
DATES: Written or electronically gener-
ated comments must be received by Janu-
ary 9, 2001. Requests to speak (with out-
lines of oral comments) to be discussed at
the public hearing scheduled for January
23, 2001 at 10 a.m., must be submitted by
January 3, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–105235–99), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–105235–
99), Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Ave., NW., Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the In-
ternet by selecting the “Tax Regs” option
on the IRS Home Page, or by submitting
comments directly to the IRS internet site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in the IRS
Auditorium, Seventh Floor, Internal Rev-
enue Service Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Sara
P. Shepherd, (202) 622-4910; concerning
submissions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, contact Treena
Garrett, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
1. Section 121 Exclusion
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 121 of
the Internal Revenue Code relating to the
exclusion of gain from the sale or exchange
of a taxpayer’s principal residence. These
proposed regulations reflect changes to the
law made by the Taxpayer Relief Act of
1997, Public Law 105–34 (111 Stat. 788
(TRA 1997)), as amended by the Internal
Revenue Service Restructuring and Reform
Act of 1998, Public Law 105–206 (112
Stat. 805 (RRA 1998)).
Prior to the repeal by TRA 1997, section
1034 provided that gain from the sale or ex-
change of a principal residence (old resi-
dence) was recognized only to the extent
that the taxpayer’s adjusted sales price of
the old residence exceeded the taxpayer’s
cost of purchasing a new residence within
the replacement period (generally 2 years
before or after the date of sale).
Prior to amendment by TRA 1997, for-
mer section 121 provided that a taxpayer
could make a one-time election to exclude
up to $125,000 of gain from the sale or ex-
change of property. To qualify for the ex-
clusion, the taxpayer must have (1) been
age 55 or older on the date of the sale or ex-
change, and (2) owned and used the prop-
erty as the taxpayer’s principal residence
for at least 3 years during the 5-year period
ending on the date of the sale or exchange.
TRA 1997 amended section 121 and re-
pealed section 1034 for sales and ex-
changes of principal residences after May
6, 1997 (except, at the election of the tax-
payer, to a sale or exchange (1) made on
or before August 5, 1997, (2) made pur-
suant to a binding contract in effect on
August 5, 1997, or (3) that would qualify
under section 1034 by reason of a new
residence acquired on or before August 5,
1997 or pursuant to a binding contract in
effect on August 5, 1997). Under section
121 as amended, a taxpayer generally ex-
cludes up to $250,000 ($500,000 for cer-
tain joint returns) of gain realized on the
sale or exchange of property if the prop-
erty was owned and used as the tax-
payer’s principal residence for at least 2
years during the 5-year period ending on
the date of the sale or exchange. The ex-
clusion applies regardless of the age of
the taxpayer, and the full exclusion can be
used only once every 2 years. A taxpayer
who fails to meet these requirements by
reason of a change in place of employ-
ment, health, or, to the extent provided in
regulations, unforeseen circumstances
may be entitled to a reduced exclusion.
RRA 1998 amended TRA 1997 to clar-
ify that the reduced exclusion amount
under section 121(c) is a portion of the
maximum limitation amount ($250,000 or
$500,000 for certain joint returns), not a
portion of the realized gain. See H.R.
Rep. No. 356, 105th Cong., 1st Sess. 17
(1997); S. Rep. No. 174, 105th Cong., 2d
Sess. 150 (1998). In addition, the amend-
ments provided that for married taxpayers
filing jointly but failing to meet the own-
ership, use, or timing requirements of sec-
tion 121(b)(2)(A), the maximum limita-
tion amount will be the sum of each
spouse’s limitation amount determined on
a separate basis as if they had not been
married. S. Rep. No. 174, 105th Cong.,
2d Sess. 151 (1998); H.R. Conf. Rep. No.
599, 105th Cong., 2d Sess. 337 (1998).
Lastly, the amendments clarified that a
taxpayer may elect to apply prior law
under section 1034 or former section 121
to a sale or exchange occurring on as well
as before the date of enactment, August 5,
1997. H.R. Rep. No. 356, 105th Cong.,
1st Sess. 18 (1997); S. Rep. No. 174,
105th Cong., 2d Sess. 151 (1998).
2. Section 121 Exclusion in Individuals’
Title 11 Cases
This document also contains proposed
amendments to the Income Taxation Reg-
ulations (26 CFR part 1) under section
1398 of the Internal Revenue Code.
Under the authority provided in section
1398(g)(8), the regulations add the sec-
tion 121 exclusion to the list of tax attrib-
utes of the debtor that the bankruptcy es-
tate of an individual in a chapter 7 or 11
bankruptcy case under title 11 of the
United States Code succeeds to and takes
into account in computing the taxable in-
come of the estate. Although these regu-
lations are proposed to be applicable on or
after the date they are published as final
regulations in the Federal Register, in
view of the IRS’s acquiescence in the case

October 30, 20004482000–44 I.R.B.
of Internal Revenue Service v. Wald-
schmidt (In re Bradley), AOD CC-1999-
009 (August 30, 1999), and Chief Coun-
sel Notice (35)000-162 (August 10,
1999), the IRS will not challenge the po-
sition taken prior to the effective date of
these regulations that a bankruptcy estate
may use the section 121 exclusion if the
debtor would otherwise satisfy the section
121 requirements.
Explanation of Provisions
1. Section 121 Exclusion
Section 1.121–1(b) of the proposed reg-
ulations addresses the definition of princi-
pal residence. This section provides that
whether or not property is the taxpayer’s
residence, and whether or not property is
used by the taxpayer as the taxpayer’s
principal residence (in the case of a tax-
payer using more than one property as a
residence), depends upon all the facts and
circumstances. If a taxpayer alternates be-
tween two properties, using each as a resi-
dence for successive periods of time, the
property that the taxpayer uses a majority
of the time during the year will ordinarily
be considered the taxpayer’s principal res-
idence.
Section 1.121–1(c) of the proposed reg-
ulations addresses the use requirement
under section 121(a). This section pro-
vides that, in order for a taxpayer to satisfy
the use requirement under section 121(a),
the taxpayer must occupy the residence
(except for short temporary absences) for
at least 2 years during the 5-year period
ending on the date of the sale or exchange.
See H.R. Rep. No. 148, 105th Cong., 1st
Sess. at 348 (1997); S. Rep. No. 33, 105th
Cong., 1st Sess. at 37 (1997); H.R. Conf.
Rep. No. 220, 105th Cong., 1st Sess. at
386 (1997).
Section 1.121–1(d) provides that the
section 121 exclusion does not apply to so
much of the gain from the sale or ex-
change of property as does not exceed the
portion of the depreciation adjustments (as
defined in section 1250(b)(3)) attributable
to periods after May 6, 1997, in respect of
the property.
Section 1.121–1(e) of the proposed reg-
ulations provides that if a taxpayer satis-
fies the use requirement only with respect
to a portion of the property sold or ex-
changed, section 121 will apply only to
the gain from the sale or exchange alloca-
ble to that portion. Thus, if the residence
was used partially for residential purposes
and partially for business purposes, only
that part of the gain allocable to the resi-
dential portion is excludable under section
121. Furthermore, the section 121 exclu-
sion does not apply to the extent that de-
preciation attributable to periods after
May 6, 1997, exceeds gain allocable to the
business-use portion of the property.
Under section 121(c), a reduced exclu-
sion is available for a taxpayer who sells
or exchanges property used as the tax-
payer’s principal residence but fails to sat-
isfy the ownership and use requirements
described in section 121(a) or the 2-year
limitation described in section 121(b)(3).
Section 1.121–3(a) of the proposed regu-
lations provides that the reduced exclusion
applies only if the sale or exchange is ne-
cessitated by a change in place of employ-
ment, health, or, to the extent provided in
forms, instructions, or other appropriate
guidance including regulations and letter
rulings, unforeseen circumstances. The
IRS and the Treasury Department request
written comments regarding what should
qualify as an unforeseen circumstance for
purposes of determining whether a tax-
payer is eligible to claim the reduced ex-
clusion available under section 121(c).
Under section 121(d)(8), a taxpayer
must make an election to have the section
121 exclusion apply to a sale or exchange
of a remainder interest in the taxpayer’s
principal residence. Section 1.121–4(f)(3)
provides that the taxpayer makes the elec-
tion by filing a return for the taxable year
of the sale or exchange that does not in-
clude the gain from the sale or exchange
of the remainder interest in the taxpayer’s
gross income.
Under section 121(f), a taxpayer must
make an election to have the section 121
exclusion not apply to a sale or exchange
of the taxpayer’s principal residence. Sec-
tion 1.121–4(h) provides that the taxpayer
makes the election by filing a return for
the taxable year of the sale or exchange
that includes the gain from the sale or ex-
change of the residence in the taxpayer’s
gross income.
2. Section 121 Exclusion in Individuals’
Title 11 Cases
Section 1.1398–3 of the proposed regu-
lations provides that the bankruptcy estate
of an individual in a chapter 7 or 11 bank-
ruptcy case under title 11 of the United
States Code succeeds to and takes into ac-
count the individual’s section 121 exclu-
sion if the individual satisfies the require-
ments of section 121.
3. Proposed Effective Date
These regulations are proposed to be
applicable for sales or exchanges that
occur on or after the date they are pub-
lished 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 Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because these regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic or
written comments (a signed original and
eight (8) copies of written comments) that
are submitted timely (in the manner de-
scribed in the ADDRESSES caption) to
the IRS. The IRS and Treasury request
comments on the clarity of the proposed
rules and how they may be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for January 23, 2001, beginning at 10 a.m.
in the IRS Auditorium, Seventh Floor, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, 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. In addition, all visi-
tors must present photo identification to

2000–44 I.R.B.449October 30, 2000
enter the building. Because of access re-
strictions, 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 the
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by January 3,
2001. A period of 10 minutes will be al-
lotted to each person making comments.
An agenda showing the scheduling of the
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Sara P. Shepherd, Office of Assis-
tant Chief Counsel (Income Tax and Ac-
counting). However, other personnel
from the IRS and the Treasury Depart-
ment participated in the development of
the regulations.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805.***
Section 1.1398–3 also issued under 26
U.S.C. 1398(g).
Par. 2. Sections 1.121–1, 1.121–2,
1.121–3 and 1.121–4 are revised to read
as follows:
§1.121–1 Exclusion of gain from sale or
exchange of a principal residence.
(a) In general. Section 121 provides
that, under certain circumstances, gross
income does not include gain realized on
the sale or exchange of property that was
owned and used by a taxpayer as the tax-
payer’s principal residence. Subject to
the other provisions of section 121, a tax-
payer will exclude gain only if, during the
5-year period ending on the date of the
sale or exchange, the taxpayer owned and
used the property as the taxpayer’s princi-
pal residence for periods aggregating 2
years or more.
(b) Principal residence. Whether or
not property is used by the taxpayer as the
taxpayer’s residence, and whether or not
property is used by the taxpayer as the
taxpayer’s principal residence (in the case
of a taxpayer using more than one prop-
erty as a residence), depends upon all the
facts and circumstances. If a taxpayer al-
ternates between two properties, using
each as a residence for successive periods
of time, the property that the taxpayer
uses a majority of the time during the year
will ordinarily be considered the tax-
payer’s principal residence. A property
used by the taxpayer as the taxpayer’s
principal residence may include a house-
boat, a house trailer, or stock held by a
tenant-stockholder in a cooperative hous-
ing corporation (as those terms are de-
fined in section 216(b)(1) and (2)), if the
dwelling that the taxpayer is entitled to
occupy as a stockholder is used by the
taxpayer as the taxpayer’s principal resi-
dence. Property used by the taxpayer as
the taxpayer’s principal residence does
not include personal property, that is not a
fixture under local law.
(c) Ownership and use requirements.
The requirements of ownership and use
for periods aggregating 2 years or more
may be satisfied by establishing owner-
ship and use for 24 full months or for 730
days (365 x 2). The requirements of own-
ership and use may be satisfied during
nonconcurrent periods if both the owner-
ship and use tests are met during the 5-
year period ending on the date of the sale
or exchange. In establishing whether a
taxpayer has satisfied the 2-year use re-
quirement, occupancy of the residence is
required. However, short temporary ab-
sences, such as for vacation or other sea-
sonal absence (although accompanied
with rental of the residence), are counted
as periods of use.
(d) Depreciation taken after May 6,
1997. The section 121 exclusion does not
apply to so much of the gain from the sale
or exchange of property as does not ex-
ceed the portion of the depreciation ad-
justments (as defined in section
1250(b)(3)) attributable to periods after
May 6, 1997, in respect of the property.
(e) Property used in part as a principal
residence. If a taxpayer satisfies the use
requirement only with respect to a portion
of the property sold or exchanged, section
121 will apply only to the gain from the
sale or exchange allocable to that portion.
Thus, if the residence was used partially
for residential purposes and partially for
business purposes, only that part of the
gain allocable to the residential portion is
excludable under section 121. Further-
more, the section 121 exclusion does not
apply to the extent that depreciation at-
tributable to periods after May 6, 1997,
exceeds gain allocable to the business-use
portion of the property. See Example 8in
paragraph (f) of this section.
(f) Examples. The provisions of para-
graphs (a) through (e) of this section are
illustrated by the following examples:
Example 1. Taxpayer A has owned and used his
house as his principal residence since 1986. On Jan-
uary 1, 1998, A moves to another state. A leases his
house from that date until April 18, 2000, when he
sells it. A is eligible for the section 121 exclusion
because he has owned and used the house as his
principal residence for at least 2 years out of the 5
years preceding the sale.
Example 2. Taxpayer B owned and used a house
as her principal residence from 1986 to the end of
1997. On January 1, 1998, B moved to another state
and ceases to use the house. B’s move was not ne-
cessitated by a change in place of employment,
health, or unforeseen circumstances. B’s son moved
into the house in March 1999 and used the residence
until it was sold on July 1, 2001. Taxpayer B may
not exclude gain from the sale under section 121 be-
cause she did not use the property as her principal
residence for at least 2 years out of the 5 years pre-
ceding the sale.
Example 3. Taxpayer C lived in a townhouse that
he rented from 1993 through 1997. On January 1,
1998, he purchased this townhouse. On February 1,
1998, C moved into his daughter’s home. On March
1, 2000, while still living in his daughter’s home, C
sold his townhouse. The section 121 exclusion will
apply to gain from the sale because C owned the
townhouse for at least 2 years out of the 5 years pre-
ceding the sale (from January 1, 1998 until March 1,
2000) and he used the townhouse as his principal
residence for at least 2 years during the 5-year pe-
riod preceding the sale (from March 1, 1995 until
February 1, 1998).
Example 4. Taxpayer D, a college professor, pur-
chased and moved into a house on May 1, 1997. He
used the house as his principal residence continu-
ously until September 1, 1998, when he went
abroad for a 1-year sabbatical leave. On October 1,
1999, 1 month after returning from the leave, D sold
the house. Because his leave is not considered to be
a short temporary absence for purposes of section
121 (see paragraph (c) of this section), the period of

October 30, 20004502000–44 I.R.B.
the leave may not be included in determining
whether D used the house for periods aggregating 2
years during the 5-year period ending on the date of
the sale. Consequently, D is not entitled to exclude
gain under section 121 because he did not use the
residence for the requisite period.
Example 5. Taxpayer E purchased a house on
February 1, 1998, that he used as his principal resi-
dence. During 1998 and 1999, E left his residence
for a 2-month summer vacation. E sold the house on
March 1, 2000. Although, in the 5-year period pre-
ceding the date of sale, the total time E used his resi-
dence is less than 2 years (21 months), the section
121 exclusion will apply to gain from the sale of the
residence because the 2-month vacations are short
temporary absences and are counted as periods of
use in determining whether E used the residence for
the requisite period.
Example 6. On July 1, 1999, Taxpayer F moves
into a house that he owns and had rented to tenants
since July 1, 1997. F took depreciation deductions
totaling $14,000 for the period that he rented the
property. After using the residence as his principal
residence for 2 full years, F sells the property on Au-
gust 1, 2001. F’s gain realized from the sale is
$40,000. F had no capital losses for 2001. Only
$26,000 ($40,000 gain realized - $14,000 deprecia-
tion deductions) may be excluded under section 121.
The $14,000 of gain recognized by F is unrecaptured
section 1250 gain within the meaning of section
1(h).
Example 7. Taxpayer G, an attorney, uses a por-
tion of her principal residence as a law office for a
period in excess of 3 years out of the 5 years pre-
ceding the sale of the property. Because G did not
use the law office portion of the property as her
residence, the section 121 exclusion does not apply
to the gain from the sale that is allocable to the law
office portion of the property.
Example 8. Taxpayer H buys a house in 1998.
For 5 years, H uses a portion of the property as his
principal residence and a portion of the property
for business purposes. H claims depreciation de-
ductions of $20,000 for the business use of the
property. H sells the property in 2003, realizing a
gain of $50,000. H had no other section 1231 or
capital gains or losses for 2003. H determines that
$15,000 of the gain is allocable to the business-use
portion of the property and that $35,000 of the gain
is allocable to the portion of the property used as
his residence. H must recognize $15,000 of the
gain allocable to the business-use portion of the
property. This $15,000 of gain is unrecaptured sec-
tion 1250 gain within the meaning of section 1(h).
In addition, the section 121 exclusion does not
apply to the extent that H’s post-May 6, 1997 de-
preciation ($20,000) exceeds the gain allocable to
the business-use portion of the property ($15,000).
Therefore, H may exclude $30,000 of the gain from
the sale of the property. The remaining $5,000 of
gain is recognized by H as unrecaptured section
1250 gain within the meaning of section 1(h).
Example 9. Taxpayer J buys a house in 1998.
For 5 years, J uses a portion of the property as her
principal residence and a portion of the property
for business purposes. J claims depreciation de-
ductions of $10,000 for the business use of the
property. J sells the property in 2003, realizing a
gain of $50,000. J had no other section 1231 or
capital gains or losses for 2003. J determines that
$15,000 of the gain is allocable to the business-use
portion of the property and that $35,000 of the gain
is allocable to the portion of the property used as
her residence. J must recognize the $15,000 of
gain allocable to the business-use portion of the
property ($10,000 of which is unrecaptured section
1250 gain within the meaning of section 1(h), and
$5,000 of which adjusted net capital gain). J may
exclude $35,000 of the gain from the sale of the
property.
Example 10. Taxpayer K owns two residences,
one in New York and one in Florida. From 1999
through 2003, he lives in the New York residence
for 7 months and the Florida residence for 5
months. Thus, K used the New York residence a
majority of the time in each year from 1999
through 2003. Therefore, in the absence of facts
and circumstances indicating otherwise, the New
York residence is his principal residence, and only
the New York residence would be eligible for the
121 exclusion if it were sold at the end of 2003.
Example 11. Taxpayer L owns two residences,
one in Virginia and one in Maine. During 1999 and
2000, she lives in the Virginia residence. During
2001 and 2002, L lives in the Maine residence.
During 2003, she lives in the Virginia residence.
Her principal residence during 1999, 2000, and
2003 is the Virginia residence. Her principal resi-
dence during 2001 and 2002 is the Maine resi-
dence. Either residence would be eligible for the
121 exclusion if it were sold during 2003.
(g) Effective date. This section and
§§1.121–2 through 1.121–4 are applica-
ble for sales and exchanges that occur on
or after the date these regulations are
published as final regulations in the Fed-
eral Register.
§1.121–2 Limitations.
(a) Dollar limitations. A taxpayer
may exclude from gross income up to
$250,000 of gain from the sale or ex-
change of the taxpayer’s principal resi-
dence. If taxpayers jointly own a princi-
pal residence but file separate returns,
each taxpayer will exclude from gross
income up to $250,000 of gain that is at-
tributable to each taxpayer’s interest in
the property, if the requirements of sec-
tion 121 have otherwise been met.
(b) Special rules for joint returns—
(1) In general. A husband and wife who
make a joint return for the year of the
sale or exchange may exclude up to
$500,000 of gain if—
(i) Either spouse meets the 2-year
ownership requirements of §1.121–1(a);
(ii) Both spouses meet the 2-year use
requirements of
§1.121–1(a); and
(iii) Neither spouse excluded gain
from a prior sale or exchange of property
under section 121 within the last 2 years
(as determined under paragraph (c) of
this section).
(2) Other joint returns. For taxpayers
filing jointly, if the spouses fail to meet
the requirements of paragraph (b)(1) of
this section, the maximum limitation
amount to be claimed by the couple will
be the sum of each spouse’s limitation
amount determined on a separate basis as
if they had not been married. For this
purpose, each spouse will be treated as
owning the property during the period
that either spouse owned the property.
(3) Examples. The provisions of this
paragraph (b) are illustrated by the fol-
lowing examples:
Example 1. Married taxpayers H and W sell
their residence and the gain realized from the sale
is $256,000. H and W meet the requirements of
section 121 and file a joint return for the year of the
sale. The entire amount of gain from the sale of
their principal residence is excluded from gross in-
come because the gain realized from the sale does
not exceed the limitation amount of $500,000
available to taxpayers filing a joint return.
Example 2. During 1999, married taxpayers H
and W each sell a residence that each had sepa-
rately owned and used as a principal residence be-
fore their marriage. Each spouse meets the owner-
ship and use tests for his or her respective
residence. Neither spouse meets the use require-
ment for the other spouse’s residence. H and W
file a joint return for the year of the sales. The gain
realized from the sale of H’s residence is $200,000.
The gain realized from the sale of W’s residence is
$300,000. Because the ownership and use require-
ments are met for each residence by each respec-
tive spouse, H and W are eligible to exclude up to
$250,000 of gain from the sale of each of their res-
idences. However, W may not use H’s unused ex-
clusion to exclude gain in excess of her exclusion
amount. Therefore, H and W must recognize
$50,000 of the gain realized on the sale of W’s res-
idence.
Example 3. Married taxpayers H and W sell
their residence and file a joint return for the year of
the sale. Section 1.121– 3 (relating to the reduced
exclusion) does not apply to the sale of their resi-
dence. W, but not H, satisfies the requirements of
section 121. They are eligible to exclude up to
$250,000 of the gain from the sale of the residence
because that is the sum of each spouse’s dollar lim-
itation amount determined on a separate basis as if
they had not been married ($0 for H, $250,000 for
W).
Example 4. Married taxpayers H and W have
owned and used their principal residence since
1998. On February 16, 2001, H dies. On Septem-
ber 21, 2001, W sells the residence and realizes a
gain of $350,000. Pursuant to section 6013(a)(3),
W and H’s executor make a joint return for 2001.
All $350,000 of the gain from the sale of the resi-
dence may be excluded.
Example 5. Married taxpayers H and W have
owned and used their principal residence since
1998. On February 16, 2001, H dies. W sells the
residence on March 30, 2002. Because W’s filing

2000–44 I.R.B.451October 30, 2000
status for the taxable year of the sale is single, the
special rules for joint returns under paragraph (b)
of this section do not apply and W may exclude
only $250,000 of the gain.
(c) Application of section 121 to only 1
sale or exchange every 2 years—(1) In
general. Except as otherwise provided in
§1.121–3 (relating to the reduced exclu-
sion), a taxpayer may not exclude from
gross income gain from the sale or ex-
change of a principal residence if, during
the 2-year period ending on the date of the
sale or exchange, the taxpayer sold or ex-
changed other property for which gain
was excluded under section 121. For
purposes of this paragraph (c)(1), any sale
or exchange before May 7, 1997 is disre-
garded.
(2) Example. The following example
illustrates the rules of this paragraph (c):
Example. Taxpayer A owned a townhouse that he
used as his principal residence for two full years,
1998 and 1999. A then bought a house in 2000 that
he owned and used as his principal residence. A
sells the townhouse in 2002 and excludes gain real-
ized on its sale under section 121. A sells the house
in the next year, 2003. Section 1.121–3 (relating to
the reduced exclusion) does not apply to the sale of
the house. Although A meets the 2-year ownership
and use requirements of section 121, A is not eligible
to exclude gain from the sale of the house because A
excluded gain within the last 2 years under section
121 from the sale of the townhouse.
§1.121–3 Reduced exclusion.
(a) Reduced exclusion for taxpayers
failing to meet certain requirements: In
general. A reduced exclusion is available
for a taxpayer who sells or exchanges
property used as the taxpayer’s principal
residence but fails to satisfy the owner-
ship and use requirements described in
§1.121–1(a) or the 2-year limitation de-
scribed in §1.121–2(c). This reduced ex-
clusion applies only if the sale or ex-
change is necessitated by a change in
place of employment, health, or, to the ex-
tent provided in forms, instructions, or
other appropriate guidance including reg-
ulations and letter rulings, unforeseen cir-
cumstances. The reduced exclusion is
computed by multiplying the maximum
dollar limitation of $250,000 ($500,000
for certain joint filers) by a fraction. The
numerator of the fraction is the shortest of
the period of time that the taxpayer owned
the property as the taxpayer’s principal
residence during the 5-year period ending
on the date of the sale or exchange; the
period of time that the taxpayer used the
property during the 5-year period ending
on the date of the sale or exchange; or the
period of time between the date of a prior
sale or exchange of property for which the
taxpayer excluded gain under section 121
and the date of the current sale or ex-
change. The numerator of the fraction
may be expressed in days or months. The
denominator of the fraction is 730 days
or 24 months (depending on the measure
of time used in the numerator).
(b) Examples. The following exam-
ples illustrate the rules of this section:
Example 1. Taxpayer A purchases a house that
she uses as her principal residence. Twelve months
after the purchase, A sells the house due to a change
in place of her employment. A has not excluded
gain under section 121 on a prior sale or exchange of
property within the last 2 years. A is eligible to ex-
clude up to $125,000 of the gain from the sale of her
house (12/24 x $250,000).
Example 2. (i) Taxpayer H owned a house that he
used as his principal residence since 1996. On Janu-
ary 15, 1999, H and W marry and W begins to use
H’s house as her principal residence. On January
15, 2000, H sells the house due to a change in H’s
and W’s place of employment. Neither H nor W has
excluded gain under section 121 on a prior sale or
exchange of property within the last 2 years.
(ii) Because H and W have not both used the
house as their principal residence for at least 2 years
during the 5-year period preceding its sale, the max-
imum dollar limitation amount that may be claimed
by H and W will not be $500,000, but the sum of
each spouse’s limitation amount determined on a
separate basis as if they had not been married. (See
§1.121–2(b)(2).)
(iii) H is eligible to exclude up to $250,000 of
gain because he meets the requirements of section
121. W is not eligible to exclude the maximum dol-
lar limitation amount. Instead, W is eligible to
claim a reduced exclusion. Because the sale of the
house is due to a change in place of employment, W
is eligible to exclude up to $125,000 of the gain
(365/730 x $250,000). Therefore, H and W are eli-
gible to exclude up to $375,000 of gain ($250,000 +
$125,000) from the sale of the house.
§1.121–4 Special rules.
(a) Property of deceased spouse—(1)
In general. For purposes of satisfying the
ownership and use requirements of sec-
tion 121, a taxpayer is treated as owning
and using property as the taxpayer’s prin-
cipal residence during any period that the
taxpayer’s deceased spouse owned and
used the property as a principal residence
before death if—
(i) The taxpayer’s spouse is deceased
on the date of the sale or exchange of the
property; and
(ii) The taxpayer has not remarried at
the time of the sale or exchange of the
property.
(2) Example. The provisions of this
paragraph (a) are illustrated by the fol-
lowing example:
Example. Taxpayer H has owned and used a
house as his principal residence since July 1, 1987.
H and W marry on July 1, 1999 and from that date
they use H’s house as their principal residence. H
dies on August 15, 2000, and W inherits the prop-
erty and continues to use the property as her princi-
pal residence. W sells the property on September
1, 2000, at which time she has not remarried. Al-
though W has owned and used the house for less
than 2 years, W will be considered to have satisfied
the ownership and use requirements of section 121
because W’s period of ownership and use includes
the period that H owned and used the property be-
fore death.
(b) Property owned by spouse or for-
mer spouse—(1) Property transferred to
individual from spouse or former spouse.
If a taxpayer obtains property from a
spouse or former spouse in a transaction
described in section 1041(a), the period
that the taxpayer owns the property will
include the period that the spouse or for-
mer spouse owned the property.
(2) Property used by spouse or former
spouse. A taxpayer is treated as using
property as the taxpayer’s principal resi-
dence for any period that the taxpayer has
an ownership interest in the property and
the taxpayer’s spouse or former spouse is
granted use of the property under a di-
vorce or separation instrument (as defined
in section 71(b)(2)), provided that the
spouse or former spouse uses the property
as a principal residence.
(c) Tenant-stockholder in cooperative
housing corporation. A taxpayer who
holds stock as a tenant-stockholder in a
cooperative housing corporation (as those
terms are defined in section 216(b)(1) and
(2)) may be eligible to exclude gain under
section 121 on the sale or exchange of the
stock. In determining whether the tax-
payer meets the requirements of section
121, the ownership requirements are ap-
plied to the holding of the stock and the
use requirements are applied to the house
or apartment that the taxpayer was enti-
tled to occupy by reason of the taxpayer’s
stock ownership.
(d) Involuntary conversions—(1) In
general. For purposes of section 121,
the destruction, theft, seizure, requisi-
tion, or condemnation of property is
treated as a sale of the property.
(2) Application of section 1033. In ap-
plying section 1033 (relating to involun-
tary conversions), the amount realized
from the sale or exchange of property
used as the taxpayer’s principal residence

October 30, 20004522000–44 I.R.B.
is treated as being the amount determined
without regard to section 121, reduced by
the amount of gain excluded from the tax-
payer’s gross income under section 121.
(3) Property acquired after involun-
tary conversion. If the basis of the prop-
erty acquired as a result of an involuntary
conversion is determined (in whole or in
part) under section 1033(b) (relating to
the basis of property acquired through in-
voluntary conversion), then for purposes
of satisfying the requirements of section
121, the taxpayer will be treated as own-
ing and using the acquired property as the
taxpayer’s principal residence during any
period of time that the taxpayer owned
and used the converted property as the
taxpayer’s principal residence.
(4) Example. The provisions of this
paragraph (d) are illustrated by the fol-
lowing example:
Example. (i) On February 18, 1999, fire destroys
Taxpayer A’s house that had an adjusted basis of
$80,000. A had owned and used this property as her
principal residence for 20 years prior to its destruc-
tion. A’s insurance company paid A $400,000 for
the house. Thus, A realized a gain of $320,000
($400,000 - $80,000). On August 27, 1999, A pur-
chases a new house at a cost of $100,000.
(ii) Because the destruction of the house is
treated as a sale for purposes of section 121, A will
exclude $250,000 of the realized gain from A’s gross
income. For purposes of section 1033, the amount
realized is then treated as being $150,000 ($400,000
- $250,000) and the gain realized is $70,000
($150,000 amount realized - $80,000 basis). A
elects under section 1033 to recognize only $50,000
of the gain ($150,000 amount realized - $100,000
cost of new house). The remaining $20,000 of gain
is deferred and A’s basis in the new house is $80,000
($100,000 cost - $20,000 gain not recognized).
(iii) A will be treated as owning and using the
new house as A’s principal residence during the 20-
year period that A owned and used the destroyed
house.
(e) Determination of use during peri-
ods of out-of-residence care. If a taxpayer
has become physically or mentally inca-
pable of self-care and the taxpayer sells or
exchanges property that the taxpayer
owned and used as the taxpayer’s princi-
pal residence for a period aggregating at
least 1 year during the 5-year period pre-
ceding the sale or exchange, the taxpayer
is treated as using the property as the tax-
payer’s principal residence for any period
of time during the 5-year period in which
the taxpayer owns the property and re-
sides in any facility (including a nursing
home) licensed by a State or political sub-
division to care for an individual in the
taxpayer’s condition.
(f) Sales of remainder interests—(1)
In general. A taxpayer may elect to have
the section 121 exclusion apply to gain
from the sale or exchange of a remainder
interest in the taxpayer’s principal resi-
dence.
(2) Limitations—(i) Sale or exchange
of any other interest. If a taxpayer elects
to exclude gain from the sale or exchange
of a remainder interest in the taxpayer’s
principal residence, the section 121 exclu-
sion will not apply to a sale or exchange
of any other interest in the residence that
is sold or exchanged separately.
(ii) Sales to related parties. Paragraph
(f)(1) of this section will not apply to a
sale or exchange by any person who bears
a relationship to the taxpayer which is de-
scribed in section 267(b) or 707(b).
(3) Election. The taxpayer makes the
election under this paragraph (f) by filing
a return for the taxable year of the sale or
exchange that does not include the gain
from the sale or exchange of the remain-
der interest in the taxpayer’s gross in-
come.
(g) No exclusion for expatriates. The
section 121 exclusion will not apply to
any sale or exchange by an individual if
the treatment provided by section
877(a)(1) (relating to the treatment of
expatriates) applies to the individual.
(h) Election to have section not
apply. A taxpayer may elect to have the
section 121 exclusion not apply to a sale
or exchange of property. The taxpayer
makes the election by filing a return for
the taxable year of the sale or exchange
that includes the gain from the sale or
exchange of the taxpayer’s principal
residence in the taxpayer’s gross in-
come.
(i) Residences acquired in rollovers
under section 1034. If a taxpayer acquires
property (section 121 property) in a trans-
action that qualifies under section 1034 for
the nonrecognition of gain realized on the
sale or exchange of another property (sec-
tion 1034 property) and later sells or ex-
changes the section 121 property, in deter-
mining the period of the taxpayer’s
ownership and use of the sold or ex-
changed section 121 property, the tax-
payer may include the periods that the tax-
payer owned and used the section 1034
property as the taxpayer’s principal resi-
dence (and each prior residence taken into
account under section 1223(7) in deter-
mining the holding period of the 1034
property).
§1.121–5 [Removed]
Par. 3. Section 1.121–5 is removed.
Par. 4. Section 1.1398–3 is added to
read as follows:
§1.1398–3 Treatment of section 121
exclusion in individuals’ title 11 cases.
(a) Scope. This section applies to
cases under chapter 7 or chapter 11 of
title 11 of the United States Code, but
only if the debtor is an individual.
(b) Definition and rules of general
application. For purposes of this sec-
tion, section 121 exclusion means the ex-
clusion of gain from the sale or exchange
of a debtor’s principal residence avail-
able under section 121.
(c) Estate succeeds to exclusion upon
commencement of case. The bankruptcy
estate succeeds to and takes into account
the section 121 exclusion with respect to
the property transferred into the estate.
(d) Effective date. This section is ap-
plicable for sales or exchanges that occur
on or after the date these regulations are
published as final regulations in the Fed-
eral Register.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Oc-
tober 6, 2000, 8:45 a.m., and published in the issue
of the Federal Register for October 10, 2000, 65
F.R. 60136)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Classification of Certain Pension
and Employee Benefit Trusts,
and Other Trusts
REG–108553–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed amendments to the regulations
defining a domestic or foreign trust for
federal tax purposes. The proposed regu-

2000–44 I.R.B.453October 30, 2000
lations will affect certain specified em-
ployee benefit trusts and investment
trusts. The proposed amendments pro-
vide that these employee benefit trusts
and investment trusts are deemed to sat-
isfy the control test for domestic trust
treatment if United States trustees control
all of the substantial decisions of the trust
made by the trustees of the trust. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by January 10, 2001.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for January 31, 2001,
at 10 a.m. must be submitted by January
10, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–108553–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–108553–
00), Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs” op-
tion on the IRS Home Page, or by submit-
ting 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 Internal Revenue Service
Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
James A. Quinn, (202) 622-3060; con-
cerning submissions and the hearing, Guy
R. Traynor, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 401(a) requires a trust forming
part of a pension, profit-sharing, or stock
bonus plan (qualified plan trust) to be cre-
ated or organized in the United States in
order to be a qualified trust. Similarly,
section 408(a) requires an individual re-
tirement account trust (IRA trust), which
also includes a trust for a Simple IRA de-
scribed in section 408(p) and a trust for a
Roth IRA described in section 408A, to
be created or organized in the United
States. Section 1.401–1(a)(3)(i) further
provides that a trust will not constitute a
qualified trust under section 401(a) unless
the trust is maintained at all times as a do-
mestic trust in the United States. Under
§1.408–2(b), a similar requirement ap-
plies to an IRA trust.
Prior to the enactment of the Small
Business Job Protection Act (SBJPA),
Public Law 104–188 (110 Stat. 1755)
(August 20, 1996), the status of a quali-
fied plan trust as a domestic trust gener-
ally turned on a facts and circumstances
determination that the trust was a resident
trust and was subject to the continuous ju-
risdiction of the United States. See, for
example, Rev. Rul. 70–242 (1970–1 C.B.
89) regarding the determination of do-
mestic trust status for purposes of section
401(a).
The SBJPA and the Taxpayer Relief
Act of 1997 (TRA 97), Public Law
105–34 (111 Stat. 788) (August 5, 1997),
amended section 7701(a)(30) to provide
objective criteria for determining whether
a trust is a domestic trust. New section
7701(a)(30)(E) provides that a trust will
be treated as a domestic trust if: (1) a
court within the United States is able to
exercise primary supervision over the ad-
ministration of the trust (court test), and
(2) one or more United States persons
have the authority to control all substan-
tial decisions of the trust (control test).
These changes are generally effective for
taxable years beginning after December
31, 1996.
Section 301.7701–7, published in the
Federal Registeron February 2, 1999
(64 FR 4967), provides guidance under
section 7701(a)(30)(E) in determining
whether a trust is treated as a United
States person and therefore as a domestic
trust for federal tax purposes. The regula-
tions are generally effective for taxable
years ending after February 2, 1999, but
may be applied by taxpayers for taxable
years beginning after December 31, 1996.
In addition, section 1907(a)(3) of the
SBJPA, as amended by the TRA 97, gen-
erally provides that, to the extent pre-
scribed in regulations, a trust that was in
existence on August 20, 1996, and that
was treated as a United States person on
August 19, 1996, may elect to continue to
be treated as a United States person. Sec-
tion 301.7701–7(f) provides rules govern-
ing this election to continue to be treated
as a United States person.
Section 301.7701–7(d) provides guid-
ance on the application of the control test,
including defining United States persons,
substantial decisions, and control. Gener-
ally, for purposes of the control test, all
persons with any power over substantial
decisions of the trust, whether acting in a
fiduciary capacity or not, must be counted
for purposes of the control test.
However, §301.7701–7(d)(1)(iv) pro-
vides a special rule for certain employee
benefit trusts listed therein. These trusts
are required to be created or organized in
the United States and are subject to other
detailed requirements for qualification
under the Internal Revenue Code (Code).
Therefore, §301.7701–7(d)(1)(iv) pro-
vides that these trusts are deemed to sat-
isfy the control test, provided that United
States fiduciaries control all of the sub-
stantial decisions of the trust that are
made by the trustees or fiduciaries. Sec-
tion 301.7701–7(d)(1)(iv) authorizes the
Commissioner to designate additional cat-
egories of trusts subject to the special rule
in revenue procedures, notices, or other
guidance published in the Internal Rev-
enue Bulletin.
Explanation
The IRS and the Treasury Department
have become aware of two additional cat-
egories of trusts that should qualify for
the special control test rule in
§301.7701–7(d)(1)(iv).
The first category is group trusts con-
sisting of qualified plan trusts and IRA
trusts, as described in Rev. Rul. 81–100
(1981–1 C.B. 326). If the requirements
set forth in Rev. Rul. 81–100 are met, a
group trust is itself exempt from tax, and
the tax-exempt status of the participating
trusts is not affected by the pooling of
their funds in the group trust. One of the
requirements is that the group trust must
be created or organized in the United
States and must be maintained at all times
as a domestic trust in the United States.
Because these trusts are required to be
created or organized in the United States
and are subject to other detailed require-
ments, they are similar to the other cate-
gories of employee benefit trusts listed in
§301.7701–7(d)(1)(iv). Therefore, the
proposed regulations add group trusts de-

October 30, 20004542000–44 I.R.B.
scribed in Rev. Rul. 81–100 to the cate-
gories of trusts that may use the special
control test rule.
The second category is certain invest-
ment trusts that are classified as trusts
under §301.7701–4(c)(1). An investment
trust with a single class of ownership in-
terests, representing undivided beneficial
interests in the assets in the trust, is clas-
sified as a trust if there is no power under
the trust agreement to vary the invest-
ment of the certificate holders. In addi-
tion, an investment trust with multiple
classes of ownership interests, in which
there is no power under the trust agree-
ment to vary the investment of the certifi-
cate holders, is classified as a trust if the
trust is formed to facilitate direct invest-
ment in the assets of the trust and the ex-
istence of multiple classes of ownership
interests is incidental to that purpose.
These trusts are treated as owned by the
investors under the grantor trust rules of
subpart E, part I, subchapter J, chapter 1
of the Code.
The proposed regulations add invest-
ment trusts classified as trusts under
§301.7701–4(c)(1) to the categories of
trusts that may use the special control test
rule, provided the investment trusts meet
the conditions described in §301.7701–7
(d)(1)(iv)(I). These trusts are subject to
reporting requirements as domestic
grantor trusts, and each investor must re-
port the items of income, deduction, and
credit that are attributable to the in-
vestor’s portion of the trust. The condi-
tions set forth in the proposed regulations
are intended to ensure that all trustees are
United States persons including at least
one institutional United States trustee, the
sponsors (persons who exchange invest-
ment assets for beneficial interests with a
view to selling the beneficial interests) are
United States persons, and the beneficial
interests are widely offered for sale pri-
marily in the United States to United
States persons. An investment trust that
satisfies these conditions is deemed to sat-
isfy the control test even though one or
more investors may be foreign persons
with the power to make a substantial deci-
sion of the trust.
In addition, the IRS and the Treasury
Department have become aware of con-
cerns expressed by taxpayers in applying
the special rule of §301.7701–7(d)(1)(iv)
with respect to determining whether a
person is or is not a fiduciary for purposes
of the control test. For example, under
section 3(14)(A) of the Employee Retire-
ment Income Security Act of 1974
(ERISA), Public Law 93–406 (88 Stat.
829) (September 2, 1974), a variety of
persons in addition to the trustee(s) is
considered fiduciaries with respect to an
employee benefit trust. In contrast, under
ordinary trust principles the fiduciary of a
trust is generally considered to be the
trustee holding legal title to the trust as-
sets on behalf of those having a beneficial
interest therein. Section 301.7701–6(b).
Therefore, these regulations propose to
amend §301.7701–7(d)(1)(iv) relating to
the application of the control test of sec-
tion 7701(a)(30)(E) to clarify that em-
ployee benefit trusts and certain invest-
ment trusts identified in the regulations
are deemed to satisfy the control test if
United States trustees control all of the
substantial decisions of the trust made by
the trustees of the trust.
Taxpayers concerned with maintaining
domestic trust status should also note that,
in appropriate cases, it may still be possi-
ble to elect pursuant to §301.7701–7(f) to
treat a trust existing on August 19, 1996,
as a United States person.
Application to Certain Pension Trusts
Created or Organized in Puerto Rico
Section 1022(i)(1) of ERISA provides
for tax exemption for certain trusts created
or organized in Puerto Rico that form part
of a pension, profit-sharing, or stock bonus
plan. Section 1022(i)(2) and §1.401(a)–50
generally provide that the administrator of
such a trust may elect to have the trust
treated as a trust created or organized in
the United States for purposes of section
401(a). In light of the changes made to
section 7701(a)(30) in the SBJPA and the
TRA 97, and the ensuing regulations,
some taxpayers have expressed concerns
regarding the continuing application of
sections 1022(i)(1) and (2) and §1.401–50
to a pension trust created or organized in
Puerto Rico that is not a domestic trust
within the meaning of section 7701(a)(30).
Because the application of these provi-
sions is not restricted to trusts that are do-
mestic trusts within the meaning of section
7701(a)(30), the 1996 and 1997 amend-
ments to section 7701(a)(30) and the ensu-
ing regulations do not affect the applica-
tion of these provisions.
Proposed Effective Date
The amendments to the regulations are
proposed to be applicable to trusts for tax-
able years ending on or after the date on
which these regulations are published as
final regulations in the Federal Register.
It is anticipated that the final regulations
will provide that trusts will be able to rely
on the final regulations for taxable years
beginning after December 31, 1996, and
for electing trusts under section
1907(a)(3)(B) of the SBJPA for taxable
years ending after August 20, 1996. In
addition, for taxable years beginning after
December 31, 1996, and taxable years
ending before these regulations are final-
ized, or for electing trusts under section
1907(a)(3)(B) of the SBJPA for taxable
years ending after August 20, 1996, and
before these regulations are finalized, the
status of a trust as a qualified plan trust
under section 401(a), an IRA trust under
section 408(a), or any other employee
benefit trust described in
§301.7701–7(d)(1)(iv) of these proposed
regulations will not be challenged by the
IRS based on a failure of the trust to sat-
isfy the control test of section
7701(a)(30)(E)(ii) and, therefore, a failure
to be maintained at all times as a domestic
trust in the United States, if the trust satis-
fies the control test safe harbor set forth in
§301.7701–7(d)(1)(iv) of these proposed
regulations or §301.7701–7(d)(1)(iv) of
the final regulations published in the Fed-
eral Registeron February 2, 1999.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulation
does not impose a collection of informa-
tion 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, this notice of
proposed rulemaking will be submitted to

2000–44 I.R.B.455October 30, 2000
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing.
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(preferably a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment 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.
A public hearing has been scheduled for
January 31, 2001, at 10 a.m. in the Internal
Revenue Service Auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW., Washington DC. Because of
access restrictions, visitors will not be ad-
mitted beyond the Internal Revenue Build-
ing lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit written
comments by January 10, 2001, and sub-
mit an outline of the topics to be discussed
and the time to be devoted to each topic
(preferably a signed original and eight (8)
copies) by January 10, 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 regulations
is James A. Quinn of the Office of Associ-
ate Chief Counsel (Passthroughs and Spe-
cial Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as
follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701–7 is amended
as follows:
1. Paragraph (d)(1)(iv) introductory
text is revised.
2. Paragraph (d)(1)(iv)(H) is redesig-
nated as paragraph (d)(1)(iv)(J).
3. New paragraphs (d)(1)(iv)(H) and (I)
are added.
4. Paragraph (d)(1)(v) Example 1is re-
vised and Example 5is added.
5. The first sentence of paragraph
(e)(1) is revised.
6. Paragraph (e)(3) is added.
The revisions and additions read as fol-
lows:
§301.7701–7 Trusts—domestic and
foreign.
* * * * *
(d) * * * (1) * * *
(iv) Safe harbor for certain employee
benefit trusts and investment trusts.
Notwithstanding the provisions of this
paragraph (d), the trusts listed in this para-
graph (d)(1)(iv) are deemed to satisfy the
control test set forth in paragraph (a)(1)(ii)
of this section, provided that United States
trustees control all of the substantial deci-
sions made by the trustees of the trust—
* * * * *
(H) A group trust described in Rev. Rul.
81–100 (1981–1 C.B. 326) (See
§601.601(d)(2) of this chapter);
(I) An investment trust classified as a
trust under §301.7701–4(c), provided that
the following conditions are satisfied—
(1) All trustees are United States per-
sons and at least one of the trustees is a
bank, as defined in section 581, or a
United States Government-owned agency
or United States Government-sponsored
enterprise;
(2) All sponsors (persons who exchange
investment assets for beneficial interests
with a view to selling the beneficial inter-
ests) are United States persons; and
(3) The beneficial interests are widely
offered for sale primarily in the United
States to United States persons;
* * * * *
(v) * * *
Example 1. Trust is a testamentary trust with
three fiduciaries, A, B, and C. Aand Bare United
States citizens and Cis a nonresident alien. No per-
sons except the fiduciaries have authority to make
any decisions of the trust. The trust instrument pro-
vides that no substantial decisions of the trust can be
made unless there is unanimity among the fiducia-
ries. The control test is not satisfied because United
States persons do not control all the substantial deci-
sions of the trust. No substantial decisions can be
made without C’s agreement.
* * * * *
Example 5. X, a foreign corporation, conducts
business in the United States through various branch
operations. Xhas United States employees and has
established a trust as part of a qualified employee
benefit plan under section 401(a) for these employ-
ees. The trust is established under the laws of State
A, and the trustee of the trust is B, a United States
bank governed by the laws of State A. Bholds legal
title to the trust assets for the benefit of the trust ben-
eficiaries. A plan committee makes decisions with
respect to the plan and the trust. The plan committee
can direct B’s actions with regard to those decisions
and under the governing documents Bis not liable
for those decisions. Members of the plan committee
consist of United States persons and nonresident
aliens, but nonresident aliens make up a majority of
the plan committee. Decisions of the plan commit-
tee are made by majority vote. In addition, Xretains
the power to terminate the trust and to replace the
United States trustee or to appoint additional
trustees. This trust is deemed to satisfy the control
test under paragraph (d)(1)(iv) of this section be-
cause B, a United States person, is the trust’s only
trustee. Any powers held by the plan committee or
Xare not considered under the safe harbor of para-
graph (d)(1)(iv) of this section. In the event that X
appoints additional trustees including foreign
trustees, any powers held by such trustees must be
considered in determining whether United States
trustees control all substantial decisions made by the
trustees of the trust.
* * * * *
(e) Effective date—(1) General rule.
Except for the election to remain a do-
mestic trust provided in paragraph (f) of
this section and except as provided in
paragraph (e)(3) of this section, this sec-
tion is applicable to taxable years ending
after February 2, 1999.
* * * * *
(3) Effective date of safe harbor for
certain employee benefit trusts and in-
vestment trusts. Paragraphs (d)(1)(iv) and
(v) Examples 1and 5of this section apply
to trusts for taxable years ending on or
after the date of publication of final regu-
lations in the Federal Register. Para-
graphs (d)(1)(iv) and (v) Examples 1and
5of this section may be relied on by trusts
for taxable years beginning after Decem-
ber 31, 1996, and also may be relied on by

October 30, 20004562000–44 I.R.B.
trusts whose trustees have elected to
apply sections 7701(a)(30) and (31) to the
trusts for taxable years ending after Au-
gust 20, 1996, under section
1907(a)(3)(B) of the SBJP Act.
* * * * *
David A. Mader,
Acting Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Oc-
tober 10, 2000, 3:31 p.m., and published in the
issue of the Federal Register for October 12, 2000,
65 F.R. 60821)
Amendment of Qualified Plans
for Final Regulations Under
§ 411(d)(6)
Announcement 2000–71
Final regulations under § 411(d)(6) of
the Code were published in the Federal
Register on September 6, 2000. The reg-
ulations grant relief under § 411(d)(6) by
permitting qualified defined contribution
plans to be amended, under certain con-
ditions, to eliminate some alternative
forms of payment and to eliminate or
limit the right to receive certain in-kind
distributions. The final regulations also
permit certain transfers between plans
that were not previously permitted. The
regulations generally apply to amend-
ments adopted, and transfers made, on or
after September 6, 2000.
Effective September 6, 2000, plan
sponsors may adopt plan amendments
that are permitted under the final regula-
tions under § 411(d)(6). Determination
letters that are issued with respect to
plans for which an application is filed
with the Service on or after September 6,
2000, may be relied upon with respect to
whether a plan satisfies the requirements
of the final regulations.
Some plans might contain language
that would necessitate a change to con-
form to the final regulations (as de-
scribed below). Such a plan must be
amended, in connection with its applica-
tion for a determination letter, to satisfy
the final regulations. See below regard-
ing the effective date of the amendment.
Plan sponsors that have determination
letter applications on file with the Ser-
vice which were submitted before Sep-
tember 6, 2000, should contact the Ser-
vice if they wish to amend their plans
and have the provisions of the final regu-
lations taken into account in their deter-
mination letters. Plan sponsors should
contact the EP specialist who has been
assigned to review their application, if
possible. Otherwise, they should contact
Customer Service at 1-877-829-5500. In
these cases, the Service will try to ac-
commodate the plan sponsor’s request to
have the provisions of the final regula-
tions taken into account in the determi-
nation letter. However, if the EP special-
ist assigned to review the application has
already completed that review, the Ser-
vice will not be able to accommodate the
plan sponsor’s request and a new appli-
cation and user fee will be required.
In general, the final regulations ex-
pand the permitted changes that may be
made to alternative forms of payment
and in-kind distributions under a defined
contribution plan and, in the case of vol-
untary direct transfers between plans, the
circumstances under which elimination
of optional forms of benefit is permitted.
Generally, therefore, plan sponsors may
choose to amend their plans as a result of
these changes, but are not required to do
so, except as provided below.
The regulations under § 411(d)(6), as in
effect prior to September 6, 2000, (“the
1988 regulations”) permitted elimination
of optional forms of benefit in connection
with voluntary direct transfers between
plans, provided certain requirements were
satisfied. Section 401(a)(31), which was
added after the 1988 regulations, requires
that participants be able to elect a direct
rollover to an IRA or other eligible retire-
ment plan of any eligible rollover distrib-
ution. Because the requirements of
§ 411(d)(6) do not apply to amounts dis-
tributed, including those amounts directly
rolled over under § 401(a)(31), the volun-
tary direct transfer rules in the 1988 regu-
lations produce the same § 411(d)(6) re-
sult with respect to an eligible rollover
distribution as a direct rollover under
§ 401(a)(31).
The final regulations under
§ 411(d)(6) generally eliminate this du-
plication. The final regulations provide,
in part, that relief from the requirements
of § 411(d)(6) is not available under the
voluntary transfer rules where the par-
ticipant is entitled to elect a
§ 401(a)(31) direct rollover because the
participant is eligible to receive an im-
mediate distribution of the participant’s
entire nonforfeitable accrued benefit in a
single-sum distribution that would con-
sist entirely of an eligible rollover distri-
bution within the meaning of
§ 401(a)(31)(C). This provision of the
final regulations is effective for transfers
occurring on or after January 1, 2002.
Some plans might contain pre-existing
provisions that permit elimination of op-
tional forms of benefit pursuant to the
voluntary direct transfer rules as in effect
under the 1988 regulations. To the extent
that these plan provisions are inconsistent
with the final regulations under
§ 411(d)(6), as described in the preceding
paragraph, the plan must be amended.
The amended plan must provide that the
benefit of a participant described in the
preceding paragraph may be voluntarily
transferred only through a § 401(a)(31)
direct rollover.
Any plan amendment required to con-
form the plan terms to the final
§ 411(d)(6) regulations does not have to
be adopted prior to the end of the plan’s
GUST remedial amendment period, as de-
scribed in Rev. Proc. 2000–27, 2000–26
I.R.B. 1272, and Rev. Proc. 2000–20,
2000–6 I.R.B. 553. However, as provided
above, if a determination letter applica-
tion for the plan is filed on or after Sep-
tember 6, 2000, the required plan amend-
ment must be adopted in connection with
the application. In any case, the plan
amendment must be effective no later
than January 1, 2002.
Changes to Codes for IRAs on
the 2001 Form 1099–R
Announcement 2000–86
Purpose: The purpose of this an-
nouncement is to advise payers making
distributions from IRAs of changes to
the distribution codes entered in box 7
on the 2001 Form 1099–R, Distributions
From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.

Changes to1.Notice 2000–30, 2000–25 I.R.B. 1266, specifies a
Distribution Codesnew method for reporting recharacterizations and reconversions occurring after 2000.
Result.Because of Notice 2000–30, the following
changes are being made to the distribution codes:
• Code Nis added for reporting a
“Recharacterized IRA contribution made for 2001.”
• Code Ris changed to report a
“Recharacterized IRA contribution made for 2000.”
2. Only two distribution codes can be entered in box 7 on Form 1099-R. Therefore, pay-
ers were only able to report a distribution as the result of an excess contribution to a
Roth IRA by using Code J with Code 8 or P. Payers could not use Code 1, 2, 3, or 4 if
Codes J and 8 or P applied.
Result.To alleviate this reporting problem, the following changes are being made to the
distribution codes:
• Code Jis changed to report an “Early distribution from a Roth IRA, no known
exception.”
• Code Tis added to report a “Roth IRA distribution, exception applies.”
Therefore, payers can only use the following codes for a Roth IRA distribution:
• Code J for an early distribution from a Roth IRA, no known exception. (Do not use
Code 1 with Code J. However, you must use Code 5, 8, or P, if applicable.)
• Code T for a distribution from a Roth IRA,
exception applies. (Do not use Code 2, 3, 4, or 7 with Code T. However, you must use
Code 5, 8, or P, if applicable.)
2000–44 I.R.B.457October 30, 2000
Foundations Status of Certain
Organizations
Announcement 2000–87
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations in
the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
Acorn International, Inc., Waterbury, VT
Actex Foundation, Inc., Winsted, CT
Adventure Education of Vermont,
Burlington, VT
Ahepa 250-III, Inc., Groton, CT
Alliance for the Commonwealth, Inc.,
Boston, MA
American Bilingual Community
Association, Inc., Richmond Hill, NY
American Dream Houses Association,
Inc., Baltimore, MD
American Safe Boating Foundation, Inc.,
Mentor, OH
Apollonian Society, Chicago, IL
Arts in Motion, Conway, NH
Artspans, Dunbarton, NH
Association for the Advancement of
Psychosynthesis, St. Louis, MO
Attleboro Friends of Cats, Inc., Attleboro,
MA
Balamand Educational Foundation, Inc.,
Winchester, MA
Balkan Studies Institute, Inc.,
Newton, MA
Baystate Affordable Housing Agency, Inc.,
Somerville, MA
Bennington Foster Parent Association,
Bennington, VT
Berkley Athletic Association, Inc.,
Berkley, MA
Biblical Counseling Center,
Farmington, NM
100 Black Men of Bridgeport, Inc.,
Bridgeport, CT
Blackfriars School of Fence, Inc.,
Paso Robles, CA
Boston Public Sailing, Inc.,
Winthrop, MA
Boston Urological Society, Inc.,
Boston, MA
Brattleboro Area Affordable Housing
Corporation, Brattleboro, VT
Briar Crest I Affordable Housing
Corp., St. Joseph, MI
Brockton Hispanic Community
Center, Brockton, MA
Brownsville Housing Opportunity
Corporation, Brownsville, TX
Brunswick Bambino Baseball
League, Brunswick, ME
Bryan Elementary PTO, Bryan, OH
Bucket Full of Friends, Inc.,
Clinton, CT
Build the Monument Foundation,
Inc., Bedford, NH
Camping and City Children, Inc.,
Lynn, MA
Care Works, Inc., Medford, MA
Caroline County Community Action
Agency, Inc., Bowling Green, VA

October 30, 20004582000–44 I.R.B.
Carosello Musicale Italiano, Inc.,
Hartford, CT
Center for Security and Social Progress,
Inc., Waban, MA
Central City Economic Development
Corporation, Inc., Los Angeles, CA
Central Vermont Memorial Civic Center,
Inc., Montpelier, VT
Central Vermont Supervised Visitation
Center, Montpelier, VT
Centre for Successful Aging Foundation,
Inc., Stamford, CT
Chamblee Foundation, Ltd.,
Glendale, CA
Charis Institute, Inc., Danvers, MA
Charity Foundation, Inc., Boston, MA
Charlotte Land Trust, Inc., Charlotte, VT
Child Charitable Development
Association, New Canaan, CT
Children of the Middle Passage, Inc.,
New York, NY
Children of Today International Youth
Center, Detroit, MI
Childrens Annex Ellenville Child Care
Center, Inc., Ellenville, NY
Childrens Lighthouse, Inc.,
Charlestown, MA
Childrens Television Consortium, Inc.,
Hyannis, MA
Chinese Culture Development and
Promotion Council, Inc., Quincy, MA
Christian Stewardship Fund, Inc.,
Boston, MA
Christians Building Urban Communities,
Inc., Chicago, IL
Cindi Foundation, Coventry, RI
Civil War Roundtable of the Merrimack,
Inc., Newburyport, MA
Coachella Valley Society for the
Prevention of Cruelty to Animals,
Palm Desert, CA
Columbus County Dream Cntr., Inc.,
Whiteville, NC
Comite Pro Festival Latino-Americano
De Queens, Jackson Heights, NY
Community Collaborative of Bridgeport,
Inc., Bridgeport, CT
Community Eyecare Services, Ltd.,
Charlottesville, VA
Community Improvement Program, Inc.,
Roxbury, MA
Community Mobilization Team, Inc.,
Portland, ME
Community Organized Prevention Effort
(COPE), Deerfield, NH
Companion Resource Corp., Buffalo, NY
Compost Charitable Corporation,
Jamaica Plain, MA
Concerned Child Care Providers,
New Bedford, MA
Concerned Maine Families Foundation,
Portland, ME
Creative Gifts, Inc., Hartford, CT
Cultural Resources, Inc., Blue Hill, ME
Dare to Dream Educational Farm
Program, Inc., Orange, MA
Desfile Puertorriqueno, Trenton, NJ
Disabled Individuals for Recreational
Activities (DIRA), S. Dartmouth, MA
Dive 4 Life, Inc., Chicago, IL
Elm Terrace Development Corporation,
New Haven, CT
Emanuel Baptist Church Jamaica Square
Alliance, Elmont, NY
Environmental Council of Alabama, Inc.,
Highland Home, AL
Faces Foundation for World Peace, Inc.,
Ridgefield, CT
Families and Friends of People with
Special Needs, Inc., Bronx, NY
Family Day Care Association of Suffolk
County, Inc., W. Babylon, NY
Fathers of Imani, Inc., Milwaukee, WI
Festival Italiano, Inc., New London, CT
Florida Stars for Children, Inc.,
St. Petersburg, FL
Fontana Academy of Martial Arts,
Fontana, CA
Foundation for the Seventh Fire,
Groton, MA
Foundation of Youth, Luray, VA
Francophone Broadcasting Corporation,
Woburn, MA
Friends of Atlantic Theatre Festival
Society, Ltd., Cohasset, MA
Friends of BHS Girls Ice Hockey, Inc.,
Boston, MA
Friends of CAP, Cranston, RI
Friends of North Star Academy Charter
School, Inc., Springfield, MA
Friends of the Capen-Reynolds Farm,
Inc., Stoughton, MA
Friends of the Holmes School Mural,
Inc., Westport, CT
Friends of the Mashpee National Wildlife
Refuge, Inc., Mashpee, MA
Friends of the Union for Infants
Protection in Lebanon, Rego Park, NY
Friends of the West River Trail,
Jamaica, VT
Friends of the Wolfeboro Community
Bandstand, Inc., Wolfeboro, NH
Friends of the Yankee Brass, Inc.,
White River Jct, VT
Gamma ETA Educational Foundation,
Inc., Tallahasee, FL
Gateway Babe Ruth League, Inc.,
Wareham, MA
Geauga County Mounted Unit, Inc.,
Novelty, OH
GLO of Hartford, Inc., Hartford, CT
Global Commission to Fund the United
Nations, St. Augustine, FL
Gloucester Fishermans Wives
Development Programs, Inc.,
Gloucester, MA
Goshen Soccer Club, Inc.,
Torrington, CT
Greater New York Association of
Holocoust, Woodsburgh, NY
Green Olive Tree, Inc., Crozet, VA
Greenforest Community Development,
Incorporated, Decatur, GA
Dr. Grover C. Hunter University of
North Carolina Dental Trust Fund,
Atlanta, GA
H3, Inc., Cambridge, MA
Happy Prayer House, Tehachapi, CA
Harrington School Foundation,
American Fork, UT
Haven, Inc., Braintree, MA
He is the Bright and Morning Star
Ministries, Milwaukee, WI
Heartstone Alzheimers Foundation, Inc.,
Wellesley, MA
Henry & Yorelis Alvarez Ministries, Inc.,
Weslaco, TX
Heritage Preservation Committee of
Monroe, Inc., Monroe, NY
Hispanic Association for Bilingual
Literacy and Education of Conn., Inc.,
Southington, CT
Hockey for Caribou, Caribou, ME
Hodges Village Environmental
Education Association, Oxford, MA
Holyoke Power, Inc., Holyoke, MA
Hope Ministries, Inc., Medford, MA
Houses to Homes, Inc., Somerville, MA
Hudson Highlands Music Festival, Inc.,
Garrison, NY
Institute for Fundamental Sciences,
Irvine, CA
Interfaith Council for Elders, Inc.,
Needham, MA
Interfaith Volunteer Caregivers of
Greater Bridgeport, Inc.,
Bridgeport, CT
Israel Center for International
Environmental Studies-US, Inc.,
Needham, MA
Itasca Rotary Student Partnership,
Grand Rapids, MN
Jamaica Plain Youth Soccer, Inc.,
Jamaica Plain, MA

2000–44 I.R.B.459October 30, 2000
Jeffrey P. Nelen Memorial Golf
Tournament, Inc., Springfield, MA
Jessi’s Gift, Biddeford, ME
Just Do It Youth Services, Oakland, CA
Karnei Shomrom Foundation, Inc.,
New York, NY
Knox Booster Club, Knox, ME
Laborers in the Harvest, Inc.,
Magnolia, AR
Las Manos Foundation, Healdsburg, CA
Ledyard Girls Softball League,
Ledyard, CT
Life Enhancement Seminars, Inc.,
Wynnwood, PA
Lincoln Little League, Inc., Lincoln, RI
Linda McDonald Ministries,
Castle Rock, CO
Lords Manna, Los Angeles, CA
Loring Memorial Park Development
Association, Inc., Portland, ME
Lubbock Therapeutic Center, Inc.,
Lubbock, TX
Lunenburg Hockey Association,
Lunenburg, MA
Lyceum Educational Corporation,
Milford, CT
Manderlee Productions, Inc.,
Rocky Hill, CT
Mariana Braceti and Rincon De Gautier
Institute, Inc., Springfield, MA
Marion Road Athletic Association,
Macon, GA
Matthew Twenty-Five Foundation, Inc.,
Arlington, TX
Melrose East New Directions, Inc.,
Baton Rouge, LA
Meriden Arts Council, Inc., Meriden, CT
Metro IAF, Inc., Rego Park, NY
Micah Foundation, Highland Park, IL
Middlesex Law Libraries Foundation,
Inc., Cambridge, MA
Milford Pop Warner Association, Inc.,
Milford, MA
Minority Business Association, Inc.,
Burlington, VT
Mission Impossible, Spanaway, WA
Missisquoi Health Center, Swanton, VT
Montesano Football Parents Club,
Montesano, WA
Move Over Broadway Productions, Inc.,
Canfield, OH
National Affordable Housing Foundation
Charlotte II, Inc., Boston, MA
National Housing & Development Non-
Profit Corporation, Hartford, CT
NCOBPS, Inc., North Oaks, MN
New England Corporate Aids
Consortium, Inc., Lexington, MA
New Hampshire Harm Reduction
Alliance, Manchester, NH
New Traveller Fund, Santa Monica, CA
New York Presbytery of the Korean
Presbyterian Church in America,
Staten Island, NY
North Andover 350th Anniversary,
North Andover, MA
North Coast Express Academy of
Basketball, Alameda, CA
North Country Thresholds & Decisions
NCTD, Enfield, NH
North Suffolk Foundation, Inc.,
Smithtown, NY
Northern New England Transplant
Alliance, Portland, ME
Norwich Communications and
Technology Learning Center, Inc.,
Norwich, CT
Optimist International Chester South
Chester Pennsylvania Club,
Chester, PA
Orange County Pro Bono Legal Services,
Inc. Goshen, NY
Orford Village Housing Development
Corporation, Manchester, CT
Organization for the Poor People in Haiti,
Inc., S. Ozone Pk, NY
Otter Creek Research Corporation,
Springport, MI
Otter Valley Football Club, Ltd.,
Brandon, VT
Owen L. Wells Foundation, Inc.,
Boston, MA
Ozark Harvest, Inc., Gravette, AR
Mike Pagliarulo Foundation, Inc.,
Winchester, MA
Pentucket Regional School District
Parent Alliance, Inc., W. Newbury, MA
People Helping People, Inc.,
Newport, VT
People Promoting Progress, Inc.,
Los Angeles, CA
Phase I Recovery House, Inc.,
Brattleboro, VT
Philadelphia Center for Organizational
Dynamics, Melrose Park, PA
Photography Preservation Society,
St. Louis, MO
Pinardville Booster Club, Goffstown, NH
PLAY, Inc., Lincoln, RI
Pomfret Emergency Services
Corporation, N. Pomfret, VT
Pregnancy Help Center of Wayne County,
Goldsboro, NC
Prison Families of New York, Inc.,
Albany, NY
Project Play, Inc., North Haven, CT
Provincetown Repertory Theatre, Inc.,
Provincetown, MA
Public Utility Policy Institute,
Concord, NH
Quincy Transportation, Inc., Quincy, MA
Raylynmor Opera, Peterborough, NH
Red Ribbon Foundation, Inc.,
Greenwich, CT
Revived Theatre Inc., Those People Who
Put on Plays, Seekonk, MA
Rhode Island Committee for Non-
Violence Initiatives, Inc.,
Providence, RI
Rhode Island Council of Family
Mediators, Warwick, RI
Rising Stars Therapeutic Riding, Inc.,
W. Hartford, CT
Riverside Academy, Ltd., Lowell, MA
Rosh Hodesh Exchange, Somerville, MA
Roundtable Center, Portland, ME
Roxbury South End Tenants Association,
Inc., Boston, MA
Rural Opportunity Fund, Poteau, OK
Rural School and Community Trust,
Washington, DC
Sabor Foundation, San Antonio, TX
Sabrinnas Angels, Carmel, NY
Scandanavian Collectors Club,
Rockville, MD
Schoolworks Foundation, Inc.,
Westport, CT
Seeds of Change Education Fund, Inc.,
Somerville, MA
Sellecca-Tesh Foundation for the
Forgotten Generation, Los Angeles,
CA
SHA Development Corp, Seymour, CT
Shiloh Manor, Inc., Middletown, CT
Shots Across Texas Coalition, Austin, TX
Siloam Mission Worldwide,
Los Angeles, CA
Society Affects Students, Incorportated,
Middletown, RI
Southeastern Area Lacrosse, Inc.,
Mystic, CT
Spirit of Truth Foundation,
Washington, DC
Springfied Armory National Park, Tr,
Southport, CT
Staff, Inc., North Haven, CT
Stand By Me, Inc., Waterbury, CT
Steven B. Fox Foundation, Inc.,
Brattleboro, VT
Stinesville Renaissance Group,
Stinesville, IN
Stop the Violence, Olympia, WA
Strong-Cuevas Foundation, Inc.,
New York, NY

October 30, 20004602000–44 I.R.B.
Stylettes Drill Team and Drum Corp,
West Haven, CT
Suffolk County Society for the Prevention
of Cruelty to Animals, Huntington, NY
Team Connecticut, New Haven, CT
Technology for Learning, Inc.,
Providence, RI
Tender Loving Care Mercy Ministries,
Detroit, MI
Theatre for Dramatic Development,
New York, NY
Thoughtform Research Institute,
Bountiful, UT
Transcription Technologies, Inc.,
Vernon, CT
Tri County Partnership, Inc.,
Spencer, WV
Tripod Foundation, Williamstown, MA
U.S. Peace 2000, Nashville, TN
Vera Arterburn Memorial Scholarship
Fund, Inc., Glastonbury, CT
31 Verdun St., Inc., Dorchester, MA
Vermont Center Economic
Environmental & Social Justice, Inc.,
Burlington, VT
Vermont Financial Research Institute,
Burlington, VT
Vetiver Network, Bellingham, WA
Vineyard Initiative for Teaching &
Alternative Education, Inc.,
Oak Bluffs, MA
Virtual Reality Foundation, Inc.,
Cambridge, MA
Virtually Wired Educational Foundation,
Boston, MA
Vital Live Center for Adolescence,
Lake Forest, CA
Vitas Gerulaitis Youth Foundation,
New York, NY
Walk the Walk Trust, Bayside, NY
Walnut Square Tower Clock Foundation,
Inc., Haverhill, MA
Wareham Babe Ruth League, Inc.,
Wareham, MA
Warmline of Northeastern Connecticut,
Inc., Willimantic, CT
Watson Park Playground Project, Inc.,
E. Braintree, MA
Wedum-Presbyterian Homes Affordable
Housing, Inc., Arden Hills, MN
West Point Park and Recreation
Association, West Point, CA
Westside Girls Softball, Pueblo, CO
What Would Jesus Do, Inc.,
Citrus Heights, CA
Wheel-eez, Inc., Feeding Hills, MA
Widowed Persons Service of Greater
Bridgeport, Inc., Fairfield, CT
Widowed Persons Service of Marion
County, Inc., Silver Springs, FL
Willing to Help, Chicago, IL
Windhorse Publications USA,
Missoula, MT
Winter Park Christian School, Inc.,
Fraser, CO
WIT Productions, Inc., Boston, MA
Women and Children First, Inc.,
Wallingford, CT
Worchester Institute of Contemporary
Issues & Affairs, Inc., Worchester,
MA
Word Ambassadors, Fort Worth, TX
WSC Community Development Corp.,
Philadelphia, PA
Yella Gal Productions, Huntsville, AL
Zion Community Empowerment Center,
College Park, GA
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contrib-
utors may thereafter rely upon such rul-
ing or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classi-
fication of foundation status in the Inter-
nal Revenue Bulletin.
Rules for Property Produced in
a Farming Business; Correction
Announcement 2000-88
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to removal of
final regulations.
SUMMARY: This document contains
corrections to a removal of final regula-
tions relating to the application of sec-
tion 263A of the Internal Revenue Code
to property production in the trade or
business of farming. This document
was published in the Federal Register
on August 21, 2000 (65 F.R. 50638).
EFFECTIVE DATE: August 21, 2000
FOR FURTHER INFORMATION
CONTACT: Grant D. Anderson (202)
622-4970 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Need for Correction
As published, the final regulations (TD
8897, 2000–36 I.R.B. 234) contain errors
that may prove to be misleading and are
in need of clarification.
Correction of Publication
Accordingly, the publication of the final
regulations (TD 8897), which were the sub-
ject of FR Doc. 00-21103, is corrected as
follows:
1. On page 50638, column 3, in the pre-
amble under the paragraph heading, “Back-
ground”, line 3, the language proposed
rulemaking (REG-208151-91) is corrected
to read “proposed rulemaking (REG-
209316-86)”.
2. On page 50640, column 3, paragraph
1, line 14, the language “I.R.B. (Sept. 5,
2000)) issued” is corrected to read “I.R.B.
256 (Sept. 5, 2000)) issued”.
Part 1–[CORRECTED]
§1.263A–1 [CORRECTED]
3. On page 50644, column 2, in
amendatory instruction Par. 5., remove item
designations for items “1.” and “2.” and
correctly designate the items “2.” and “3.”,
respectively.
Add new item “1.” to read as follows:
1. The last sentence of paragraph
(a)(3)(v) is revised.
4. On page 50644, column 2, §1.263A-
1, remove the five asterisks following the
section heading and add the following lan-
guage for the last sentence of paragraph
(a)(3)(v) to read as follows:
§1.263A-1 Uniform capitalization of costs.
(a) * * *
(3) * * *
(v) * * * See sections 263A(d) and
263A(e) and §1.263A-4 for rules relating to
taxpayers engaged in a farming business.
* * * * *
§1.263A–4 [CORRECTED]
5. On page 50644, column 3, §1.263A-
4, paragraph (a)(2)(i)(B), line 3, the lan-
guage “disbursements method under sec-
tion” is corrected to read “disbursements
method of accounting (cash method)
under section”.

2000–44 I.R.B.461October 30, 2000
6. On page 50648, column 3, § 1.263A-
4, paragraph (d)(2), line 5 from the top of
the column, the language “required to use
the accrual method” is corrected to read
“required to use an accrual method”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Office of Special Counsel (Modernization
& Strategic Planning).
(Filed by the Office of the Federal Register on Octo-
ber 13, 2000, 8:45 a.m., and published in the issue of
the Federal Register for October 16, 2000, 65 F.R.
61091)

October 30, 2000i2000–44 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

2000–44 I.R.B.iiOctober 30, 2000
Numerical Finding List
1
Bulletins 2000–27 through 2000–43
Announcements:
2000–57, 2000–28 I.R.B. 115
2000–58, 2000–30 I.R.B. 135
2000–59, 2000–29 I.R.B. 120
2000–60, 2000–31 I.R.B. 149
2000–61, 2000–30 I.R.B. 136
2000–62, 2000–30 I.R.B. 137
2000–63, 2000–31 I.R.B. 149
2000–64, 2000–31 I.R.B. 149
2000–65, 2000–31 I.R.B. 150
2000–66, 2000–32 I.R.B. 160
2000–67, 2000–32 I.R.B. 160
2000–68, 2000–32 I.R.B. 161
2000–69, 2000–33 I.R.B. 183
2000–70, 2000–34 I.R.B. 204
2000–72, 2000–35 I.R.B. 226
2000–73, 2000–35 I.R.B. 230
2000–74, 2000–35 I.R.B. 230
2000–75, 2000–37 I.R.B. 268
2000–76, 2000–36 I.R.B. 260
2000–77, 2000–36 I.R.B. 260
2000–78, 2000–43 I.R.B. 428
2000–79, 2000–39 I.R.B. 303
2000–80, 2000–40 I.R.B. 320
2000–81, 2000–41 I.R.B. 348
2000–82, 2000–42 I.R.B. 385
2000–83, 2000–41 I.R.B. 348
2000–84, 2000–42 I.R.B. 385
2000–85, 2000–43 I.R.B. 429
Court Decisions:
2068, 2000–28 I.R.B. 109
Notices:
2000–33, 2000–27 I.R.B. 97
2000–34, 2000–33 I.R.B. 172
2000–35, 2000–29 I.R.B. 118
2000–36, 2000–33 I.R.B. 173
2000–37, 2000–29 I.R.B. 118
2000–38, 2000–33 I.R.B. 174
2000–39, 2000–30 I.R.B. 132
2000–40, 2000–30 I.R.B. 134
2000–41, 2000–33 I.R.B. 177
2000–42, 2000–39 I.R.B. 302
2000–43, 2000–35 I.R.B. 209
2000–44, 2000–36 I.R.B. 255
2000–45, 2000–36 I.R.B. 256
2000–46, 2000–37 I.R.B. 265
2000–48, 2000–37 I.R.B. 265
2000–49, 2000–37 I.R.B. 266
2000–50, 2000–38 I.R.B. 291
2000–51, 2000–38 I.R.B. 291
2000–52, 2000–38 I.R.B. 292
2000–53, 2000–38 I.R.B. 293
2000–54, 2000–42 I.R.B. 356
2000–55, 2000–43 I.R.B. 393
2000–56, 2000–43 I.R.B. 393
2000–57, 2000–43 I.R.B. 389
Proposed Regulations:
REG–209038–89, 2000–34 I.R.B. 191
REG–105316–98, 2000–27 I.R.B. 98
REG–110311–98, 2000–36 I.R.B. 258
REG–103805–99, 2000–42 I.R.B. 376
REG–116495–99, 2000–33 I.R.B. 179
Proposed Regulations—Continued
REG–103735–00, 2000–36 I.R.B. 258
REG–103736–00, 2000–36 I.R.B. 258
REG–108522–00, 2000–34 I.R.B. 187
REG–112502–00, 2000–40 I.R.B. 316
REG–114697–00, 2000–43 I.R.B. 421
Railroad Retirement Quarterly Rate:
2000–28, I.R.B. 112
2000–29, I.R.B. 117
2000–42, I.R.B. 354
Revenue Procedures:
2000–28, 2000–27 I.R.B. 60
2000–29, 2000–28 I.R.B. 113
2000–30, 2000–28 I.R.B. 113
2000–31, 2000–31 I.R.B. 146
2000–32, 2000–33 I.R.B. 172
2000–33, 2000–36 I.R.B. 257
2000–34, 2000–34 I.R.B. 186
2000–35, 2000–35 I.R.B. 211
2000–36, 2000–37 I.R.B. 267
2000–37, 2000–40 I.R.B. 308
2000–38, 2000–40 I.R.B. 310
2000–39, 2000–41 I.R.B. 340
2000–40, 2000–42 I.R.B. 357
2000–41, 2000–42 I.R.B. 371
2000–42, 2000–43 I.R.B. 394
2000–43, 2000–43 I.R.B. 404
2000–44, 2000–43 I.R.B. 409
2000–45, 2000–43 I.R.B. 417
Revenue Rulings:
2000–32, 2000–27 I.R.B. 1
2000–33, 2000–31 I.R.B. 142
2000–34, 2000–29 I.R.B. 116
2000–35, 2000–31 I.R.B. 138
2000–36, 2000–31 I.R.B. 140
2000–37, 2000–32 I.R.B. 156
2000–38, 2000–32 I.R.B. 157
2000–39, 2000–34 I.R.B. 184
2000–40, 2000–35 I.R.B. 208
2000–41, 2000–36 I.R.B. 248
2000–42, 2000–39 I.R.B. 297
2000–43, 2000–41 I.R.B. 333
2000–44, 2000–41 I.R.B. 336
2000–45, 2000–41 I.R.B. 337
2000–46, 2000–41 I.R.B. 334
2000–47, 2000–37 I.R.B. 264
2000–48, 2000–42 I.R.B. 349
Treasury Decisions:
8886, 2000–27 I.R.B. 3
8888, 2000–27 I.R.B. 3
8889, 2000–30 I.R.B. 124
8890, 2000–30 I.R.B. 122
8891, 2000–32 I.R.B. 152
8892, 2000–32 I.R.B. 158
8893, 2000–31 I.R.B. 143
8894, 2000–33 I.R.B. 162
8895, 2000–40 I.R.B. 304
8896, 2000–36 I.R.B. 249
8897, 2000–36 I.R.B. 234
8898, 2000–38 I.R.B. 276
8899, 2000–38 I.R.B. 288
8900, 2000–38 I.R.B. 279
8901, 2000–38 I.R.B. 272
8902, 2000–41 I.R.B. 323
8903, 2000–42 I.R.B. 352
8904, 2000–42 I.R.B. 350
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–1 through 2000–26
is in Internal Revenue Bulletin 2000–27, dated July
3, 2000.

October 30, 2000iii2000–44 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2000–27 through 2000–43
Notices:
87–76
Obsoleted by
T.D. 8897, 2000–36 I.R.B. 234
88–24
Obsoleted by
T.D. 8897, 2000–36 I.R.B. 234
88–86
Obsoleted by
T.D. 8897 (section V), 2000–36 I.R.B. 234
2000–48
Superseded by
Rev. Proc. 2000–39, 2000–41 I.R.B. 340
Proposed Regulations:
LR–97–79
Partial withdrawal by
REG–103805–99, 2000–42 I.R.B. 376
FI–42–90
Withdrawn by
Announcement 2000–63, 2000–31 I.R.B. 149
IA–38–93
Withdrawn by
Announcement 2000–68, 2000–32 I.R.B. 161
REG–107644–98
Corrected by
Announcement 2000–66, 2000–32 I.R.B. 160
REG–108522–00
Corrected by
Announcement 2000–85, 2000–43 I.R.B. 429
Revenue Procedures:
88–23
Superseded by
Rev. Proc. 2000–35, 2000–35 I.R.B. 211
98–50
Modified and superseded by
Rev. Proc. 2000–31, 2000–31 I.R.B. 146
98–51
Modified and superseded by
Rev. Proc. 2000–31, 2000–31 I.R.B. 146
99–18
Modified by
Rev. Proc. 2000–29, 2000–28 I.R.B. 113
99–34
Superseded by
Rev. Proc. 2000–28, 2000–27 I.R.B. 60
99–49
Modified and amplified by
Rev. Proc. 2000–38, 2000–40 I.R.B. 310
2000–9
Superseded by
Rev. Proc. 2000–39, 2000–41 I.R.B. 340
Treasury Decisions:
8873
Corrected by
Announcement 2000–74, 2000–35 I.R.B. 230
Treasury Decisions—Continued
8883
Corrected by
Announcement 2000–57, 2000–28 I.R.B. 115
8884
Corrected by
Announcement 2000–73, 2000–35 I.R.B. 230
8892
Corrected by
Announcement 2000–81, 2000–41 I.R.B. 348
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–1 through 2000–26 is in Internal Revenue
Bulletin 2000–27, dated July 3, 2000.

INTERNAL REVENUE BULLETIN
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Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
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The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
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