Internal Revenue Bulletin 2000-5 (PDF rendition): IRS Revenue Procedures

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

INCOME TAX
Rev. Rul. 2000–5, page 436.
Application of section 368(a)(1)(A) to divisive merg-
ers. This ruling holds that a state law merger will not qual-
ify as a reorganization under section 368(a)(1)(A) of the
Code if the merger does not result in one corporation ac-
quiring the assets of a target corporation and the target
corporation ceasing to exist.
T.D. 8859, page 429.
Final regulations under section 42 of the Code amend var-
ious low-income housing tax credit regulations including
the procedures for compliance monitoring by the state
and local housing agencies, the requirements for making
carryover allocations, and the rules for the agencies’ cor-
rection of administrative errors or omissions. In addition,
the regulations require the independent verification of in-
formation on sources and uses of funds submitted by tax-
payers to the agencies.
T.D. 8860, page 437.
Final regulations under section 988 of the Code relate to the
treatment of income and expenses from certain hyperinfla-
tionary, nonfunctional currency transactions and certain no-
tional principal contracts.
EXEMPT ORGANIZATIONS
T.D. 8861, page 441.
Final regulations under section 6104(d) of the Code relate
to the disclosure requirements of private foundations.
ADMINISTRATIVE
REG–103831–99, page 452.
Proposed regulations under section 752 of the Code relate
to the allocation of nonrecourse liabilities by a partnership. A
public hearing is scheduled for May 3, 2000.
REG–111119–99, page 455.
Proposed regulations under section 708 of the Code clarify
the tax consequences of partnership mergers and divisions.
A public hearing is scheduled for May 4, 2000.
REG–116567–99, page 463.
Proposed regulations address when a currency will be
considered hyperinflationary under section 988 of the
Code. These regulations are intended to prevent distor-
tions associated with the computation of income and ex-
Internal Revenue
bbuulllleettiinn
Bulletin No. 2000–5
January 31, 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
Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
(Continued on the next page )
IRB 2000-5 2/1/00 3:37 PM Page 1

ADMINISTRATIVE—continued
penses arising from section 988 transactions denomi-
nated in hyperinflationary currencies. A public hearing is
scheduled for May 17, 2000.
Rev. Proc. 2000–15, page 447.
Innocent spouse; equitable relief.Guidance is provided
for taxpayers seeking relief from federal tax liability under
section 6015(f) or 66(c) of the Code. Notice 98–61 modi-
fied and superseded.
Notice 2000–9, page 449.
Insurance companies; treatment of variable con-
tracts, closing agreements.This notice reminds issuers
of variable contracts that diversification rules for invest-
ments in U.S. Treasury securities by separate accounts
are different for variable annuity contracts than for vari-
able life insurance contracts. For a limited time, the notice
permits issuers of variable annuity contracts that did not
satisfy the diversification requirements under section
817(h) of the Code, but which would have satisfied the
more lenient diversification requirements for variable life
insurance contracts, to obtain a closing agreement
through a reduced payment amount.
Notice 2000–10, page 451.
Guidance Priority List. Public comments are requested
about items that should be included in the Guidance Prior-
ity List for 2000. All comments should be submitted by
February 14, 2000.
January 31, 20002000–5 I.R.B.
IRB 2000-5 2/1/00 3:37 PM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2000–5 I.R.B.January 31, 2000
IRB 2000-5 2/1/00 3:37 PM Page 3

January 31, 20002000–5 I.R.B.
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
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
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-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquies-
cence” and “acquiescence in result only”
mean that the Service accepts the holding
of the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
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 ACQUIESCES in
result only in the following decision:
McLeod v. United States,
1
276 F. Supp. 213 (S.D. Ala. 1967)
Actions Relating to Court Decisions
1
Acquiescence in result only relating to whether minor children, listed as exemptions on taxpayer’s income tax return for 1964, were taxpayer’s dependents within
the meaning of I.R.C. section 152.
IRB 2000-5 2/1/00 3:37 PM Page 4

2000–5 I.R.B.429January 31, 2000
Section.—42 Low-Income
Housing Credit
26 CFR 1.42–5: Monitoring compliance with low-
income housing credit requirements.
T.D. 8859
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Compliance Monitoring and
Miscellaneous Issues Relating to
the Low-Income Housing Credit
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations regarding the procedures
for compliance monitoring by state and
local housing agencies (Agencies) with
the requirements of the low-income hous-
ing credit; the requirements for making
carryover allocations; the rules for Agen-
cies’ correction of administrative errors or
omissions; and the independent verifica-
tion of information on sources and uses of
funds submitted by taxpayers to Agen-
cies. These final regulations affect own-
ers of low-income housing projects who
claim the credit and the Agencies who ad-
minister the credit.
DATES: Effective Dates: These regula-
tions are effective January 1, 2001, except
that the amendments made to
§§1.42–5(c)(5) and (e)(3)(i), and 1.42–13
are effective January 14, 2000, and the
amendment made to §1.42–6(d)(4)(ii) is
effective January 1, 2000.
Applicability Dates:For dates of ap-
plicability of the amendments to §1.42–5,
see §1.42–5(h). For date of applicability
of the amendment made to §1.42–6, see
§1.42–12(c). For date of applicability of
the amendments made to §1.42–13, see
§1.42–13(d). For date of applicability of
§1.42–17, see §1.42–17(b).
FOR FURTHER INFORMATION CON-
TACT: Paul Handleman, (202) 622-3040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507) under control
number 1545-1357. Responses to these
collections of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
For §1.42–5, the estimated annual bur-
den per respondent varies from .5 hour to
3 hours for taxpayers and 250 to 5,000
hours for Agencies, with an estimated av-
erage of 1 hour for taxpayers and 1,500
hours for Agencies. For §1.42–13, the
estimated annual burden per respondent
varies from .5 hour to 10 hours for tax-
payers and Agencies, with an estimated
average of 3.5 hours for taxpayers and 3
hours for Agencies. For §1.42–17, the
estimated annual burden per respondent
varies from .5 hour to 2 hours for taxpay-
ers and .5 hour to 5 hours for Agencies,
with an estimated average of 1 hour for
taxpayers and 2 hours for Agencies.
Comments concerning the accuracy of
these burden estimates and suggestions
for reducing these burdens 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 Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On January 8, 1999, the IRS published
proposed regulations (REG–114664–97,
1999–11 I.R.B. 21) in the Federal Regis-
ter(64 FR 1143) inviting comments
under section 42. A public hearing was
held May 27, 1999. Numerous comments
have been received. After consideration
of all the comments, the proposed regula-
tions are adopted as revised by this Trea-
sury Decision.
Public Comments
A.Compliance Monitoring
1.Inspection Requirement for New Build-
ings.
The proposed regulations require that,
by the end of the calendar year following
the year the last building in a project is
placed in service, the Agency conduct on-
site inspections of the projects and review
the low-income certification, the docu-
mentation supporting such certification,
and the rent record for each tenant in the
project. Most commentators view the re-
quirement for reviewing all tenant records
for all buildings in a project as unneces-
sary and burdensome. Most commenta-
tors suggest limiting inspections for new
buildings to 20 percent of the project’s
low-income units. Commentators also
suggest extending the time limit for in-
specting new buildings to the end of the
calendar year following the first year of
the credit period or at least until a reason-
able time after the Agency issues Form
8609, “Low-Income Housing Credit Allo-
cation Certification.” This added flexibil-
ity would allow the Agency to combine a
physical inspection with a file review of
the first year of the credit period.
In response to the comments, the final
regulations reduce the inspection burden
for new buildings by requiring the
Agency to conduct on-site inspections of
all new buildings in the project and, for at
least 20 percent of the project’s low-in-
come units, to inspect the units and re-
view the low-income certifications, the
documentation supporting the certifica-
tions, and the rent records for the tenants
in those units. To allow the Agency suffi-
cient time to review the tenant files for the
first year of the credit period, the final
regulations extend the time limit for in-
specting new buildings to the end of the
second calendar year following the year
the last building in the project is placed in
service.
2. Three-year Inspection Requirement.
The proposed regulations require that,
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 2000-5 2/1/00 3:37 PM Page 429

January 31, 20004302000–5 I.R.B.
at least once every 3 years, each Agency
conduct on-site inspections of all build-
ings in each low-income housing project
and, for each tenant in at least 20 percent
of the project’s low-income units selected
by the Agency, review the low-income
certification, the documentation support-
ing such certification, and the rent record.
Most commentators agree with requir-
ing physical inspections of the buildings
at least once every 3 years. However,
commentators recommend reviewing ten-
ant income and rent records once every 5
years, which is one of the options under
the current compliance monitoring regu-
lations (see §1.42–5(c)(2)(ii)(B) requiring
an Agency to review tenant files for 20
percent of the low-income housing pro-
jects each year). Commentators also rec-
ommend reviewing tenant files either on-
site or at other locations, including desk
audits.
Although the physical inspection and
file review requirements for new build-
ings are relaxed in the final regulations,
the final regulations retain the 3-year in-
spection cycle for existing buildings. The
final regulations do not separate the phys-
ical inspection and file review cycles
(every 3 years for physical inspections
and every 5 years for file reviews) as sug-
gested by commentators because it is ad-
ministratively complete to do both during
the same year. The tenant income and
rent restrictions in section 42(g) are
equally important as the habitability stan-
dards for a low-income unit in section
42(i)(3)(B)(ii). The final regulations
adopt the suggestion that the file review
may be done wherever the tenant files are
maintained.
3. Health, Safety, and Building Code In-
spections.
The proposed regulations require the
Agency to determine whether the project
is suitable for occupancy, taking into ac-
count local health, safety, and building
codes. Many commentators object to this
requirement as too costly and unadminis-
terable because building codes vary con-
siderably within states. Commentators
also asked for guidelines as to what con-
stitutes an “inspection.” Some commen-
tators propose defining an inspection as
looking at selected units in the building
and common areas for visible problems or
defects without applying the local health,
safety, and building codes standards. One
commentator suggests inspections based
on a complaint from the local jurisdiction
or from a tenant. Some commentators
suggest using a uniform physical standard
such as the uniform physical condition
standards for public housing established
by the Department of Housing and Urban
Development (HUD) in 24 CFR 5.703.
Section 42(i)(3)(B)(i) excludes from
the definition of a “low-income unit” a
unit that is not suitable for occupancy.
Under section 42(i)(3)(B)(ii), suitability
of a unit for occupancy shall be deter-
mined under regulations prescribed by the
Secretary taking into account local health,
safety, and building codes. Recognizing
that these codes vary considerably within
states, the final regulations require an
Agency to determine whether a low-in-
come housing project satisfies these
codes, or satisfies the HUD uniform phys-
ical condition standards. The HUD stan-
dards are intended to ensure that housing
is decent, safe, sanitary, and in good re-
pair. Though it would be appropriate that
an Agency use HUD’s inspection protocol
under 24 CFR 5.705, the final regulations
do not mandate use of HUD’s inspection
protocol because to do so could increase
costs to the Agencies as well as limit their
latitude in applying standards consistent
with their own operating procedures and
practices. The final regulations except a
building from the inspection requirement
if the building is financed by the Rural
Housing Service (RHS) under the section
515 program, the RHS inspects the build-
ing (under 7 CFR part 1930(c)), and the
RHS and Agency enter into a memoran-
dum of understanding, or other similar
arrangement, under which the RHS
agrees to notify the Agency of the inspec-
tion results. Irrespective of the physical
inspection standard selected by the
Agency, a low-income housing project
under section 42 must continue to satisfy
local health, safety, and building codes.
The proposed regulations limit an
Agency’s delegation of the physical in-
spection of a project to only a state or
local government unit responsible for
making building code inspections. Com-
mentators suggest expanding the delega-
tion of inspections to professional firms.
The final regulations remove the delega-
tion limitation and Agencies may delegate
the physical inspection requirement to
state or local governmental agencies,
HUD, or private contractors.
4. Local Reports of Building Code Viola-
tions.
The proposed regulations require the
owner of a low-income housing project to
certify that for the preceding 12-month
period the state or local government unit
responsible for making building code in-
spections didnot issue a report of a viola-
tion for the project. If the governmental
unit issued a report of a violation, the
owner is required to attach a copy of the
report of the violation to the annual certi-
fication submitted to the Agency.
A commentator noted that the number
of violations attached to the annual owner
certification would be considerable be-
cause even the highest quality rental
housing operations do not have an inspec-
tion without a report or notice of some vi-
olation. Two commentators suggest at-
taching reports only for violations that
have not been corrected prior to filing the
annual owner certification or requiring
that owners only attach reports for
“major” violations. The commentators
suggest defining major violations as vio-
lations not corrected within 90 days of the
notice of violation or violations where the
cost to comply exceeds $2,500. A com-
mentator suggests that Agencies be al-
lowed to distinguish between minor tech-
nical violations and serious violations
(i.e., lack of heat or hot water, hazardous
conditions, and security) in reporting non-
compliance.
Though a minor violation will not lead
to the disallowance or recapture of section
42 credits, a series of minor violations
may be the equivalent of a major violation
resulting in disallowance or recapture of
credits. Determining the difference be-
tween a major and minor violation is sub-
jective. The final regulations do not ex-
clude minor violations from the reporting
and recordkeeping requirement. How-
ever, to reduce the inspection violation
paperwork, the final regulations require
that the owner must either attach a state-
ment summarizing the violations or a
copy of each violation report to the annual
owner certification submitted to the
Agency. The owner must state on the cer-
tification whether the violation has been
corrected. In addition, the final regula-
tions require that the owner retain the
original violation report for the Agency’s
physical inspection. Retention of the
IRB 2000-5 2/1/00 3:37 PM Page 430

2000–5 I.R.B.431January 31, 2000
original violation report is not required
once the Agency reviews the violation
and completes its inspection, unless the
violation remains uncorrected.
5. Correction of Noncompliance or Fail-
ure to Certify.
The final regulations adopt commenta-
tors’ suggestion to limit to a 3-year period
after the end of the correction period in
§1.42–5(e)(4) the requirement that Agen-
cies file Form 8823, “Low-Income Hous-
ing Credit Agencies Report of Noncom-
pliance,” with the IRS reporting the
correction of the noncompliance or failure
to certify.
6. Compliance Monitoring Effective
Dates.
Commentators suggest an effective
date of at least one year after the final reg-
ulations are published in the Federal Reg-
ister. Commentators also recommend on-
site inspections apply only to new
buildings allocated section 42 credits after
the effective date of the final regulations.
Because the amendments to the com-
pliance monitoring regulations will re-
quire amendments to qualified allocation
plans, the final regulations relating to
compliance generally contain a January 1,
2001, effective date. Thus, the require-
ments to attach local health, safety, or
building code violations to the annual
owner certification and to inspect build-
ings and review tenant files for existing
projects are effective January 1, 2001.
The inspection requirement and tenant
file review for new buildings is effective
for buildings placed in service on or after
January 1, 2001.
7. Section 8 and Federal Civil Rights
Laws.
Two commentators state that insuffi-
cient controls are in place to ensure that
low-income housing projects adhere to
the requirement in section 42(h)(6)(B)(iv)
of nondiscrimination against Section 8
voucher or certificate holders. The com-
mentators suggest that the IRS could help
compensate for lack of controls by work-
ing with HUD to ensure that Section 8
voucher or certificate holders are aware
of, and have access to, low-income hous-
ing projects. The commentators also sug-
gest that Agencies provide regional HUD
offices a list of low-income housing pro-
jects in that state, with information that
would be helpful for prospective tenants.
One commentator suggests that the prohi-
bition on discrimination based on Section
8 status be clarified to exclude policies
that bar Section 8 tenants but have no sub-
stantial business justification. For exam-
ple, low-income housing projects should
not be permitted to exclude Section 8
voucher or certificate holders through a
rule that requires every applicant to have
income equal to at least three times the
total rent.
The commentators also suggest that the
Agencies should be required to develop a
plan for educating applicants and owners
of projects of the prohibition against dis-
crimination on the basis of Section 8
voucher or certificate status. They recom-
mend that the Agencies should be re-
quired to have a procedure for accepting
and processing complaints about discrim-
ination against Section 8 voucher or cer-
tificate holders. They also recommend
that IRS and HUD should work together
to study the circumstances under which
Section 8 voucher or certificate holders
are, or are not, accessing projects.
Section 42(h)(6)(A) provides that no
credit shall be allowed by reason of sec-
tion 42 with respect to any building for
the taxable year unless an extended low-
income housing commitment is in effect
as of the end of such taxable year. Sec-
tion 42(h)(6)(B)(iv) defines the term “ex-
tended low-income housing commitment”
to include any agreement between the
taxpayer and the housing credit agency
that prohibits the refusal to lease to a
holder of a voucher or certificate of eligi-
bility under section 8 of the United States
Housing Act of 1937 because of the status
of the prospective tenant as such a holder.
To help monitor compliance with section
42(h)(6)(B)(iv), the final regulations
amend the annual owner certification re-
lating to the extended low-income hous-
ing commitment under §1.42–5(c)(1)(xi)
to require owners to certify that the owner
has not refused to lease a unit in the pro-
ject to a Section 8 applicant because the
applicant holds a Section 8 voucher or
certificate.
The IRS has informed HUD of the
comments received about preventing dis-
crimination based on Section 8 status.
Agencies should provide HUD with pub-
licly available information on section 42
low-income housing projects if HUD re-
quests it.
A commentator also suggests that the
compliance monitoring regulations be
amended to acknowledge the authority of
Title VIII of the 1968 Civil Rights Act, as
well as HUD’s Title VIII regulations;
specify the civil rights obligations of the
Agencies; and specify what developers
and owners of projects must do to satisfy
their civil rights obligations.
To monitor for compliance with the
Fair Housing Act, the final regulations
amend the annual owner certification re-
lating to the general public use require-
ment in §1.42–5(c)(1)(v) to require own-
ers to certify that no finding of
discrimination under the Fair Housing Act
has occurred for the project (a finding of
discrimination includes an adverse final
decision by HUD, an adverse final deci-
sion by a substantially equivalent state or
local fair housing agency, or an adverse
judgment from a Federal court).
B. Sources and Uses of Funds
Section 42(m)(2)(A) requires Agencies
to limit the housing credit dollar amount
allocated to a project to only the amount
necessary for the financial feasibility of a
project and its viability as a qualified low-
income project through the credit period.
The proposed regulations require an
Agency to evaluate the housing credit
dollar amount at four times: (1) at appli-
cation for the housing credit dollar
amount, (2) the allocation of the housing
credit dollar amount, (3) the date the
building is placed in service, and (4) after
the building is placed in service, but be-
fore the Agency issues the Form 8609.
Commentators recommend elimination of
the evaluation at the placed-in-service
date. In practice, Agencies currently eval-
uate the credit amount at the three other
times. The final regulations adopt the rec-
ommendation by deleting the fourth time
requirement and clarifying that the
placed-in-service evaluation may occur
not later than the date the Agency issues
the Form 8609.
Commentators are concerned that the
opinion by a certified public accountant,
based upon the accountant’s audit or exam-
ination, on the financial determinations
and certifications required in the proposed
regulations, could have significant cost im-
plications, particularly for smaller devel-
opers. Commentators suggest limiting the
requirement to projects with 25 or more
units, or projects with total development
costs of $5 million or more.
IRB 2000-5 2/1/00 3:37 PM Page 431

January 31, 20004322000–5 I.R.B.
The third-party validation on financial
information was recommended in the re-
port by the General Accounting Office
(GAO), “Tax Credits: Opportunities to
Improve Oversight of the Low-Income
Housing Program,” (GAO/GGD/RCED-
97–55), dated March 28, 1997. The GAO
report states on page 93 that an account-
ing firm with a tax credit speciality would
charge in the $5,000 to $7,500 range per
engagement for tax credit certifications
(opinion on total costs, eligible basis, and
tax credit amount) prepared on the basis
of an audit done in accordance with
AICPA audit standards even for projects
costing upwards of $5 million to $10 mil-
lion. As a percentage of development
costs, the CPA tax credit certifications
represent a minimal cost for validating fi-
nancial information. However, in recog-
nition that the cost may be burdensome
for smaller developers, the final regula-
tions limit the requirement for an audited
schedule of costs for projects with more
than 10 units.
Two commentators were concerned
that the meaning of the term “financial
determinations and certifications” is un-
clear. A CPA would not be able to evalu-
ate what needs to be audited and whether
there are relevant and reliable criteria
against which the information can be
evaluated. To conduct an audit or attesta-
tion engagement, CPAs require that the
subject matter be defined and that such
subject matter be capable of evaluation
against reasonable criteria. Reasonable
criteria are essential so that CPAs using
the same criteria will be able to arrive at
similar conclusions.
Another concern expressed by com-
mentators involved uncertainty as to
whether the CPA is being asked to report
on financial information that is only his-
torical or whether the CPA is also being
asked to examine prospective financial in-
formation. CPAs can compile or examine
and report on certain types of prospective
financial information. However, such en-
gagements generally are more costly than
audits of historical information because of
minimum presentation guidelines re-
quired by professional standards as well
as increased risk associated with future-
oriented information. The commentators
believe that if an Agency were to require
CPAs to be associated with prospective fi-
nancial information, the related costs to
the taxpayer may far exceed any per-
ceived benefits to the Agency. Accord-
ingly, the final regulations have been re-
vised to specify that the CPA’s opinion
only relates to historical project costs.
C. Correction of Administrative Errors
and Omissions
Commentators recommend filing the
corrected allocation document with the
current year’s Form 8610, “Annual Low-
Income Housing Credit Agencies Re-
port,” instead of amending the Form 8610
for the year the allocation was made. Be-
cause the administrative errors covered by
the automatic approval provision will not
have an effect on the total amount of
credit the Agency allocated to the build-
ing(s) or project, commentators view an
amended Form 8610 as unnecessary.
Agency recordkeeping would be simpli-
fied if all corrected allocation documents
could be submitted with the current year’s
Form 8610. The final regulations adopt
this recommendation.
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. It is hereby certified that the collec-
tions 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 burden on taxpayers is mini-
mal and the burden on small entity Agen-
cies is not significant. Accordingly, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Paul F. Handleman, Office of the
Assistant Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
* * * * *
Adoption of 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 adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42–17 also issued under 26
U.S.C. 42(n); * * *
Par. 2. Section 1.42–5 is amended by:
1. Removing the word “Revenue” in
paragraph (b)(1)(iv) and adding “Om-
nibus Budget” in its place.
2. Adding paragraph (b)(3).
3. Revising paragraphs (c)(1)(v),
(c)(1)(vi), (c)(1)(xi), (c)(2)(ii), and
(c)(2)(iii).
4. Removing the word “project” in
paragraph (c)(1)(x) and adding “building”
in its place.
5. Removing the word “and” at the end
of paragraph (c)(1)(x).
6. Adding paragraph (c)(1)(xii).
7. Removing the language “paragraph
(c)(2)(ii)(A), (B), and (C) of this section”
from the first sentence in paragraph
(c)(4)(i) and adding “paragraph (c)(2)(ii)
of this section” in its place.
8. Removing the language “Farmers
Home Administration (FmHA)” in the
first sentence in paragraph (c)(4)(i) and
adding “Rural Housing Service (RHS),
formerly known as Farmers Home Ad-
ministration,” in its place.
9. Removing the language “FmHA” in
paragraph (c)(4)(ii) and adding “RHS” in
its place in each place it appears.
10. Removing the language “An Agency
chooses the review requirement of para-
graph (c)(2)(ii)(A) of this section and some
of the buildings selected for review are”
from the first sentence in the example in
paragraph (c)(4)(iii) and adding “An
Agency selects for review” in its place.
11. Removing the language “FmHA”
in paragraph (c)(4)(iii) Exampleand
adding “RHS” in its place in each place it
appears.
12. Adding paragraph (c)(5).
IRB 2000-5 2/1/00 3:37 PM Page 432

2000–5 I.R.B.433January 31, 2000
13. Revising paragraph (d).
14. Removing the language
“(c)(2)(ii)(A), (B), or (C) of this section
(whichever is applicable)” from para-
graph (e)(2) and adding the language
“(c)(2)(ii) of this section” in its place.
15. Adding a sentence at the end of
paragraph (e)(3)(i).
16. Removing the language “para-
graph (e)(3) of this section” in the third
sentence in paragraph (f)(1)(i) and adding
“paragraphs (c)(5) and (e)(3) of this sec-
tion” in its place.
17. Adding three sentences at the end
of paragraph (h).
The revisions and additions read as fol-
lows:
§1.42–5 Monitoring compliance with
low-income housing credit requirements.
* * * * *
(b) * * *
(3) Inspection record retention provi-
sion. Under the inspection record reten-
tion provision, the owner of a low-income
housing project must be required to retain
the original local health, safety, or build-
ing code violation reports or notices that
were issued by the State or local govern-
ment unit (as described in paragraph
(c)(1)(vi) of this section) for the Agency’s
inspection under paragraph (d) of this sec-
tion. Retention of the original violation
reports or notices is not required once the
Agency reviews the violation reports or
notices and completes its inspection, un-
less the violation remains uncorrected.
(c) * * * (1) * * *
(v) All units in the project were for use
by the general public (as defined in
§1.42–9), including the requirement that
no finding of discrimination under the
Fair Housing Act, 42 U.S.C. 3601 – 3619,
occurred for the project. A finding of dis-
crimination includes an adverse final de-
cision by the Secretary of the Department
of Housing and Urban Development
(HUD), 24 CFR 180.680, an adverse final
decision by a substantially equivalent
state or local fair housing agency, 42
U.S.C. 3616a(a)(1), or an adverse judg-
ment from a federal court;
(vi) The buildings and low-income
units in the project were suitable for occu-
pancy, taking into account local health,
safety, and building codes (or other habit-
ability standards), and the State or local
government unit responsible for making
local health, safety, or building code in-
spections did not issue a violation report
for any building or low-income unit in the
project. If a violation report or notice was
issued by the governmental unit, the
owner must attach a statement summariz-
ing the violation report or notice or a copy
of the violation report or notice to the an-
nual certification submitted to the Agency
under paragraph (c)(1) of this section. In
addition, the owner must state whether
the violation has been corrected;
* * * * *
(xi) An extended low-income housing
commitment as described in section
42(h)(6) was in effect (for buildings sub-
ject to section 7108(c)(1) of the Omnibus
Budget Reconciliation Act of 1989, 103
Stat. 2106, 2308 - 2311 (1989)), including
the requirement under section
42(h)(6)(B)(iv) that an owner cannot
refuse to lease a unit in the project to an
applicant because the applicant holds a
voucher or certificate of eligibility under
section 8 of the United States Housing
Act of 1937, 42 U.S.C. 1437f (for build-
ings subject to section 13142(b)(4) of the
Omnibus Budget Reconciliation Act of
1993, 107 Stat. 312, 438 – 439 (1993));
and
(xii) All low-income units in the pro-
ject were used on a nontransient basis (ex-
cept for transitional housing for the home-
less provided under section
42(i)(3)(B)(iii) or single-room-occupancy
units rented on a month-by-month basis
under section 42(i)(3)(B)(iv)).
(2) * * *
(ii) Require that with respect to each
low-income housing project—
(A) The Agency must conduct on-site
inspections of all buildings in the project
by the end of the second calendar year
following the year the last building in the
project is placed in service and, for at
least 20 percent of the project’s low-in-
come units, inspect the units and review
the low-income certifications, the docu-
mentation supporting the certifications,
and the rent records for the tenants in
those units; and
(B) At least once every 3 years, the
Agency must conduct on-site inspections
of all buildings in the project and, for at
least 20 percent of the project’s low-in-
come units, inspect the units and review
the low-income certifications, the docu-
mentation supporting the certifications,
and the rent records for the tenants in
those units; and
(iii) Require that the Agency randomly
select which low-income units and tenant
records are to be inspected and reviewed
by the Agency. The review of tenant
records may be undertaken wherever the
owner maintains or stores the records (ei-
ther on-site or off-site). The units and
tenant records to be inspected and re-
viewed must be chosen in a manner that
will not give owners of low-income hous-
ing projects advance notice that a unit and
tenant records for a particular year will or
will not be inspected and reviewed. How-
ever, an Agency may give an owner rea-
sonable notice that an inspection of the
building and low-income units or tenant
record review will occur so that the owner
may notify tenants of the inspection or as-
semble tenant records for review (for ex-
ample, 30 days notice of inspection or re-
view).
* * * * *
(5) Agency reports of compliance mon-
itoring activities.The Agency must re-
port its compliance monitoring activities
annually on Form 8610, “Annual Low-In-
come Housing Credit Agencies Report.”
(d) Inspection provision—(1) In gen-
eral. Under the inspection provision, the
Agency must have the right to perform an
on-site inspection of any low-income
housing project at least through the end of
the compliance period of the buildings in
the project. The inspection provision of
this paragraph (d) is a separate require-
ment from any tenant file review under
paragraph (c)(2)(ii) of this section.
(2) Inspection standard.For the on-
site inspections of buildings and low- in-
come units required by paragraph
(c)(2)(ii) of this section, the Agency must
review any local health, safety, or build-
ing code violations reports or notices re-
tained by the owner under paragraph
(b)(3) of this section and must deter-
mine—
(i) Whether the buildings and units are
suitable for occupancy, taking into ac-
count local health, safety, and building
codes (or other habitability standards); or
(ii) Whether the buildings and units
satisfy, as determined by the Agency, the
uniform physical condition standards for
public housing established by HUD (24
CFR 5.703). The HUD physical condition
standards do not supersede or preempt
local health, safety, and building codes. A
IRB 2000-5 2/1/00 3:37 PM Page 433

January 31, 20004342000–5 I.R.B.
low-income housing project under section
42 must continue to satisfy these codes
and, if the Agency becomes aware of any
violation of these codes, the Agency must
report the violation to the Service. How-
ever, provided the Agency determines by
inspection that the HUD standards are
met, the Agency is not required under this
paragraph (d)(2)(ii) to determine by in-
spection whether the project meets local
health, safety, and building codes.
(3) Exception from inspection provi-
sion.An Agency is not required to in-
spect a building under this paragraph (d)
if the building is financed by the RHS
under the section 515 program, the RHS
inspects the building (under 7 CFR part
1930), and the RHS and Agency enter
into a memorandum of understanding, or
other similar arrangement, under which
the RHS agrees to notify the Agency of
the inspection results.
(4) Delegation. An Agency may dele-
gate inspection under this paragraph (d) to
an Authorized Delegate retained under
paragraph (f) of this section. Such Autho-
rized Delegate, which may include HUD
or a HUD-approved inspector, must no-
tify the Agency of the inspection results.
(e) * * *
(3) * * *
(i) * * * If the noncompliance or failure
to certify is corrected within 3 years after
the end of the correction period, the
Agency is required to file Form 8823 with
the Service reporting the correction of the
noncompliance or failure to certify.
* * * * *
(h) * * * In addition, the requirements
in paragraphs (b)(3) and (c)(1)(v), (vi),
and (xi) of this section (involving record-
keeping and annual owner certifications)
and paragraphs (c)(2)(ii)(B), (c)(2)(iii),
and (d) of this section (involving tenant
file reviews and physical inspections of
existing projects, and the physical inspec-
tion standard) are applicable January 1,
2001. The requirement in paragraph
(c)(2)(ii)(A) of this section (involving
tenant file reviews and physical inspec-
tions of new projects) is applicable for
buildings placed in service on or after
January 1, 2001. The requirements in
paragraph (c)(5) of this section (involving
Agency reporting of compliance monitor-
ing activities to the Service) and para-
graph (e)(3)(i) of this section (involving
Agency reporting of corrected noncom-
pliance or failure to certify within 3 years
after the end of the correction period) are
applicable January 14, 2000.
Par. 3. Section 1.42–6 is amended by:
1. In paragraph (c)(3), second sen-
tence, remove the language “Annual
Low-Income Housing Credit Agencies
Report,” and add the language “ ‘Annual
Low-Income Housing Credit Agencies
Report,’ “ in its place.
2. In paragraph (d)(1), first sentence,
remove the language “Low-Income Hous-
ing Credit Allocation Certification,” and
add the language “ ‘Low-Income Housing
Credit Allocation Certification,’ “ in its
place.
3. Revising the first sentence in para-
graph (d)(4)(ii).
§1.42–6 Buildings qualifying for carry-
over allocations.
* * * * *
(d) * * *
(4) * * *
(ii) Agency.The Agency must retain
the original carryover allocation docu-
ment made under paragraph (d)(2) of this
section and file Schedule A (Form 8610),
“Carryover Allocation of the Low-Income
Housing Credit,” with the Agency’s Form
8610 for the year the allocation is made. *
* *
* * * * *
Par. 4. Section 1.42–11 is amended by
revising the last sentence in paragraph
(b)(3)(ii)(A) to read as follows:
§
1.42–11 Provision of services.
* * * * *
(b) * * *
(3) * * *
(ii) * * * (A) * * * For a building de-
scribed in section 42(i)(3)(B)(iii) (relating
to transitional housing for the homeless)
or section 42(i)(3)(B)(iv) (relating to sin-
gle-room occupancy), a supportive ser-
vice includes any service provided to as-
sist tenants in locating and retaining
permanent housing.
* * * * *
Par. 5. Section 1.42–12 is amended by
adding paragraph (c) to read as follows:
§1.42–12 Effective dates and transitional
rules.
* * * * *
(c) Carryover allocations. The rule set
forth in §1.42–6(d)(4)(ii) relating to the
requirement that state and local housing
agencies file Schedule A (Form 8610),
“Carryover Allocation of the Low-Income
Housing Credit,” is applicable for carry-
over allocations made after December 31,
1999.
Par. 6. Section 1.42–13 is amended by:
1. Revising the introductory text of
paragraph (b)(3)(iii).
2. Adding paragraphs (b)(3)(vi),
(b)(3)(vii), and (b)(3)(viii).
3. Adding a sentence at the end of
paragraph (d).
The revisions and additions read as fol-
lows:
§1.42–13 Rules necessary and appropri-
ate; housing credit agencies’ correction
of administrative errors and omissions.
* * * * *
(b) * * *
(3) * * *
(iii) Secretary’s prior approval re-
quired.Except as provided in paragraph
(b)(3)(vi) of this section, an Agency must
obtain the Secretary’s prior approval to
correct an administrative error or omis-
sion, as described in paragraph (b)(2) of
this section, if the correction is not made
before the close of the calendar year of
the error or omission and the correction—
* * * * *
(vi) Secretary’s automatic approval.
The Secretary grants automatic approval
to correct an administrative error or omis-
sion described in paragraph (b)(2) of this
section if—
(A) The correction is not made before
the close of the calendar year of the error
or omission and the correction is a numer-
ical change to the housing credit dollar
amount allocated for the building or mul-
tiple-building project;
(B) The administrative error or omis-
sion resulted in an allocation document
(the Form 8609, “Low-Income Housing
Credit Allocation Certification,” or the al-
location document under the requirements
of section 42(h)(1)(E) or (F), and
§1.42–6(d)(2)) that either did not accu-
rately reflect the number of buildings in a
project (for example, an allocation docu-
ment for a 10-building project only refer-
ences 8 buildings instead of 10 buildings),
or the correct information (other than the
amount of credit allocated on the alloca-
tion document);
(C) The administrative error or omis-
sion does not affect the Agency’s ranking
of the building(s) or project and the total
amount of credit the Agency allocated to
the building(s) or project; and
IRB 2000-5 2/1/00 3:37 PM Page 434

2000–5 I.R.B.435January 31, 2000
(D) The Agency corrects the adminis-
trative error or omission by following the
procedures described in paragraph
(b)(3)(vii) of this section.
(vii) How Agency corrects errors or
omissions subject to automatic approval.
An Agency corrects an administrative
error or omission described in paragraph
(b)(3)(vi) of this section by—
(A) Amending the allocation document
described in paragraph (b)(3)(vi)(B) of
this section to correct the administrative
error or omission. The Agency will indi-
cate on the amended allocation document
that it is making the “correction under
§1.42–13(b)(3)(vii).” If correcting the al-
location document requires including any
additional B.I.N.(s) in the document, the
document must include any B.I.N.(s) al-
ready existing for buildings in the project.
If possible, the additional B.I.N.(s) should
be sequentially numbered from the exist-
ing B.I.N.(s);
(B) Amending, if applicable, the
Schedule A (Form 8610), “Carryover Al-
location of the Low-Income Housing
Credit,” and attaching a copy of this
schedule to Form 8610, “Annual Low-In-
come Housing Credit Agencies Report,”
for the year the correction is made. The
Agency will indicate on the schedule that
it is making the “correction under
§1.42–13(b)(3)(vii).” For a carryover al-
location made before January 1, 2000, the
Agency must complete Schedule A (Form
8610), and indicate on the schedule that it
is making the “correction under
§1.42–13(b)(3)(vii)”;
(C) Amending, if applicable, the Form
8609 and attaching the original of this
amended form to Form 8610 for the year
the correction is made. The Agency will
indicate on the Form 8609 that it is mak-
ing the “correction under
§1.42–13(b)(3)(vii)”; and
(D) Mailing or otherwise delivering a
copy of any amended allocation docu-
ment and any amended Form 8609 to the
affected taxpayer.
(viii) Other approval procedures.The
Secretary may grant automatic approval to
correct other administrative errors or omis-
sions as designated in one or more docu-
ments published either in the Federal Reg-
isteror in the Internal Revenue Bulletin
(see §601.601(d)(2) of this chapter).
* * * * *
(d) * * * Paragraphs (b)(3)(vi), (vii),
and (viii) of this section are effective Jan-
uary 14, 2000.
Par. 7. Section 1.42–17 is added to
read as follows:
§1.42–17 Qualified allocation plan.
(a) Requirements—(1) In general.
[Reserved]
(2) Selection criteria. [Reserved]
(3) Agency evaluation.Section
42(m)(2)(A) requires that the housing
credit dollar amount allocated to a project
is not to exceed the amount the Agency
determines is necessary for the financial
feasibility of the project and its viability
as a qualified low-income housing project
throughout the credit period. In making
this determination, the Agency must con-
sider—
(i) The sources and uses of funds and
the total financing planned for the project.
The taxpayer must certify to the Agency
the full extent of all federal, state, and
local subsidies that apply (or which the
taxpayer expects to apply) to the project.
The taxpayer must also certify to the
Agency all other sources of funds and all
development costs for the project. The
taxpayer’s certification should be suffi-
ciently detailed to enable the Agency to
ascertain the nature of the costs that will
make up the total financing package, in-
cluding subsidies and the anticipated syn-
dication or placement proceeds to be
raised. Development cost information,
whether or not includible in eligible basis
under section 42(d), that should be pro-
vided to the Agency includes, but is not
limited to, site acquisition costs, construc-
tion contingency, general contractor’s
overhead and profit, architect’s and engi-
neer’s fees, permit and survey fees, insur-
ance premiums, real estate taxes during
construction, title and recording fees, con-
struction period interest, financing fees,
organizational costs, rent-up and market-
ing costs, accounting and auditing costs,
working capital and operating deficit re-
serves, syndication and legal fees, and de-
veloper fees;
(ii) Any proceeds or receipts expected
to be generated by reason of tax benefits;
(iii) The percentage of the housing
credit dollar amount used for project costs
other than the costs of intermediaries.
This requirement should not be applied so
as to impede the development of projects
in hard-to-develop areas under section
42(d)(5)(C); and
(iv) The reasonableness of the devel-
opmental and operational costs of the pro-
ject.
(4) Timing of Agency evaluation—(i)
In general. The financial determinations
and certifications required under para-
graph (a)(3) of this section must be made
as of the following times—
(A) The time of the application for the
housing credit dollar amount;
(B) The time of the allocation of the
housing credit dollar amount; and
(C) The date the building is placed in
service.
(ii) Time limit for placed-in-service
evaluation. For purposes of paragraph
(a)(4)(i)(C) of this section, the evaluation
for when a building is placed in service
must be made not later than the date the
Agency issues the Form 8609, “Low-In-
come Housing Credit Allocation Certifi-
cation.” The Agency must evaluate all
sources and uses of funds under para-
graph (a)(3)(i) of this section paid, in-
curred, or committed by the taxpayer for
the project up until date the Agency issues
the Form 8609.
(5) Special rule for final determina-
tions and certifications. For the
Agency’s evaluation under paragraph
(a)(4)(i)(C) of this section, the taxpayer
must submit a schedule of project costs.
Such schedule is to be prepared on the
method of accounting used by the tax-
payer for federal income tax purposes,
and must detail the project’s total costs as
well as those costs that may qualify for in-
clusion in eligible basis under section
42(d). For projects with more than 10
units, the schedule of project costs must
be accompanied by a Certified Public Ac-
countant’s audit report on the schedule
(an Agency may require an audited sched-
ule of project costs for projects with fewer
than 11 units). The CPA’s audit must be
conducted in accordance with generally
accepted auditing standards. The audi-
tor’s report must be unqualified.
(6) Bond-financed projects. A project
qualifying under section 42(h)(4) is not en-
titled to any credit unless the governmental
unit that issued the bonds (or on behalf of
which the bonds were issued), or the
Agency responsible for issuing the Form(s)
8609 to the project, makes determinations
under rules similar to the rules in para-
graphs (a)(3), (4), and (5) of this section.
(b) Effective date. This section is ef-
IRB 2000-5 2/1/00 3:37 PM Page 435

January 31, 20004362000–5 I.R.B.
fective January 1, 2001.
Part 602–OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 9. In §602.101, paragraph (b) is
amended by revising the entry for 1.42–5
and adding an entry for 1.42–17 to the
table in numerical order to read as fol-
lows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Acting Commissioner
of Internal Revenue.
Approved December 28, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the
Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 13, 2000, 8:45 a.m., and published in the issue
of the Federal Register for January 14, 2000, 65
F.R. 2323)
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.42–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357
1.42–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357
* * * * *
Section 368(a)(1)(A).—
Definitions Relating to
Corporate Reorganizations
26 CFR 1.368–1: Purpose and scope of exception
of reorganization exchanges.
Application of section 368(a)(1)(A) to
divisive mergers.The ruling holds that a
state law merger will not qualify as a reor-
ganization under section 368(a)(1)(A) of
the Code if the merger does not result in
one corporation acquiring the assets of a
target corporation and the target corpora-
tion ceasing to exist.
Rev. Rul. 2000–5
ISSUES:
Whether a transaction in which (1) a
target corporation “merges” under state
law with and into an acquiring corpora-
tion and the target corporation does not go
out of existence, or (2) a target corpora-
tion “merges” under state law with and
into two or more acquiring corporations
and the target corporation goes out of ex-
istence, qualifies as a reorganization
under § 368(a)(1)(A) of the Internal Rev-
enue Code?
FACTS:
Situation (1). A target corporation
transfers some of its assets and liabilities
to an acquiring corporation, retains the re-
mainder of its assets and liabilities, and
remains in existence following the trans-
action. The target corporation’s share-
holders receive stock in the acquiring cor-
poration in exchange for part of their
target corporation stock and they retain
their remaining target corporation stock.
The transaction qualifies as a merger
under state X corporate law.
Situation (2). A target corporation
transfers some of its assets and liabilities
to each of two acquiring corporations.
The target corporation liquidates and the
target corporation’s shareholders receive
stock in each of the two acquiring corpo-
rations in exchange for their target corpo-
ration stock. The transaction qualifies as
a merger under state X corporate law.
DISCUSSION:
The purpose of the reorganization pro-
visions of the Code is to provide tax-free
treatment to certain exchanges incident to
readjustments of corporate structures
made in one of the specified ways de-
scribed in the Code. Section 1.368–1(b)
of the Income Tax Regulations. In 1921,
Congress defined a reorganization as in-
cluding “. . . a merger or consolidation
(including the acquisition by one corpora-
tion . . . of substantially all the properties
of another corporation).” In 1934, Con-
gress separated this rule into two distinct
provisions. In the predecessor of current
§ 368(a)(1)(C), an “acquisition by one
corporation . . . of substantially all the
properties of another corporation” contin-
ued to be a reorganization where payment
was effectuated with the acquiror’s voting
stock. In the predecessor of current §
368(a)(1)(A), the terms “merger or con-
solidation” were qualified by requiring
that they be “statutory” mergers and con-
solidations. The word “statutory” was
added to the definition of a reorganization
so that the definition “will conform more
closely to the general requirements of
[state] corporation law.” SeeH. R. Rep.
No. 704, 73d Cong., 2 d Sess. 14 (1934).
Historically, corporate law merger
statutes have operated to ensure that “[a]
merger ordinarily is an absorption by one
corporation of the properties and fran-
chises of another whose stock it has ac-
quired. The merged corporation ceases to
exist, and the merging corporation alone
survives.” Cortland Specialty Co. v. Com-
missioner, 60 F.2d 937, 939 (2d Cir.
1932), cert. denied,288 U.S. 599 (1933);
for other cases that describe mergers as re-
quiring that the target corporation transfer
its assets and cease to exist, see, e.g., Vul-
can Materials Company v. U.S., 446 F.2d
690, 694 (5th Cir. 1971), cert. denied, 404
U.S. 942 (1971); Fisher v. Commissioner,
108 F.2d 707, 709 (6th Cir. 1939), cert.
denied, 310 U.S. 627 (1939). Thus, unlike
§ 368(a)(1)(C), in which Congress in-
cluded a “substantially all the properties”
IRB 2000-5 2/1/00 3:37 PM Page 436

requirement, it was not necessary for Con-
gress to explicitly include a similar re-
quirement in § 368(a)(1)(A) because cor-
porate law merger statutes contemplated
an acquisition of the target corporation’s
assets by the surviving corporation by op-
eration of law.
Compliance with a corporate law
merger statute does not by itself qualify a
transaction as a reorganization. See, e.g.,
Southwest Natural Gas Co. v. Commis-
sioner, 189 F.2d 332 (5th Cir. 1951), cert.
denied, 342 U.S. 860 (1951) (holding that
a state law merger was not a reorganiza-
tion under § 368(a)(1)(A)); Roebling v.
Commissioner, 143 F.2d 810 (3d Cir.
1944),cert. denied, 323 U.S. 773 (1944)
(same holding).In addition to satisfying
the requirements of business purpose,
continuity of business enterprise and con-
tinuity of interest, in order to qualify as a
reorganization under § 368(a)(1)(A), a
transaction effectuated under a corporate
law merger statute must have the result
that one corporation acquires the assets of
the target corporation by operation of the
corporate law merger statute and the tar-
get corporation ceases to exist. The trans-
actions described in Situations (1) and (2)
do not have the result that one corporation
acquires the assets of the target corpora-
tion by operation of the corporate law
merger statute and the target corporation
ceases to exist. Therefore, these transac-
tions do not qualify as reorganizations
under § 368(a)(1)(A).
In contrast with the operation of corpo-
rate law merger statutes, a divisive trans-
action is one in which a corporation’s as-
sets are divided among two or more
corporations. Section 355 provides tax-
free treatment for certain divisive transac-
tions, but only if a number of specific re-
quirements are satisfied. Congress
intended that § 355 be the sole means
under which divisive transactions will be
afforded tax-free status and, thus, specifi-
cally required the liquidation of the ac-
quired corporation in reorganizations
under both §§ 368(a)(1)(C) and
368(a)(1)(D) in order to prevent these re-
organizations from being used in divisive
transactions that did not satisfy § 355.
SeeS. Rep. No. 1622, 83d Cong., 2d Sess.
274 (1954); S. Rep. No. 169, 98th Cong.,
2d Sess. 204 (1984). No specific liquida-
tion requirement was necessary for statu-
tory mergers because corporate law
merger statutes contemplated that only
one corporation survived a merger. The
transaction described in Situation (1) is
divisive because, after the transaction, the
target corporation’s assets and liabilities
are held by both the target corporation
and acquiring corporation and the target
corporation’s shareholders hold stock in
both the target corporation and acquiring
corporation. The transaction described in
Situation (2) is divisive because, after the
transaction, the target corporation’s assets
and liabilities are held by each of the two
acquiring corporations and the target cor-
poration’s shareholders hold stock in each
of the two acquiring corporations.
HOLDING:
The transactions described in Situa-
tions (1) and (2) do not qualify as reorga-
nizations under § 368(a)(1)(A). However,
the transactions described in Situations
(1) and (2) possibly may qualify for tax-
free treatment under other provisions of
the Code.
DRAFTING INFORMATION:
The principal author of this revenue
ruling is Reginald Mombrun of the Office
of the Assistant Chief Counsel (Corpo-
rate). For further information regarding
this revenue ruling, contact Reginald
Mombrun on (202) 622-7750 (not a toll-
free call).
Section 988.—Treatment of
Certain Foreign Currency
Transactions
26 CFR 1.988–2: Recognition and computation of
exchange gain or loss.
T.D. 8860
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Treatment of Income and
Expense From Certain
Hyperinflationary,
Nonfunctional Currency
Transactions and Certain
Notional Principal Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations regarding the treatment
of income and deductions arising from
certain foreign currency transactions de-
nominated in hyperinflationary currencies
and coordinates section 988 with the sec-
tion 446 regulations pertaining to signifi-
cant nonperiodic payments. These regu-
lations are intended to prevent distortions
in computing income and deductions of
taxpayers who enter into certain transac-
tions in hyperinflationary currencies, and
nonfunctional currency, notional principal
contracts with significant nonperiodic
payments.
DATES: These regulations are effective
February 14, 2000.
FOR FURTHER INFORMATION CON-
TACT: Roger M. Brown at (202) 622-
3830 (not a toll-free number) of the Of-
fice of the Associate Chief Counsel
(International) within the Office of the
Chief Counsel, Room 4554, 1111 Consti-
tution Avenue, NW., Washington, DC.
20224.
SUPPLEMENTARY INFORMATION:
Background
On March 17, 1992, proposed regula-
tions were published in the Federal Reg-
isterat (57 F.R. 9217 [INTL–15–91,
1992–1 C.B. 1202]). The IRS received
two written comments on the proposed
regulations, which are discussed below.
No public hearing was held and no re-
quests to speak were received. Having
considered the comments, the IRS and
Treasury Department adopt the proposed
regulations, as modified by this Treasury
decision.
Explanation of Provisions
I. Hyperinflationary Instruments
A. Proposed Regulations
The proposed regulations under
§1.988–2(b)(15) generally provided that
currency gain or loss on debt instruments
and demand deposits entered into or ac-
quired when the currency in which the
item was denominated was hyperinfla-
tionary must be realized annually under a
2000–5 I.R.B.437January 31, 2000
IRB 2000-5 2/1/00 3:37 PM Page 437

January 31, 20004382000–5 I.R.B.
mark-to-market methodology. For pur-
poses of determining the character and
source (or allocation) of such currency
gain or loss, the gain or loss was generally
treated as an increase in, or a reduction of,
interest income or expense.
The proposed §1.988–2(b)(15) regula-
tions excluded instruments described in
section 988(a)(3)(C) (relating to non-dol-
lar, related-party loans where the rate of
interest is at least 10 percentage points
higher than the Federal mid-term rate)
from these rules. Proposed regulations
§1.988–2(d)(5) and (e)(7) generally pro-
vided that currency gain or loss realized
with respect to section 988 forward con-
tracts, futures contracts, option contracts
and similar items (such as currency swap
contracts) entered into or acquired when
the currency in which such an item is de-
nominated was hyperinflationary was rec-
ognized annually under a mark-to-market
methodology.
B. Discussion of Comments and Final
Regulations
1. Comments and the Treasury and IRS’s
responses
One of the comments responding to the
proposed regulations criticized the exclu-
sion of loans described in section
988(a)(3)(C) from the rules of proposed
regulation §1.988–2(b)(15). The com-
ment noted that it was inappropriate to
treat related-party loans differently from
loans between unrelated parties in this
context.
Proposed regulation §1.988–2(b)(15)
excluded loans subject to section
988(a)(3)(C) from the mark-to-market
rule of the proposed regulations because
the loans were already subject to mark-to-
market treatment under section
988(a)(3)(C), which was enacted to pre-
vent manipulation of the section 904(a)
foreign tax credit limitation through re-
lated party loans with artificially high in-
terest rates. See H. Conf. Rep. No. 841,
99
th
Cong., 2d Sess. 668 (1986). How-
ever, due to interest income’s U.S. source
treatment under section 988(a)(3)(C)(ii),
mark-to-market treatment under section
988(a)(3)(C), rather than
§1.988–2(b)(15), would be, in most cases,
more unfavorable to taxpayers.
Since the rules of proposed regulation
§1.988–2(b)(15) were consistent with the
approach of section 988(a)(3)(C) and pre-
vented manipulation of the type Congress
addressed in that section, the IRS and
Treasury agree that transactions described
in section 988(a)(3)(C) should not be ex-
cluded from the mark-to-market rule of
the final regulations. The IRS and Trea-
sury also have concluded that to the ex-
tent a debt instrument is subject to the
rules of §1.988–2(b)(15), the application
of section 988(a)(3)(C)’s resourcing rule
is not necessary. The final regulations re-
flect these changes.
The other comment identified the need
for coordinating the mark-to-market
regime for hyperinflationary instruments
under proposed regulation
§1.988–2(b)(15), and the mark-to-market
election under proposed regulation
§1.988–5(f) for all section 988 transac-
tions. The final regulations do not in-
clude a rule coordinating these two mark-
to-market regimes because the
mark-to-market election for all section
988 transactions is still in proposed form.
Accordingly, the IRS and Treasury have
decided that consideration of the proper
coordination is most appropriate when the
regulations relating to the general mark-
to-market election for all section 988
transactions are finalized.
2. Other changes to the final regulations
(a) Source and Character of Gain or Loss
The proposed regulations provided that
any exchange gain or loss realized upon
marking to market a debt instrument or a
demand deposit under proposed regula-
tion §1.988–2(b)(15)(i) was to be directly
allocable to the interest income or interest
expense from the debt instrument or de-
posit. Accordingly, the gain or loss re-
duced or increased the amount of interest
income or interest expense paid or ac-
crued during that year with respect to that
instrument or deposit. Additionally, if re-
alized exchange gain exceeded interest
expense of an issuer, or realized exchange
loss exceeded interest income of a holder
or depositor, the character and source of
such excess amount were to be deter-
mined under the general rules of
§§1.988–3 and 1.988–4.
The assumption underlying this pro-
posed treatment was that in hyperinfla-
tionary conditions, high nominal interest
rates perform two functions: compensate
lenders for currency loss attributable to
the repayment of the principal with a de-
valued currency, and account for borrow-
ers’ currency gain on the repayment of the
principal with a devalued currency. In in-
stances, however, where hyperinflation-
ary conditions are subsiding and a lender
would actually have currency gain on
principal repayment (and the borrower
would have currency loss on principal re-
payment), these assumptions are no
longer appropriate. For example, if a
lender has currency gain on the marking
to market (for currency fluctuations only)
of the principal of a debt instrument, high
nominal interest rates would not be com-
pensating the lender for the decline in the
value of the principal as there would be a
gain on the principal.
Accordingly, the final regulations re-
tain the source and character rule of the
proposed regulations (direct allocation of
the exchange gain or loss against interest
expense or income, respectively) when
hyperinflationary conditions result in ex-
change loss to lenders or exchange gain to
borrowers on the principal amount of a
debt instrument or deposit. However,
where a lender has exchange gain or a
borrower has exchange loss on the debt
instrument — which may occur as hyper-
inflationary conditions subside — the
final regulations clarify that the exchange
gain or loss is not allocated against inter-
est expense or income. Rather, the ex-
change gain or loss is treated under the
normal currency character and source
rules of §§1.988–3 and 1.988–4. Thus,
for example, if an issuer has both interest
expense and currency loss, the currency
loss is sourced and characterized under
section 988 and does not affect the deter-
mination of interest expense.
(b) Synthetic, Non-hyperinflationary Cur-
rency Debt Instruments
The final regulations also make clear
that when a debt instrument has interest
and principal payments that are to be
made by reference to a non-hyperinfla-
tionary currency or item (commonly
known as interest and principal protection
features), the instrument is not marked to
market under the final section 988 regula-
tions. This is because the instrument is, in
substance, a synthetic non-hyperinflation-
ary instrument and does not experience
the distortions associated with a hyperin-
flationary instrument.
(c) Treatment of Hyperinflationary Con-
tracts
Proposed regulation §1.988–2(d)(5)
generally provided that currency gain or
IRB 2000-5 2/1/00 3:37 PM Page 438

2000–5 I.R.B.439January 31, 2000
loss on derivative contracts described in
§1.988–1(a)(2)(iii) and denominated in a
currency that was hyperinflationary at the
time the contract was entered into was to
be realized annually under a mark-to-mar-
ket methodology. This proposed regula-
tion was issued prior to promulgation of
the §1.446–4 regulations (published in the
Federal Registeron July 18, 1994)
which requires that, to clearly reflect in-
come, the timing of income, deduction,
gain or loss on a hedge must match the
timing of income, deduction, gain or loss
on the item being hedged. The final regu-
lations modify proposed regulation
§1.988–2(d)(5) by providing that
§1.446–4, to the extent applicable, will
take precedence over proposed regulation
§1.988–2(d)(5). This is because the IRS
and Treasury believe that a clearer reflec-
tion of income is present where the in-
come and deductions arising from an item
hedged under §1.446–4 is matched with
the income and deductions arising from
the hedge. See §1.446–4(b).
(d) Demand and Time Deposits
The proposed regulations applied the
mark-to-market rules to demand deposits
denominated in a currency that was hy-
perinflationary at the time the deposit was
entered into. Under the final regulations,
the mark-to-market rules apply to demand
and time deposits that provide for pay-
ments denominated in or by reference to a
currency which is hyperinflationary at the
time the taxpayer enters into or otherwise
acquires the deposit, or whose interest
rate reflects hyperinflationary conditions
in a country. Similar clarifications have
been made with respect to the definitions
of hyperinflationary debt instruments and
currency swap contracts.
3. Abusive transactions
The Treasury and the IRS are con-
cerned about the use of hyperinflationary
currencies in transactions motivated by
tax considerations. Because the direction
of exchange rates is relatively predictable
in hyperinflation economies, some tax-
payers have attempted to use such curren-
cies in transactions lacking economic sub-
stance. See, e.g.,
Agro Science Co. v.
Commissioner, T.C. Memo. 1989–687,
aff ’d, 927 F.2d 213 (5
th
Cir.), cert. denied,
502 U.S. 907 (1991). However, section
988 may be applied by the IRS in a man-
ner that reflects the proper timing,
source, and character of income, gain,
loss, or expense arising from a transaction
whose form is not in accordance with its
economic substance. §§1.988–1(a)(11)
and 1.988–2(f); Agro Science Co. v.
Commissioner, supra. Accordingly, the
rules contained in this Treasury decision
will be applied within the framework of
these general economic substance princi-
ples.
II. Significant Non-periodic Payments
and Currency Swaps
The proposed regulations coordinated
section 988 with the section 446 regula-
tions pertaining to significant nonperiodic
payments. The final regulations maintain
this coordination and clarify that ex-
change gain or loss may be realized on the
principal and interest components of a
significant nonperiodic payment.
III. Proposed Change to Base Period in
Notice of Proposed Rulemaking
In REG–116567–99 on page 463, the
IRS and Treasury are publishing a notice
of proposed rulemaking that proposes to
change the period during which inflation
rates are measured in the determination of
whether a currency is hyperinflationary
for purposes of section 988 (base period).
The effect of this change to §1.988–1(f)
(defining hyperinflationary currency for
purposes of section 988) is to take into ac-
count current year, hyperinflationary con-
ditions, rather than determining whether a
currency is hyperinflationary based on the
three years prior to the current year. The
proposed change relates only to section
988 and not to the dollar approximate sep-
arate transactions method of §1.985–3
(DASTM). However, other sections, such
as §1.267(f)–1(e) (relating to application
of the loss disallowance rule of section
267(a)(1) as applied to related party, non-
functional currency loans), which make
reference to the section 988 definition of
hyperinflation will be affected.
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 has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regu-
latory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Small Business Ad-
ministration for comment on its impact on
small businesses.
Drafting Information
The principal author of these regula-
tions is Roger M. Brown of the Office of
the Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury Department also
participated in their development.
* * * * *
Adoption of the Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 ***
Par. 2. Section 1.988–0 in the Table of
Contents is amended by:
1. The entry for §1.988–2(b)(14)–(15) is
removed.
2. An entry for §1.988–2(b)(14) is added.
3. An entry for §1.988–2(b)(15) is added.
4. The entry for §1.988–2(d)(5) is re-
vised.
5. The entry for §1.988–2(e)(7) is re-
vised.
The revisions and additions read as fol-
lows:
§1.988–0 Taxation of gain or loss from a
section 988 transaction; Table of Con-
tents.
* * * * *
§1.988–2 Recognition and computation of
exchange gain or loss.
* * * * *
(b) ***
(14) [Reserved]
(15) Debt instruments and deposits de-
nominated in hyperinflationary curren-
cies.
* * * * *
(d) ***
(5) Hyperinflationary contracts.
(e) ***
(7) Special rules for currency swap con-
tracts in hyperinflationary currencies.
* * * * *
IRB 2000-5 2/1/00 3:37 PM Page 439

January 31, 20004402000–5 I.R.B.
Par. 3. Section 1.988–2 is amended
by:
1. Adding paragraphs (b)(14) and
(b)(15).
2. Adding paragraph (d)(5).
3. Adding paragraph (e)(3)(iv).
4. Adding paragraph (e)(7).
The additions read as follows:
§1.988–2 Recognition and computation
of exchange gain or loss.
* * * * *
(b) ***
(14) [Reserved]
(15) Debt instruments and deposits de-
nominated in hyperinflationary curren-
cies— (i) In general.If a taxpayer issues,
acquires, or otherwise enters into or holds
a hyperinflationary debt instrument (as
defined in paragraph (b)(15)(vi)(A) of
this section) or a hyperinflationary de-
posit (as defined in paragraph
(b)(15)(vi)(B) of this section) on which
interest is paid or accrued that is denomi-
nated in (or determined by reference to) a
nonfunctional currency of the taxpayer,
then the taxpayer shall realize exchange
gain or loss with respect to such instru-
ment or deposit for its taxable year deter-
mined by reference to the change in ex-
change rates between—
(A) The later of the first day of the tax-
able year, or the date the instrument was
entered into (or an amount deposited);
and
(B) The earlier of the last day of the
taxable year, or the date the instrument (or
deposit) is disposed of or otherwise termi-
nated.
(ii) Only exchange gain or loss is real-
ized. No gain or loss is realized under
paragraph (b)(15)(i) by reason of factors
other than movement in exchange rates,
such as the creditworthiness of the debtor.
(iii) Special rule for synthetic, non-hy-
perinflationary currency debt
instruments—(A)General rule.Para-
graph (b)(15)(i) does not apply to a debt
instrument that has interest and principal
payments that are to be made by reference
to a currency or item that does not reflect
hyperinflationary conditions in a country
(within the meaning of §1.988–1(f)).
(B) Example. Paragraph (b)(15)(iii)(A)
is illustrated by the following example:
Example.When the Turkish lira (TL) is a hyper-
inflationary currency, A, a U.S. corporation with the
U.S. dollar as its functional currency, makes a 5
year, 100,000 TL-denominated loan to B, an unre-
lated corporation, at a 10% interest rate when 1,000
TL equals $1. Under the terms of the debt instru-
ment, B must pay interest annually to A in amount of
Turkish lira that is equal to $100. Also under the
terms of the debt instrument, B must pay A upon ma-
turity of the debt instrument an amount of Turkish
lira that is equal to $1,000. Although the principal
and interest are payable in a hyperinflationary cur-
rency, the debt instrument is a synthetic dollar debt
instrument and is not subject to paragraph (b)(15)(i)
of this section.
(iv) Source and character of gain or
loss—(A) General rule for hyperinfla-
tionary conditions. The rules of this para-
graph (b)(15)(iv)(A) shall apply to any
taxpayer that is either an issuer of (or
obligor under) a hyperinflationary debt
instrument or deposit and has currency
gain on such debt instrument or deposit,
or a holder of a hyperinflationary debt in-
strument or deposit and has currency loss
on such debt instrument or deposit. For
purposes of subtitle A of the Internal Rev-
enue Code, any exchange gain or loss re-
alized under paragraph (b)(15)(i) of this
section is directly allocable to the interest
expense or interest income, respectively,
from the debt instrument or deposit (com-
puted under this paragraph (b)), and
therefore reduces or increases the amount
of interest income or interest expense paid
or accrued during that year with respect to
that instrument or deposit. With respect
to a debt instrument or deposit during a
taxable year, to the extent exchange gain
realized under paragraph (b)(15)(i) of this
section exceeds interest expense of an is-
suer, or exchange loss realized under
paragraph (b)(15)(i) of this section ex-
ceeds interest income of a holder or de-
positor, the character and source of such
excess amount shall be determined under
§§1.988–3 and 1.988–4.
(B) Special rule for subsiding hyperin-
flationary conditions. If the taxpayer is
an issuer of (or obligor under) a hyperin-
flationary debt instrument or deposit and
has currency loss, or if the taxpayer is a
holder of a hyperinflationary debt instru-
ment or deposit and has currency gain,
then for purposes of subtitle A of the In-
ternal Revenue Code, the character and
source of the currency gain or loss is de-
termined under §§1.988–3 and 1.988–4.
Thus, if an issuer has both interest ex-
pense and currency loss, the currency loss
is sourced and characterized under section
988, and does not affect the determination
of interest expense.
(v) Adjustment to principal or basis.
Any exchange gain or loss realized under
paragraph (b)(15)(i) of this section is an
adjustment to the functional currency
principal amount of the issuer, functional
currency basis of the holder, or the func-
tional currency amount of the deposit.
This adjusted amount or basis is used in
making subsequent computations of ex-
change gain or loss, computing the basis
of assets for purposes of allocating inter-
est under §§1.861–9T through 1.861–12T,
and 1.882–5, or making other determina-
tions that may be relevant for computing
taxable income or loss.
(vi) Definitions—(A) Hyperinflation-
ary debt instrument. A hyperinflationary
debt instrument is a debt instrument that
provides for—
(1) Payments denominated in or deter-
mined by reference to a currency that is
hyperinflationary (as defined in
§1.988–1(f)) at the time the taxpayer en-
ters into or otherwise acquires the debt in-
strument; or
(2) Payments denominated in or deter-
mined by reference to a currency that is
hyperinflationary (as defined in
§1.988–1(f)) during the taxable year, and
the terms of the instrument provide for the
adjustment of principal or interest pay-
ments in a manner that reflects hyperin-
flation. For example, a debt instrument
providing for a variable interest rate based
on local conditions and generally re-
sponding to changes in the local con-
sumer price index will reflect hyperinfla-
tion.
(B) Hyperinflationary deposit. A hy-
perinflationary deposit is a demand or
time deposit or similar instrument issued
by a bank or other financial institution
that provides for—
(1) Payments denominated in or deter-
mined by reference to a currency that is
hyperinflationary (as defined in
§1.988–1(f)) at the time the taxpayer en-
ters into or otherwise acquires the deposit;
or
(2) Payments denominated in or deter-
mined by reference to a currency that is
hyperinflationary (as defined in
§1.988–1(f)) during the taxable year, and
the terms of the deposit provide for the
adjustment of the deposit amount or inter-
est payments in a manner that reflects hy-
perinflation.
(vii) Interaction with other provisions—
(A) Interest allocation rules.In determin-
ing the amount of interest expense, this
IRB 2000-5 2/1/00 3:37 PM Page 440

paragraph (b)(15) applies before
§§1.861–9T through 1.861–12T, and
1.882–5.
(B) DASTM. With respect to a qualified
business unit that uses the United States
dollar approximate separate transactions
method of accounting described in
§1.985–3, paragraph (b)(15)(i) of this sec-
tion does not apply.
(C) Interaction with section
988(a)(3)(C). Section 988(a)(3)(C) does
not apply to a debt instrument subject to
the rules of paragraph (b)(15)(i) of this sec-
tion.
(D) Hedging rules. To the extent
§1.446–4 or 1.988–5 apply, the rules of
paragraph (b)(15)(i) of this section will not
apply. This paragraph (b)(15)(vii)(D) does
not apply if the application of §1.988–5 re-
sults in hyperinflationary debt instrument
or deposit described in paragraph
(b)(15)(vi)(A) or (B) of this section.
(viii) Effective date. This paragraph
(b)(15) applies to transactions entered
into after February 14, 2000.
* * * * *
(d) * * *
(5) Hyperinflationary contracts—(i)
In general. If a taxpayer acquires or oth-
erwise enters into a hyperinflationary
contract (as defined in paragraph
(d)(5)(ii) of this section) that has pay-
ments to be made or received that are de-
nominated in (or determined by reference
to) a nonfunctional currency of the tax-
payer, then the taxpayer shall realize ex-
change gain or loss with respect to such
contract for its taxable year determined by
reference to the change in exchange rates
between—
(A) The later of the first day of the tax-
able year, or the date the contract was ac-
quired or entered into; and
(B) The earlier of the last day of the
taxable year, or the date the contract is
disposed of or otherwise terminated.
(ii) Definition of hyperinflationary
contract. A hyperinflationary contract is
a contract described in paragraph (d)(1) of
this section that provides for payments
denominated in or determined by refer-
ence to a currency that is hyperinflation-
ary (as defined in §1.988–1(f)) at the time
the taxpayer acquires or otherwise enters
into the contract.
(iii) Interaction with other provisions—
(A) DASTM. With respect to a qualified
business unit that uses the United States
dollar approximate separate transactions
method of accounting described in
§1.985–3, this paragraph (d)(5) does not
apply.
(B) Hedging rules.To the extent
§1.446–4 or 1.988–5 apply, this para-
graph (d)(5) does not apply.
(C) Adjustment for subsequent trans-
actions.Proper adjustments must be
made in the amount of any gain or loss
subsequently realized for gain or loss
taken into account by reason of this para-
graph (d)(5).
(iv) Effective date. This paragraph (d)
(5) is applicable to transactions acquired
or otherwise entered into after February
14, 2000.
(e) ***
(3) ***
(iv) Coordination with §1.446–3(g)(4)
regarding swaps with significant nonperi-
odic payments.The rules of
§1.446–3(g)(4) apply to any currency
swap with a significant nonperiodic pay-
ment. Section 1.446–3(g)(4) applies be-
fore this paragraph (e)(3). Thus, if
§1.446–3(g)(4) applies, currency gain or
loss may be realized on the loan. This
paragraph (e)(3)(iv) applies to transac-
tions entered into after February 14, 2000.
* * * * *
(7) Special rules for currency swap
contracts in hyperinflationary
currencies—(i) In general. If a taxpayer
enters into a hyperinflationary currency
swap (as defined in paragraph (e)(7)(iv)
of this section), then the taxpayer realizes
exchange gain or loss for its taxable year
with respect to such instrument deter-
mined by reference to the change in ex-
change rates between —
(A) The later of the first day of the tax-
able year, or the date the instrument was
entered into (by the taxpayer); and
(B) The earlier of the last day of the
taxable year, or the date the instrument is
disposed of or otherwise terminated.
(ii) Adjustment to principal or basis.
Proper adjustments are made in the
amount of any gain or loss subsequently
realized for gain or loss taken into ac-
count by reason of this paragraph (e)(7).
(iii) Interaction with DASTM.With re-
spect to a qualified business unit that uses
the United States dollar approximate sep-
arate transactions method of accounting
described in §1.985–3, this paragraph
(e)(7) does not apply.
(iv) Definition of hyperinflationary
currency swap contract.A hyperinfla-
tionary currency swap contract is a cur-
rency swap contract that provides for—
(A) Payments denominated in or deter-
mined by reference to a currency that is
hyperinflationary (as defined in
§1.988–1(f)) at the time the taxpayer en-
ters into or otherwise acquires the cur-
rency swap; or
(B) Payments that are adjusted to take
into account the fact that the currency is
hyperinflationary (as defined in
§1.988–1(f)) during the current taxable
year. A currency swap contract that pro-
vides for periodic payments determined
by reference to a variable interest rate
based on local conditions and generally
responding to changes in the local con-
sumer price index is an example of this
latter type of currency swap contract.
(v) Special effective date for nonfunc-
tional hyperinflationary currency swap
contracts.Paragraph (e)(7) applies to
transactions entered into after February
14, 2000.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 13, 1999.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 12, 2000, 8:45 a.m., and published in the issue of
the Federal Register for January 13, 2000, 65 F.R.
2026)
Section 6104.—Publicity of
Information Required From
Certain Exempt Organizations
and Certain Trusts
26 CFR 1.6104(d)–1: Public inspection and
distribution of applications for tax exemption and
annual information returns of tax-exempt
organizations.
T.D. 8861
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 301 and 602
2000–5 I.R.B.441January 31, 2000
IRB 2000-5 2/1/00 3:37 PM Page 441

Private Foundation Disclosure
Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that amend the regulations re-
lating to the public disclosure requirements
described in section 6104(d) of the Internal
Revenue Code. These final regulations im-
plement changes made by the Tax and
Trade Relief Extension Act of 1998, which
extended to private foundations the same
rules regarding public disclosure of annual
information returns that apply to other tax-
exempt organizations. These final regula-
tions provide guidance for private founda-
tions required to make copies of
applications for recognition of exemption
and annual information returns available
for public inspection and to comply with
requests for copies of those documents.
DATES: Effective Date: These regula-
tions are effective March 13, 2000.
Applicability date. Except as provided
below, these regulations are applicable to
private foundations on or after March 13,
2000. These regulations are not applicable
to any private foundation annual informa-
tion return the due date for which (deter-
mined with regard to any extension of time
for filing) is before March 13, 2000.
FOR FURTHER INFORMATION CON-
TACT: Michael B. Blumenfeld, (202)
622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507) under control
number 1545-1655. Responses to these
collections of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
The estimated average annual burden
per respondent/recordkeeper is 30 min-
utes.
Comments on the accuracy of this bur-
den estimate and suggestions for reducing
the burden should be sent to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, OP:FS:FP, Washing-
ton, DC 20224, and to the Office of Man-
agement and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document amends §§301.6104(d)–1
through 301.6104(d)–5 of the Procedure
and Administration Regulations (26 CFR
Part 301) relating to the section 6104(d)
public disclosure rules applicable to tax-ex-
empt organizations (organizations described
in section 501(c) or (d) and exempt from
taxation under section 501(a)) and certain
nonexempt charitable trusts and nonexempt
private foundations referenced in section
6033(d). The amendments remove existing
§301.6104(d)–1 (relating to public inspec-
tion of private foundation annual informa-
tion returns). The amendments also revise
§§301.6104(d)–2 through 301.6104(d)–5 to
apply the provisions to all tax-exempt orga-
nizations, nonexempt charitable trusts de-
scribed in section 4947(a)(1) and nonex-
empt private foundations. In addition, the
amendments redesignate existing
§§301.6104(d)–2 through 301.6104(d)–5 as
§§301.6104(d)–0 through 301.6104(d)–3,
respectively.
Description of Current Law Disclosure
Requirements Applicable to Private
Foundations
Section 6104(d), as in effect prior to the
effective date of the Tax and Trade Relief
Extension Act of 1998 (Division J of H.R.
4328, the Omnibus Consolidated and
Emergency Supplemental Appropriations
Act, 1999)(Public Law 105-277, 112 Stat
2681) (with respect to private foundations),
requires a private foundation to make its
annual information returns available for
public inspection at its principal office dur-
ing regular business hours for a period of
180 days after the foundation publishes no-
tice of the availability of its return. A pri-
vate foundation must publish the notice not
later than the due date of the return (deter-
mined with regard to any extension of time
for filing) in a newspaper having general
circulation in the county in which the prin-
cipal office of the foundation is located.
Section 6104(e), as in effect prior to the ef-
fective date of the Tax and Trade Relief Ex-
tension Act of 1998 (with respect to private
foundations), requires a private foundation
to allow public inspection of the founda-
tion’s application for recognition of exemp-
tion at the foundation’s principal office
(and certain regional or district offices).
Section 6104(e) also requires a private
foundation to provide copies of its exemp-
tion application upon request. The require-
ment to provide copies of an exemption ap-
plication upon request becomes effective,
however, only after the Secretary of the
Treasury issues final regulations applicable
to private foundations that describe how the
requirement is inapplicable if the private
foundation makes its exemption application
widely available or obtains an IRS determi-
nation that a particular request is part of a
harassment campaign.
Amendments Made by the Tax and Trade
Relief Extension Act of 1998
The Tax and Trade Relief Extension
Act of 1998 was enacted on October 21,
1998. Among its provisions, it amended
section 6104(e) of the Code to apply to
private foundations the same rules regard-
ing public disclosure of annual informa-
tion returns that apply to other tax-exempt
organizations. In addition, the Tax and
Trade Relief Extension Act of 1998 re-
pealed existing section 6104(d), and re-
designated section 6104(e), as amended,
as new section 6104(d). Section 6104(d),
as amended by the Tax and Trade Relief
Extension Act of 1998, requires each tax-
exempt organization, including one that is
a private foundation, to allow public in-
spection at its principal office (and at cer-
tain regional or district offices) and to
comply with requests, made either in per-
son or in writing, for copies of the organi-
zation’s application for recognition of ex-
emption and the organization’s three most
recent annual information returns. Con-
gress also intended that nonexempt chari-
table trusts described in section
4947(a)(1) and nonexempt private foun-
dations comply with the expanded public
disclosure requirements, just as the infor-
January 31, 20004422000–5 I.R.B.
IRB 2000-5 2/1/00 3:37 PM Page 442

mation reporting requirements of section
6033, pursuant to section 6033(d), apply
to these entities. See Joint Committee on
Taxation, General Explanation of Tax
Legislation Enacted in 1998 (JCS–6–98),
November 24, 1998, at 242, fn. 102.
The Tax and Trade Relief Extension
Act of 1998 amendments apply to re-
quests made after the later of December
31, 1998, or the 60
th
day after the Secre-
tary of the Treasury issues final regula-
tions referred to in section 6104(d)(4) (re-
lating to when documents are made
widely available and when a particular re-
quest is considered part of a harassment
campaign). On April 9, 1999, the IRS
published T.D. 8818, 1999–17 I.R.B. 3, in
the Federal Register(64 FR 17279) final
regulations under section 6104(d) applic-
able to tax- exempt organizations other
than private foundations. Accordingly,
section 6104(d), as amended by the Tax
and Trade Relief Extension Act of 1998,
became effective with respect to tax-ex-
empt organizations other than private
foundations on June 8, 1999.
On August 10, 1999, the IRS published
a notice of proposed rulemaking,
REG–121946–98, 1999–36 I.R.B. 403,
under section 6104(d) in the Federal
Register(64 FR 43324) that extends the
recently-published final regulations under
section 6104(d) to apply to private foun-
dations and modifies those final regula-
tions in several respects. The IRS re-
ceived a few comments on the proposed
regulations. No public hearing on the
regulations was requested or held. After
consideration of all the comments, the
proposed regulations are adopted with
minor clarifying modifications by this
Treasury Decision. The provisions and
significant comments are discussed
below.
Explanation of the Provisions
These final regulations amend the final
regulations (T.D. 8818) under section
6104(d) that were published in the Federal
Register(64 FR 17279) on April 9, 1999
(the April 9, 1999 final regulations). The
amendments clarify that the term annual
information returnincludes any return that
is required to be filed under section 6033.
For a private foundation, these returns in-
clude Form 990-PF and Form 4720. The
amendments clarify that, unlike other tax-
exempt organizations, a private foundation
must disclose to the general public the
names and addresses of its contributors,
consistent with section 6104(d)(3). The
amendments also clarify that, for purposes
of section 6104(d), the terms tax-exempt
organizationand private foundationin-
clude nonexempt private foundations and
nonexempt charitable trusts described in
section 4947(a)(1) that are subject to the in-
formation reporting requirements of section
6033. Finally, the amendments remove ex-
isting §301.6104(d)–1 and redesignate ex-
isting §§301.6104–2 through
301.6104(d)–5, as §§301.6104(d)–0
through 301.6104(d)–3, respectively.
Until March 13, 2000, private founda-
tions remain subject to section 6104(d)
and section 6104(e), as in effect prior to
the Tax and Trade Relief Extension Act of
1998, and existing §301.6104(d)–1.
Thereafter, private foundations are sub-
ject to the public inspection requirements
of section 6104(d), as in effect prior to the
Tax and Trade Relief Extension Act of
1998, and existing §301.6104(d)–1 with
respect to any annual information return
the due date (determined with regard to
any extension of time for filing) for which
is prior to March 13, 2000.
Summary of Comments
One commenter suggested another
method to satisfy the widely available ex-
ception to the requirement that a private
foundation provide a copy of its applicable
documents upon request. The commenter
would permit a private foundation to satisfy
the widely available exception by (1) filing
copies of its documents with a state agency
that, in turn, makes the documents avail-
able for public inspection, and (2) publish-
ing a notice in a newspaper of general cir-
culation stating where the documents are
available. The Tax and Trade Relief Exten-
sion Act of 1998 repealed the requirement
(in former section 6104(d)) that private
foundations publish notice of the availabil-
ity of their annual information returns with
respect to annual information returns due
after the effective date of these final regula-
tions. The Act extended the same public
disclosure requirements that apply to all
other tax-exempt organizations to private
foundations, including the widely available
exception. The proposed regulations spec-
ify that a private foundation satisfies the
widely available exception by posting its
documents on the World Wide Web as de-
scribed in the April 9, 1999 final regula-
tions. After carefully considering this com-
ment, the IRS and the Treasury Department
have concluded that providing copies of the
applicable documents to a state agency and
publishing notice would not make those
documents widely available. We reached
our conclusion because the method sug-
gested by the commenter could impose a
substantial inconvenience to members of
the public. Therefore, the IRS and the
Treasury Department did not adopt this
suggestion.
A few commenters asked that these final
regulations not require private foundations
to disclose to the general public the identi-
ties of their contributors. Section 6104(d)
requires public disclosure of all the infor-
mation contained on an exemption applica-
tion and an annual information return filed
with the IRS, unless the information is
specifically excepted from disclosure.
Section 6104(d)(3) specifically excepts
from disclosure the names and addresses of
any contributor to an organization which is
not a private foundation. By its terms, this
exception does not apply to private founda-
tions. The IRS and the Treasury Depart-
ment believe the rule of the proposed regu-
lation is consistent with the statute and
Congressional intent and, therefore, did not
change this provision.
One commenter asked that these final
regulations clarify how the disclosure re-
quirements apply to a supporting organi-
zation described in section 509(a)(3).
Section 509(a) provides that an organiza-
tion described in section 501(c)(3) is a
private foundation if it does not meet the
requirements of section 509(a)(1), (2),
(3), or (4). Therefore, an organization
that is described in section 501(c)(3) and
classified as a supporting organization
under section 509(a)(3) is not a private
foundation. The disclosure requirements
under section 6104(d) apply to supporting
organizations described in section
509(a)(3) in the same manner as they
apply to all other tax-exempt organiza-
tions that are not private foundations.
The proposed regulations define the terms
tax-exempt organizationand private foun-
dationconsistent with the applicable
statutory provisions, and the IRS and the
Treasury Department have determined
that further regulatory clarification is not
necessary in this regard.
Another commenter expressed concern
2000–5 I.R.B.443January 31, 2000
IRB 2000-5 2/1/00 3:37 PM Page 443

that some private foundations may not have
copies of their exemption applications.
This commenter suggested that these final
regulations only require private founda-
tions formed after 1990 to disclose their
exemption applications. Since July 15,
1987, a tax-exempt organization, including
one that is a private foundation, has been
required under section 6104 to make its ex-
emption application available for public in-
spection. See section 10702(b) of the Om-
nibus Budget Reconciliation Act of 1987
(Public Law 100–203) and Notice 88–120
(1988–2 C.B. 454). Under the proposed
regulations, a private foundation that filed
its exemption application before July 15,
1987 is required to make available for pub-
lic inspection a copy of its application only
if it had a copy of its application on July 15,
1987. Thus, these final regulations do not
change this provision of the proposed regu-
lations.
One commenter stated that the applica-
ble date in the proposed regulations, which
would eliminate the requirement that pri-
vate foundations publish notice of the avail-
ability of their annual information returns,
is inconsistent with the effective date speci-
fied in the House Committee Report to the
Tax and Trade Relief Extension Act of
1998 (H.R. Rep. No. 105–817). This com-
menter requested that the final regulations
add a rule that prevents the IRS from assert-
ing a late filing penalty against a private
foundation whose return is rejected by the
IRS because the foundation filed the return
on or after June 8, 1999 (the effective date
of the April 9, 1999 final regulations) with-
out proof that it satisfied the publication of
notice requirement. Section 6104(d), as in
effect prior to the effective date of the Tax
and Trade Relief Extension Act of 1998,
provides that a private foundation must
publish a notice of the availability of its re-
turn not later than the due date of the return
(determined with regard to any extension of
time for filing). Section 1.6033–3(b) of the
regulations requires a private foundation to
attach a copy of the notice to its return.
The Tax and Trade Relief Extension Act
of 1998 repealed the publication of notice
requirement of section 6104(d) effective for
private foundation annual information re-
turns due after the later of December 31,
1998 or 60 days after the Treasury Depart-
ment issues final regulations that explain
how requested documents may be made
widely available or when requests for docu-
ments are part of a harassment campaign.
The April 9, 1999 final regulations do not
apply to private foundations and, therefore,
the issuance of those regulations did not
trigger the repeal of the publication of no-
tice requirement. Indeed, the April 9, 1999
final regulations stated explicitly that, until
the IRS issues final regulations under sec-
tion 6104(d) applicable to private founda-
tions, private foundations continue to be
governed by the existing § 301.6104(d)–1
requirements relating to public disclosure
of private foundation annual information
returns
The IRS and the Treasury Department
believe the effective date of the repeal of
the publication of notice requirement stated
in the proposed regulations is consistent
with both the statute and the legislative his-
tory. Further, the IRS and the Treasury De-
partment believe it is important to retain
one public disclosure standard for private
foundations until another is finally adopted.
Accordingly, the IRS and the Treasury De-
partment did not modify these final regula-
tions as suggested.
Finally, one commenter expressed con-
cern that disclosure in some instances could
adversely affect the charitable operations of
some small operating private foundations
that advance unpopular causes or desire to
maintain a low profile. This commenter
suggested that the final regulations should
authorize the Secretary to grant a waiver
from some or all of the disclosure require-
ments if a small operating foundation es-
tablishes that, without the waiver, its chari-
table operations could be adversely affected
and it provides alternative methods of dis-
closure that enhance oversight and public
accountability. Section 6104(d), however,
does not authorize the Secretary to grant
waivers except in the case of a harassment
campaign determination. Moreover, all
tax-exempt organizations have the option
under the regulations of avoiding having to
comply with requests for copies of docu-
ments by making such documents widely
available on the Internet. Therefore, the
IRS and the Treasury Department did not
adopt this suggestion.
Effective Date
These final regulations are applicable
to private foundations on March 13, 2000.
Special Analyses
It is hereby certified that the collections
of information in these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that
the average time required to maintain and
disclose the information required under
these regulations is estimated to be 30
minutes for each private foundation. This
estimate is based on the assumption that,
on average, a private foundation will re-
ceive one request per year to inspect or
provide copies of its application for tax
exemption and its annual information re-
turns. Approximately 0.1 percent of the
private foundations affected by these reg-
ulations will be subject to the reporting
requirements contained in the regulations.
It is estimated that annually, approxi-
mately 65 private foundations will make
their documents widely available by post-
ing them on the Internet. In addition, it is
estimated that annually, approximately 3
private foundations will file an applica-
tion for a determination that they are the
subject of a harassment campaign such
that a waiver of the obligation to provide
copies of their applications for tax exemp-
tion and their annual information returns
is in the public interest. The average time
required to complete, assemble and file an
application describing a harassment cam-
paign is expected to be 5 hours. Because
applications for a harassment campaign
determination will be filed so infre-
quently, they will have no effect on the
average time needed to comply with the
requirements in these regulations. In ad-
dition, a private foundation is allowed in
these regulations to charge a reasonable
fee for providing copies to requesters.
Therefore, it is estimated that it will cost a
private foundation less than $10 per year
to comply with these regulations, which is
not a significant economic impact.
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 was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regula-
tions is Michael B. Blumenfeld, Office of
Associate Chief Counsel (Employee Ben-
January 31, 20004442000–5 I.R.B.
IRB 2000-5 2/1/00 3:37 PM Page 444

efits and Exempt Organizations), IRS.
Other personnel from the IRS and Trea-
sury Department also participated in their
development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 301 and
602 are amended as follows:
PART 301–PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6104(d)–2 also issued
under 26 U.S.C. 6104(d)(3);
Section 301.6104(d)–3 also issued
under 26 U.S.C. 6104(d)(3); * * *
§301.6104(d)–1 [Removed]
Par. 2. Section 301.6104(d)–1 is re-
moved.
§301.6104(d)–2 [Redesignated as
§301.6104(d)–0]
Par. 3. Section 301.6104(d)–2 is redes-
ignated as §301.6104(d)–0.
Par. 4. Newly designated §301.6104(d)–0
is revised to read as follows:
§301.6104(d)–0 Table of contents.
This section lists the major captions
contained in §§301.6104(d)–1 through
301.6104(d)–3 as follows:
§301.6104(d)–1 Public inspection and
distribution of applications for tax
exemption and annual information
returns of tax-exempt organizations.
(a) In general.
(b) Definitions.
(1) Tax-exempt organization.
(2) Private foundation.
(3) Application for tax exemption.
(i) In general.
(ii) No prescribed application form.
(iii) Exceptions.
(iv) Local or subordinate organizations.
(4) Annual information return.
(i) In general.
(ii) Exceptions.
(iii) Returns more than 3 years old.
(iv) Local or subordinate organizations.
(5) Regional or district offices.
(i) In general.
(ii) Site not considered a regional or dis-
trict office.
(c) Special rules relating to public inspec-
tion.
(1) Permissible conditions on public in-
spection.
(2) Organizations that do not maintain
permanent offices.
(d) Special rules relating to copies.
(1) Time and place for providing copies in
response to requests made in person.
(i) In general.
(ii) Unusual circumstances.
(iii) Agents for providing copies.
(2) Request for copies in writing.
(i) In general.
(ii) Time and manner of fulfilling written
requests.
(A) In general.
(B) Request for a copy of parts of docu-
ment.
(C) Agents for providing copies.
(3) Fees for copies.
(i) In general.
(ii) Form of payment.
(A) Request made in person.
(B) Request made in writing.
(iii) Avoidance of unexpected fees.
(iv) Responding to inquiries of fees
charged.
(e) Documents to be provided by regional
and district offices.
(f) Documents to be provided by local and
subordinate organizations.
(1) Applications for tax exemption.
(2) Annual information returns.
(3) Failure to comply.
(g) Failure to comply with public inspec-
tion or copying requirements.
(h) Effective date.
(1) In general.
(2) Private foundation annual information
returns.
§301.6104(d)–2 Making applications
and returns widely available.
(a) In general.
(b) Widely available.
(1) In general.
(2) Internet posting.
(i) In general.
(ii) Transition rule.
(iii) Reliability and accuracy.
(c) Discretion to prescribe other methods
for making documents widely available.
(d) Notice requirement.
(e) Effective date.
§301.6104(d)–3 Tax-exempt
organization subject to harassment
campaign.
(a) In general.
(b) Harassment.
(c) Special rule for multiple requests from
a single individual or address.
(d) Harassment determination procedure.
(e) Effect of a harassment determination.
(f) Examples.
(g) Effective date.
§301.6104(d)–3 [Redesignated as
§301.6104(d)–1]
Par. 5. Section 301.6104(d)–3 is redes-
ignated as §301.6104(d)–1.
Par. 6. Newly designated §301.6104(d)–1
is amended as follows:
1. Revise the section heading.
1a. Paragraph (a) is amended as fol-
lows:
a. Remove the language “, other than a
private foundation (as defined in para-
graph (b)(2) of this section),” from the
first sentence.
b. Remove the language “, other than a
private foundation,” from the second sen-
tence.
c. Remove the language
“§§301.6104(d)–4 and 301.6104(d)–5”
from the fourth sentence and add
“§§301.6104(d)–2 and 301.6104(d)–3” in
its place.
2. In paragraph (b) introductory text, re-
move the language “§§301.6104(d)–4 and
301.6104(d)–5” and add “§§301.6104(d)–2
and 301.6104(d)–3” in its place.
3. In paragraph (b)(1), add a sentence
at the end of the paragraph.
4. In paragraph (b)(2), add the lan-
guage “or a nonexempt charitable trust
described in section 4947(a)(1) or a
nonexempt private foundation subject to
the information reporting requirements of
section 6033 pursuant to section 6033(d)”
at the end of the sentence.
5. In paragraph (b)(3)(iii)(B), remove
the word “or” at the end of the paragraph.
6. Redesignate paragraph (b)(3)(iii)(C)
as paragraph (b)(3)(iii)(D) and add a new
paragraph (b)(3)(iii)(C).
7. In paragraph (b)(4)(i), remove the
last two sentences and add three sentences
in their place.
8. Paragraph (b)(4)(ii) is amended as
follows:
a. Remove the language “, and the re-
turn of a private foundation” from the first
sentence.
b. Revise the last sentence.
9. Revise paragraph (h).
2000–5 I.R.B.445January 31, 2000
IRB 2000-5 2/1/00 3:37 PM Page 445

The revisions and additions read as fol-
lows:
§301.6104(d)–1 Public inspection and
distribution of applications for tax exemp-
tion and annual information returns of
tax-exempt organizations.
* * * * *
(b) * * *
(1) * * * The term tax-exempt organi-
zation also includes any nonexempt chari-
table trust described in section 4947(a)(1)
or nonexempt private foundation that is
subject to the reporting requirements of
section 6033 pursuant to section 6033(d).
* * * * *
(3)* * *
(iii) * * *
(C) In the case of a tax-exempt organi-
zation other than a private foundation, the
name and address of any contributor to
the organization; or
* * * * *
(4) * * * (i) * * * Returns filed pursuant to
section 6033 include Form 990, Return of
Organization Exempt From Income Tax,
Form 990-PF, Return of Private Foundation,
or any other version of Form 990 (such as
Forms 990-EZ or 990-BL, except Form 990-
T) and Form 1065. Each copy of a return
must include all information furnished to
the Internal Revenue Service on the return,
as well as all schedules, attachments and
supporting documents. For example, in the
case of a Form 990, the copy must include
Schedule A of Form 990 (containing supple-
mentary information on section 501(c)(3)
organizations), and those parts of the return
that show compensation paid to specific per-
sons (currently, Part V of Form 990 and
Parts I and II of Schedule A of Form 990).
(ii) * * * In the case of a tax-exempt or-
ganization other than a private founda-
tion, the term annual information return
does not include the name and address of
any contributor to the organization.
* * * * *
(h) Effective date–(1) In general.For a
tax-exempt organization, other than a pri-
vate foundation, this section is applicable
June 8, 1999. For a private foundation,
this section is applicable (except as pro-
vided in paragraph (h)(2) of this section)
beginning March 13, 2000.
(2) Private foundation annual informa-
tion returns. This section does not apply
to any private foundation return the due
date for which (determined with regard to
any extension of time for filing) is before
the applicable date for private foundations
specified in paragraph (h)(1) of this sec-
tion.
§301.6104(d)–4 [Redesignated as
§301.6104(d)–2]
Par. 7. Section 301.6104(d)–4 is redes-
ignated as §301.6104(d)–2.
Par. 8. Newly designated §301.6104(d)–2
is amended as follows:
1. In paragraph (a), remove the language
“§301.6104(d)–3(a)” from each place it ap-
pears and add “§301.6104(d)–1(a)” in each
place, respectively.
2. Revise paragraph (e).
The revision reads as follows:
§301.6104(d)–2 Making applications and
returns widely available.
* * * * *
(e) Effective date.For a tax-exempt or-
ganization, other than a private foundation,
this section is applicable June 8, 1999. For
a private foundation, this section is applica-
ble beginning March 13, 2000.
§301.6104(d)–5 [Redesignated as
§301.6104(d)–3]
Par. 9. Section 301.6104(d)–5 is redes-
ignated as §301.6104(d)–3.
Par. 10. Newly designated §301.6104(d)–3
is amended as follows:
1. In paragraph (a), remove the lan-
guage “§301.6104(d)–3(a)” and add
“§301.6104(d)–1(a)” in its place.
2. Revise paragraph (g).
The revision reads as follows:
§301.6104(d)–3 Tax-exempt organization
subject to harassment campaign.
* * * * *
(g) Effective date.For a tax-exempt or-
ganization, other than a private foundation,
this section is applicable June 8, 1999. For
a private foundation, this section is applica-
ble beginning March 13, 2000.
PART 602–OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. In §602.101, paragraph (b) is
amended by removing the entries for
301.6104(d)–4 and 301.6104(d)–5, by re-
vising the entries for 301.6104(d)–1 and
301.6104(d)–3, and adding a new entry
for 301.6104(d)–2 in numerical order to
the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 23, 1999.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on Janu-
ary 12, 2000, 8:45 a.m., and published in the issue
of the Federal Register for January 13, 2000, 65
F.R. 2030)
January 31, 20004462000–5 I.R.B.
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
301.6104(d)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655
301.6104(d)–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655
301.6104(d)–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655
* * * * *
IRB 2000-5 2/1/00 3:37 PM Page 446

2000–5 I.R.B.447January 31, 2000
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, sections 66, 6015.)
Rev. Proc. 2000–15
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance for taxpayers seeking equitable relief
from federal tax liability under § 6015(f)
or 66(c) of the Internal Revenue Code (a
“requesting spouse”). Section 4.01 of this
revenue procedure provides the threshold
conditions that must be satisfied for any
request for equitable relief to be consid-
ered. Section 4.02 of this revenue proce-
dure sets forth the conditions under which
relief under § 6015(f) will ordinarily be
granted. Section 4.03 of this revenue pro-
cedure provides a partial list of factors to
be considered in determining whether it
would be inequitable to hold a requesting
spouse jointly and severally liable for a li-
ability that was properly reported but not
paid where the conditions of section 4.02
are not met, or for a deficiency. The fac-
tors in section 4.03 will also be used to
determine whether equitable relief should
be granted under § 66(c).
SECTION 2. BACKGROUND
.01 Section 6013(d)(3) provides that
married taxpayers who file a joint return
under § 6013 will be jointly and severally
liable for the tax arising from that return.
For purposes of § 6013(d)(3), and this
revenue procedure, the term “tax” in-
cludes additions to tax, interest, and
penalties. See§§ 6601(e)(1) and
6665(a)(2).
.02 Section 3201(a) of the Internal
Revenue Service Restructuring and Re-
form Act of 1998, Pub. L. No. 105–206,
112 Stat.742 (RRA), enacted § 6015 of
the Code, which provides relief in certain
circumstances from the joint and several
liability imposed by § 6013(d)(3). Sec-
tions 6015(b) and 6015(c) specify two
sets of circumstances under which relief
from joint and several liability is avail-
able. Where relief is not available under
§ 6015(b) or 6015(c), § 6015(f) autho-
rizes the Secretary to grant equitable re-
lief if, taking into account all the facts and
circumstances, the Secretary determines
that it is inequitable to hold a requesting
spouse liable for any unpaid tax or any
deficiency (or any portion of either). Sec-
tion 3201(b) of RRA amended § 66(c) to
add an equitable relief provision similar
to § 6015(f). Section 66(c) applies to
married individuals with community
property income, and provides certain
conditions under which an individual may
be relieved of separate return liability for
items of community income attributable
to the individual’s spouse. The enactment
of § 6015 and the amendment of § 66(c)
are effective with respect to any liability
for tax arising after July 22, 1998, and any
liability for tax arising on or before July
22, 1998, that is unpaid on that date.
.03 Under § 6015(b), a requesting
spouse may elect relief from joint and
several liability if the following five con-
ditions are met: (1) a joint return was
filed; (2) on the return there was an under-
statement of tax attributable to erroneous
items of the spouse with whom the re-
questing spouse filed the return (“nonre-
questing spouse”); (3) the requesting
spouse establishes that in signing the re-
turn, the requesting spouse had no knowl-
edge or reason to know that there was an
understatement of tax; (4) taking into ac-
count all the facts and circumstances, it is
inequitable to hold the requesting spouse
liable for the understatement; and (5) the
requesting spouse elects the application of
§ 6015(b) no later than two years after the
date of the first collection activity after
July 22, 1998, with respect to the request-
ing spouse. If all five conditions would
be met except for the fact that the request-
ing spouse had no knowledge or reason to
know of only a portion of the understate-
ment, then the requesting spouse may be
granted relief to the extent of that portion
of the understatement.
.04 Under § 6015(c), a requesting
spouse may elect to allocate a deficiency
if the following four conditions are met:
(1) a joint return was filed; (2) at the time
of the election, the requesting spouse is
no longer married to, is legally separated
from, or has not been a member of the
same household as the nonrequesting
spouse at any time during the 12-month
period ending on the date the election was
filed; (3) the requesting spouse elects the
application of § 6015(c) no later than two
years after the date of the first collection
activity after July 22, 1998, with respect
to the requesting spouse; and (4) the defi-
ciency remains unpaid. Relief under §
6015(c) is subject to several limitations.
First, an election under § 6015(c) is in-
valid if the Service establishes that assets
were transferred between the requesting
spouse and the nonrequesting spouse as
part of a fraudulent scheme (and §
6013(d)(3) shall apply to the joint return).
Second, relief is not available to the ex-
tent that the Secretary demonstrates that
the requesting spouse had actual knowl-
edge of an item giving rise to a deficiency
at the time the return was signed. Third,
relief will only be available to the extent
that the liability exceeds the value of any
disqualified assets (as defined in §
6015(c)(4)(B)) transferred to the request-
ing spouse by the nonrequesting spouse.
.05 Section 6015 provides for relief
only from joint and several liability aris-
ing from a joint return. If an individual
signs a joint return under duress, the sig-
nature is not valid and a joint return is not
made. The individual is not jointly and
severally liable for liabilities arising from
such a return. Therefore, § 6015 does not
apply.
.06 Under both §§ 6015(b) and
6015(c), relief is available only from pro-
posed or assessed deficiencies. Neither §
6015(b) nor § 6015(c) authorizes relief
from liabilities that were properly re-
ported on the return but not paid. How-
ever, equitable relief under § 6015(f) or
66(c) may be available for such liabilities.
The legislative history of the RRA indi-
cates that Congress intended for the Sec-
retary to exercise discretion in granting
equitable relief when a requesting spouse
“does not know, and had no reason to
know, that funds intended for the payment
of tax were instead taken by the other
spouse for such other spouse’s benefit.”
H.R. Conf. Rep. No. 599, 105
th
Cong., 2d
Sess. 254 (1998). Congress also intended
for the Secretary to exercise the equitable
relief authority under § 6015(f) in other
situations where, “taking into account all
the facts and circumstances, it is in-
equitable to hold an individual liable for
all or part of any unpaid tax or deficiency
arising from a joint return.” Id.
Part III. Administrative, Procedural, and Miscellaneous
IRB 2000-5 2/1/00 3:37 PM Page 447

January 31, 20004482000–5 I.R.B.
.07 Notice 98–61, 1998–51 I.R.B. 13
(Dec. 21, 1998), provided interim guid-
ance to taxpayers seeking equitable relief
under § 6015(f) or 66(c). In Notice
98–61, the Service and Treasury Depart-
ment requested comments from the public
by April 30, 1999, regarding the interim
guidelines. Notice 99–29, 1999–21
I.R.B. 8 (May 24, 1999), extended the
deadline for submitting comments on No-
tice 98–61 to June 30, 1999.
SECTION 3. SCOPE
This revenue procedure applies to a
spouse who requests either equitable re-
lief from joint and several liability under
§ 6015(f), or relief from separate liability
under § 66(c) that arises due to the opera-
tion of community property law, with re-
spect to any liability for tax arising after
July 22, 1998, or any liability for tax aris-
ing on or before July 22, 1998, that was
unpaid on that date.
SECTION 4. GENERAL CONDITIONS
FOR RELIEF
.01 Eligibility to be considered for eq-
uitable relief.All the following threshold
conditions must be satisfied before the
Service will consider a request for equi-
table relief under § 6015(f). In addition,
with the exception of conditions (1) and
(2), all of the following threshold condi-
tions must be satisfied before the Service
will consider a claim for equitable relief
under § 66(c). The threshold conditions
are as follows:
(1) The requesting spouse filed a
joint return for the taxable year for which
relief is sought;
(2) Relief is not available to the re-
questing spouse under § 6015(b) or
6015(c);
(3) The requesting spouse applies for
relief no later than two years after the date
of the Service’s first collection activity
after July 22, 1998, with respect to the re-
questing spouse;
(4) Except as provided in the next
sentence, the liability remains unpaid. A
requesting spouse is eligible to be consid-
ered for relief in the form of a refund of li-
abilities for: (a) amounts paid on or after
July 22, 1998, and on or before April 15,
1999; and (b) installment payments, made
after July 22, 1998, pursuant to an install-
ment agreement entered into with the Ser-
vice and with respect to which an individ-
ual is not in default, that are made after
the claim for relief is requested;
(5) No assets were transferred be-
tween the spouses filing the joint return as
part of a fraudulent scheme by such
spouses;
(6) There were no disqualified assets
transferred to the requesting spouse by the
nonrequesting spouse. If there were dis-
qualified assets transferred to the request-
ing spouse by the nonrequesting spouse,
relief will be available only to the extent
that the liability exceeds the value of such
disqualified assets. For this purpose, the
term “disqualified asset” has the meaning
given such term by § 6015(c)(4)(B); and
(7) The requesting spouse did not
file the return with fraudulent intent.
A requesting spouse satisfying all the ap-
plicable threshold conditions set forth
above may be relieved of all or part of the
liability under § 6015(f) or 66(c), if, tak-
ing into account all the facts and circum-
stances, the Service determines that it
would be inequitable to hold the request-
ing spouse liable for such liability.
.02 Circumstances under which equi-
table relief under § 6015(f) will ordinarily
be granted.
(1) In cases where a liability reported
on a joint return is unpaid, equitable relief
under § 6015(f) will ordinarily be granted
(subject to the limitations of paragraph (2)
below) in cases where all of the following
elements are satisfied:
(a) At the time relief is requested,
the requesting spouse is no longer married
to, or is legally separated from, the nonre-
questing spouse, or has not been a mem-
ber of the same household as the nonre-
questing spouse at any time during the
12-month period ending on the date relief
was requested;
(b) At the time the return was
signed, the requesting spouse had no
knowledge or reason to know that the tax
would not be paid. The requesting spouse
must establish that it was reasonable for
the requesting spouse to believe that the
nonrequesting spouse would pay the re-
ported liability. If a requesting spouse
would otherwise qualify for relief under
this section, except for the fact that the re-
questing spouse had no knowledge or rea-
son to know of only a portion of the un-
paid liability, then the requesting spouse
may be granted relief only to the extent
that the liability is attributable to such
portion; and
(c) The requesting spouse will
suffer economic hardship if relief is not
granted. For purposes of this section, the
determination of whether a requesting
spouse will suffer economic hardship will
be made by the Commissioner or the
Commissioner’s delegate, and will be
based on rules similar to those provided in
§ 301.6343–1(b)(4) of the Regulations on
Procedure and Administration.
(2) Relief under this section 4.02 is
subject to the following limitations:
(a) If the return is or has been ad-
justed to reflect an understatement of tax,
relief will be available only to the extent
of the liability shown on the return prior
to any such adjustment; and
(b) Relief will only be available to
the extent that the unpaid liability is allo-
cable to the nonrequesting spouse.
.03 Factors for determining whether to
grant equitable relief. This section 4.03
applies to requesting spouses who filed
separate returns in community property
states, request relief under § 66(c), and
satisfy the applicable threshold conditions
of section 4.01. This section 4.03 also ap-
plies to requesting spouses who filed joint
returns and satisfy the threshold condi-
tions of section 4.01, but do not qualify
for relief under section 4.02. The Secre-
tary may grant equitable relief under §
6015(f) or 66(c) if, taking into account all
the facts and circumstances, it is in-
equitable to hold the requesting spouse li-
able for all or part of the unpaid liability
or deficiency. The following is a partial
list of the positive and negative factors
that will be taken into account in deter-
mining whether to grant full or partial eq-
uitable relief under § 6015(f) or 66(c).
No single factor will be determinative of
whether equitable relief will or will not be
granted in any particular case. Rather, all
factors will be considered and weighed
appropriately. The list is not intended to
be exhaustive.
(1) Factors weighing in favor of re-
lief.The factors weighing in favor of re-
lief include, but are not limited to, the fol-
lowing:
(a) Marital status.The requesting
spouse is separated (whether legally sepa-
rated or living apart) or divorced from the
nonrequesting spouse.
(b) Economic hardship. The re-
questing spouse would suffer economic
IRB 2000-5 2/1/00 3:37 PM Page 448

2000–5 I.R.B.449January 31, 2000
hardship (within the meaning of section
4.02(1)(c) of this revenue procedure) if
relief from the liability is not granted.
(c) Abuse. The requesting spouse
was abused by the nonrequesting spouse,
but such abuse did not amount to duress.
(d) No knowledge or reason to
know.In the case of a liability that was
properly reported but not paid, the re-
questing spouse did not know and had no
reason to know that the liability would not
be paid. In the case of a liability that
arose from a deficiency, the requesting
spouse did not know and had no reason to
know of the items giving rise to the defi-
ciency.
(e) Nonrequesting spouse’s legal
obligation. The nonrequesting spouse
has a legal obligation pursuant to a di-
vorce decree or agreement to pay the
outstanding liability. This will not be a
factor weighing in favor of relief if the
requesting spouse knew or had reason to
know, at the time the divorce decree or
agreement was entered into, that the non-
requesting spouse would not pay the lia-
bility.
(f) Attributable to nonrequesting
spouse. The liability for which relief is
sought is solely attributable to the nonre-
questing spouse.
(2) Factors weighing against relief.
The factors weighing against relief in-
clude, but are not limited to, the follow-
ing:
(a) Attributable to the requesting
spouse. The unpaid liability or item giv-
ing rise to the deficiency is attributable to
the requesting spouse.
(b) Knowledge, or reason to
know. A requesting spouse knew or had
reason to know of the item giving rise to
a deficiency or that the reported liability
would be unpaid at the time the return
was signed. This is an extremely strong
factor weighing against relief. Nonethe-
less, when the factors in favor of equi-
table relief are unusually strong, it may
be appropriate to grant relief under §
6015(f) in limited situations where a re-
questing spouse knew or had reason to
know that the liability would not be paid,
and in very limited situations where the
requesting spouse knew or had reason to
know of an item giving rise to a defi-
ciency.
(c) Significant benefit.The re-
questing spouse has significantly benefit-
ted (beyond normal support) from the un-
paid liability or items giving rise to the
deficiency. See § 1.6013–5(b).
(d) Lack of economic hardship.
The requesting spouse will not experience
economic hardship (within the meaning
of section 4.02(1)(c) of this revenue pro-
cedure) if relief from the liability is not
granted.
(e) Noncompliance with federal
income tax laws. The requesting spouse
has not made a good faith effort to com-
ply with federal income tax laws in the
tax years following the tax year or years
to which the request for relief relates.
(f) Requesting spouse’s legal
obligation. The requesting spouse has a
legal obligation pursuant to a divorce de-
cree or agreement to pay the liability.
SECTION 5. PROCEDURE
A requesting spouse seeking equitable
relief under § 6015(f) or 66(c) must file
Form 8857, Request for Innocent Spouse
Relief (and Separation of Liability, and
Equitable Relief), or other similar state-
ment signed under penalties of perjury,
within 2 years of the first collection activ-
ity against the requesting spouse. If a re-
questing spouse has already filed an ap-
plication for relief under § 6015(b) or
6015(c), the Service will consider
whether equitable relief under § 6015(f) is
appropriate for the portion of the liability
for which relief under § 6015(b) or §
6015(c) is not available. A subsequent fil-
ing of a request for equitable relief under
§ 6015(f) is not necessary.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Notice 98–61 is modified and, as modi-
fied, is superseded.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective on
January 18, 2000.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Bridget E. Finkenaur of the
Office of Assistant Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Ms. Finkenaur on (202)
622-4940 (not a toll-free call).
Closing Agreements Concerning
Variable Annuity Contracts
Notice 2000–9
PURPOSE
This notice reminds issuers of variable
annuity contracts that the special rules of §
817(h)(3) of the Internal Revenue Code and
§ 1.817–5(h)(3) of the Income Tax Regula-
tions do not apply in determining whether
the investments of a segregated asset ac-
count with respect to those contracts are ad-
equately diversified for purposes of §
817(h). For a limited period of time, this
notice also permits issuers of failed variable
annuity contracts based on one or more ac-
counts that would have satisfied the special
rules for accounts with respect to variable
life insurance contracts to obtain the relief
described in § 1.817–5(a)(2) through a re-
duced payment amount.
BACKGROUND
Section 817(h) of the Code provides
that a variable contract (other than a pen-
sion plan contract) based on a segregated
asset account shall not be treated as an
annuity, endowment, or life insurance
contract if the investments made by the
account are not adequately diversified in
accordance with regulations prescribed
by the Secretary. Section 1.817–5(a)(1)
of the regulations provides generally that
a variable contract is not treated as an
annuity, endowment, or life insurance
contract for any calendar quarter period
in which the investments of an account
on which the contract is based are not
adequately diversified. Thus, any in-
come on the contract within the meaning
of § 7702(g) is treated as ordinary in-
come received or accrued by the contract
holder during that period and any subse-
quent period.
Under § 1.817–5(b)(1), the investments
of a segregated asset account are consid-
ered adequately diversified for purposes
of § 817(h) only if–
(1) No more than 55%
of the value of the total assets of
the account is represented by
any one investment;
(2) No more than 70%
of the value of the total assets of
the account is represented by
IRB 2000-5 2/1/00 3:37 PM Page 449

January 31, 20004502000–5 I.R.B.
any two investments;
(3) No more than 80%
of the value of the total assets of
the account is represented by
any three investments; and
(4) No more than 90%
of the value of the total assets of
the account is represented by
any four investments.
In addition, § 817(h)(2) and §
1.817–5(b)(2) provide a safe harbor under
which the investments of a segregated
asset account are considered adequately
diversified if the account meets the re-
quirements of § 851(b)(3), and no more
than 55% of the value of the total assets of
the account is attributable to cash, cash
items, government securities, and securi-
ties of other regulated investment compa-
nies. For purposes of testing diversifica-
tion, all securities of the same issuer are
treated as a single investment, and each
government agency or instrumentality is
treated as a separate issuer. See§
1.817–5(b)(1)(ii).
Under § 817(h)(3), the investments
made by a segregated asset account with
respect to a variable life insurance con-
tract are treated as adequately diversified
to the extent the account is invested in se-
curities issued by the United States Trea-
sury. Section 1.817–5(b)(3) provides al-
ternative diversification requirements for
a segregated asset account invested in
United States Treasury securities. Both §
817(h)(3) and § 1.817–5(b)(3) apply only
to segregated asset accounts with respect
to variable life insurance contracts; nei-
ther applies to such accounts with respect
to variable annuity contracts.
Under § 1.817–5(a)(2), the investments
of an inadequately diversified segregated
asset account are nevertheless treated as
diversified if three requirements are satis-
fied. First, the issuer or holder of a vari-
able contract based on the account must
show that the failure to satisfy the diversi-
fication requirements was inadvertent.
Section 1.817–5(a)(2)(i). Second, the ac-
count must satisfy the diversification re-
quirements within a reasonable time after
discovery of such failure. Section
1.817–5(a)(2)(ii). Third, the issuer or
holder of the variable contract must agree
to make such adjustments or pay such
amounts as may be required by the Com-
missioner with respect to the period or pe-
riods during which the investments of the
account were not diversified. The amount
required to be paid by the Commissioner
shall be based upon the tax that would
have been owed by the contract holders if
they were treated as receiving the income
on the contract for the periods during
which one or more accounts were not ade-
quately diversified. Section
1.817–5(a)(2)(iii).
Rev. Rul. 91–17, 1991–1 C.B. 190,
provides that if a variable contract does
not satisfy the diversification require-
ments set forth in regulations under §
817(h), then the income on such contract
is a nonperiodic distribution under what is
now § 3405(e)(3). Thus, the insurance
company is subject to certain recordkeep-
ing, reporting, withholding and deposit
obligations under §§ 3402, 3403, 3405,
6047, 6302 and 7501. In addition, if the
company’s failure to meet those obliga-
tions is not due to reasonable cause, the
company could be subject to the penalties
described in §§ 6651, 6652(e), 6652(h),
6656(a) and 6704.
Section 7121 authorizes the Secretary
to enter into closing agreements relating
to the internal revenue tax liability of a
person. Rev. Proc. 92–25, 1992–1 C.B.
741, provides the procedure by which the
issuer of a variable contract that fails to
satisfy the requirements of § 817(h) may
request the relief described in §
1.817–5(a)(2) of the regulations. That re-
lief is in the form of a closing agreement
pursuant to which the Internal Revenue
Service and the issuer agree to treat the
assets of the nondiversified account as ad-
equately diversified for purposes of §
817(h) for the period or periods of nondi-
versification. For periods in which the
highest rate specified in § 1 of the Code is
no greater than 31 percent, the amount
due from the issuer of a variable annuity
contract under the closing agreement is
the sum of–
(1) 20% of income on
annuity contracts from which
payments have not been made
as of the end of the period; plus
(2) 15% of income on
annuity contracts from which
payments have been made as of
the end of the period; plus
(3) any interest com-
puted under § 6621(a)(2) of the
Code as if the amounts comput-
ed under (1) and (2) were under-
payments by the contract hold-
ers for their tax year(s) contain-
ing the period(s) of nondiversi-
fication.
The amount due from the issuer of a vari-
able life insurance or endowment contract
is the sum of–
(1) 28% of the income
on the contracts; plus
(2) any interest com-
puted under § 6621(a)(2) of the
Code as if the amounts comput-
ed under (1) were underpay-
ments by the contract holders
for their tax year(s) containing
the period(s) of nondiversifica-
tion.
The Service has continued to exercise
its authority under § 7121 and §
1.817–5(a)(2) to enter into closing agree-
ments using these rates, even though the
highest rate specified in § 1 now is greater
than 31 percent. Except as provided
below, it will do so until further notice.
The Service has become aware of situa-
tions in which segregated asset accounts
with respect to variable annuity contracts
satisfied the special rules of § 817(h)(3)
and § 1.817–5(b)(3) that apply to ac-
counts underlying variable life insurance
contracts, but did not satisfy the general
diversification requirements of §
1.817–5(b)(1) or (2).
SCOPE
This notice applies to any issuer of a
variable annuity contract seeking relief
under § 1.817–5(a)(2) of the regulations,
if that contract failed to satisfy the diver-
sification requirements of § 817(h) solely
by reason of one or more inadequately di-
versified segregated asset accounts that
would have satisfied the requirements of
§ 817(h)(3) and § 1.817–5(b)(3) if the
contract been a variable life insurance
contract.
PROCEDURE
An issuer requesting relief under this
notice shall request a closing agreement
under the terms and conditions of Rev.
Proc. 92–25. In computing the amount
due under the closing agreement, how-
ever, the following rates shall be substi-
tuted for the 20% and 15% rates provided
in § 4.02(1)(A) and (B) of that procedure:
(1) 3.5%, if not more
than 75% of the value of the
IRB 2000-5 2/1/00 3:37 PM Page 450

2000–5 I.R.B.451January 31, 2000
total assets of the account is rep-
resented by Treasury securities
for the period or periods of non-
diversification;
(2) 2.5%, if more than
75% but not more than 90% of
the value of the total assets of
the account is represented by
Treasury securities for the peri-
od or periods of nondiversifica-
tion; and
(3) 1.5%, if more than
90% of the value of the total
assets of the account is repre-
sented by Treasury securities for
the period or periods of nondi-
versification.
If a contract is based on more than one
nondiversified segregated asset account,
the rate shall be determined based on the
account with the lowest percentage in-
vestment in Treasury securities. Like-
wise, if the segregated asset account(s)
failed the requirements of § 1.817–5(b)(1)
or (2) for more than one calendar quarter,
the rate for all quarters shall be deter-
mined based on the quarter in which the
account had the lowest percentage invest-
ment in Treasury securities.
EFFECTIVE DATE
This notice is effective January 13,
2000, the date this notice was made avail-
able to the public.
EXPIRATION DATE
This notice applies only to requests for
closing agreement relief that are received
on or before August 1, 2000. Requests re-
ceived after that date must meet all of the
requirements, including the payment
amounts, set forth in Rev. Proc. 92–25.
DRAFTING INFORMATION
The principal author of this notice is
Gary Geisler of the Office of the Assistant
Chief Counsel (Financial Institutions and
Products). For further information re-
garding this notice, contact Mr. Geisler
on (202) 622-3970 (not a toll-free call).
Comments on Items for Year
2000 Published Guidance
Priority List
Notice 2000–10
The Department of Treasury and Inter-
nal Revenue Service request public com-
ment about items that should be included
in the Guidance Priority List for 2000.
IRS and Treasury’s Office of Tax Pol-
icy use the Guidance Priority List (GPL)
each year to identify and prioritize the tax
issues that should be addressed through
regulations, rulings, and other published
administrative guidance. Public input is
invited as part of the process of formulat-
ing the GPL to ensure that the agency’s
resources focus on the guidance items that
are most important to taxpayers and tax
administration.
No particular format is required for
comments submitted in response to this
Notice. However, it will be helpful for
comments both to briefly describe the
item that is recommended for inclusion on
the GPL and to explain why there is a
need for guidance. In addition, comments
may present an analysis of how the issue
should be resolved.
Please submit all comments by Febru-
ary 14, 2000. Written comments should
be sent to:
Internal Revenue Service
Attn: CC:DOM:CORP:R
(Notice 2000–10)
Room 5228
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:DOM:CORP:R
(Notice 2000–10)
Room 5228
1111 Constitution Avenue, N.W.
Washington, D.C.
Alternatively, comments may be submit-
ted electronically via e-mail to the follow-
ing address:
Sharon.Y.Horn@M1.IRSCOUNSEL.TR
EAS.GOV
All comments will be available for public
inspection and copying in their entirety.
For further information regarding this
notice, contact David Schneider of the
Office of Assistant Chief Counsel (In-
come Tax and Accounting) at (202) 622-
4890 (not a toll-free call).
IRB 2000-5 2/1/00 3:37 PM Page 451

January 31, 20004522000–5 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Allocation of Partnership Debt
REG–103831–99
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 allo-
cation of nonrecourse liabilities by a part-
nership. The proposed regulations revise
tier three of the three-tiered allocation
structure contained in the current nonre-
course liability regulations, and also pro-
vide guidance regarding the allocation of
a single nonrecourse liability secured by
multiple properties. This document also
contains a notice of public hearing on
these proposed regulations.
DATES: Written comments must be re-
ceived by April 12, 2000. Requests to
speak (with outlines of oral comments) at
a public hearing scheduled for May 3,
2000, at 10 a.m., must be received by
April 12, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–103831–99),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–103831–99),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option of the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at:
http://www.irs.ustreas.gov/tax_regs/regsli
st.html. The public hearing will be held
in room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Christopher Kelley, (202) 622-3070; con-
cerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, Guy
Traynor, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Introduction
This document proposes to revise
§§1.752–3 and 1.752–5 of the Income
Tax Regulations (26 CFR part 1) relating
to the allocation by a partnership of non-
recourse liabilities.
Background
Treasury regulation §1.752–3 currently
provides a three-tiered system for allocat-
ing nonrecourse liabilities. The three-
tiered system applies sequentially. Thus,
as a portion of a liability is allocated to a
partner under the first tier, that portion is
not available to be allocated under the
second tier. Similarly, as a portion of a li-
ability is allocated to a partner under the
second tier, that portion is not available to
be allocated in the third tier.
Under the first tier, a partner is allo-
cated an amount of the liability equal to
that partner’s share of partnership mini-
mum gain under section 704(b). See
§1.704–2(g)(1). Under the second tier, to
the extent the entire liability has not been
allocated under the first tier, a partner will
be allocated an amount of liability equal
to the gain that partner would be allocated
under section 704(c) if the partnership
disposed of all partnership property sub-
ject to one or more nonrecourse liabilities
in full satisfaction of the liabilities (sec-
tion 704(c) minimum gain). Under the
third tier, a partner is allocated any excess
nonrecourse liabilities under one of sev-
eral methods that the partnership may
choose. One allocation method is based
on the partner’s share of partnership prof-
its. The partnership may specify in its
partnership agreement the partners’ inter-
ests in partnership profits for purposes of
allocating excess nonrecourse liabilities
provided the specified interests are rea-
sonably consistent with allocations of
some other significant item of partnership
income or gain. The partnership also may
allocate excess nonrecourse liabilities in
accordance with the manner in which it is
reasonably expected that the deductions
attributable to those nonrecourse liabili-
ties will be allocated. The partnership
may change its allocation method under
the third tier from year to year.
In Rev. Rul. 95–41, 1995–1 C.B. 132,
the IRS and Treasury addressed the effect
of the three section 704(c) allocation
methods under §1.704–3 upon the three
tiers of §1.752–3(a). Rev. Rul. 95–41
also stated that in determining the part-
ners’ interests in partnership profits,
solely for purposes of the third tier, sec-
tion 704(c) built-in gain (i.e., the excess
of a property’s book value over the con-
tributing partner’s adjusted tax basis in
the property upon contribution) that was
not taken into account under
§1.752–3(a)(2) (the second tier) is one
factor, but not the only factor, to be con-
sidered. This gain (excess section 704(c)
gain) is equal to the excess of the amount
of section 704(c) built-in gain attributable
to an item of property over the amount of
section 704(c) minimum gain on that
property.
Explanation of Provisions
Modifications to Third Tier
The three tiers of §1.752–3(a) are
structured to allocate liabilities to those
partners who generally would be allo-
cated income or gain upon the relief of
those liabilities. Under section 752(b),
any decrease in a partner’s share of the li-
abilities of a partnership will be consid-
ered a distribution of money to the partner
by the partnership. Under section 731(a),
a partner will recognize gain on the distri-
bution of money by the partnership to the
extent that the distribution exceeds the
partner’s adjusted basis in its partnership
interest. Section 704(c) generally ensures
that any built-in gain on contributed prop-
erty will be recognized by the contribut-
ing partner upon the disposition of the
property by the partnership. The partner-
ship liability allocation rules arguably
should not accelerate the contributing
partner’s recognition of that gain when
the amount of the partnership’s liability
attributable to such property is sufficient,
if allocated to the contributing partner, to
prevent such partner from recognizing
gain.
Part IV. Items of General Interest
IRB 2000-5 2/1/00 3:38 PM Page 452

2000–5 I.R.B.453January 31, 2000
In response to comments received, the
proposed regulations modify the third tier
to allow a partnership to allocate the por-
tion of a nonrecourse liabilities in excess
of the portions allocated in tiers one and
two (excess nonrecourse liabilities) based
on the excess section 704(c) gain attribut-
able to the property securing the liability.
Thus, to the extent a portion of a partner-
ship nonrecourse liability is available to
be allocated in the third tier, the partner-
ship may allocate that portion to the con-
tributing partner based on the excess sec-
tion 704(c) gain inherent in the property.
Under §1.704–3(a)(2), section 704(c)
generally applies on a property-by-prop-
erty basis. Therefore, in determining the
amount of excess section 704(c) gain, the
built-in gains and losses on items of con-
tributed property cannot be aggregated.
Section 1.704–3(a)(3)(i) provides that
the book value of contributed property is
equal to its fair market value at the time of
contribution and is subsequently adjusted
for cost recovery and other events that af-
fect the basis of the property. Section
1.704–3(a)(3)(ii) provides that the section
704(c) built-in gain with respect to a
property is the excess of the property’s
book value over the contributing partner’s
adjusted tax basis in the property upon
contribution. The built-in gain is there-
after reduced by decreases in the differ-
ence between the property’s book value
and adjusted tax basis. Similarly, the ex-
cess section 704(c) gain will decline as
the difference between the property’s fair
market value and tax basis declines.
If a partnership holds section 704(c)
property subject to the ceiling rule of
§1.704–3(b)(1), in certain situations, the
first tier of §1.752–3(a) can gradually
shift the allocation of liabilities away
from the partner that contributed the prop-
erty (the contributing partner) to a non-
contributing partner who does not neces-
sarily need, for tax purposes, the entire
amount of the liability allocated to the
non-contributing partner in the first tier.
This can give rise to deemed distributions
to the contributing partner, resulting in
gain recognition under section 731(a)(1)
at a time that arguably is earlier than ap-
propriate. The IRS and Treasury consid-
ered other alternatives for amending
§1.752–3 that would address these liabil-
ity shifts caused by the ceiling rule, but
rejected them because of their complex-
ity. The proposed alternative was adopted
because it is simple and seems to address
the predominant concerns raised by prac-
titioners regarding the contribution of sec-
tion 704(c) property. The IRS and Trea-
sury request comments on whether further
modifications to the three-tiered structure
of §1.752–3(a) are necessary to more ap-
propriately allocate nonrecourse liabilities
among partners and, if so, what type of
modifications would be appropriate.
The holding in Rev. Rul. 95–41,
1995–1 C.B. 132, that excess section
704(c) gain is one factor to consider in de-
termining a partner’s interest in partner-
ship profits will remain relevant where a
partner does not allocate nonrecourse debt
under the third tier based on the excess
section 704(c) gain attributable to the
property that is subject to the debt. How-
ever, once a partner has allocated nonre-
course indebtedness pursuant to the rule
in these proposed regulations based upon
excess section 704(c) gain, that excess
section 704(c) gain cannot again be con-
sidered in determining a partner’s interest
in partnership profits.
Allocation of Single Liability Among
Multiple Properties
Several commentators have requested
that the IRS and Treasury issue guidance
regarding the calculation of section
704(c) minimum gain under the second
tier when a partnership holds multiple
properties subject to a single nonrecourse
liability. This situation typically arises
when a partnership that holds several
properties, each subject to an individual
liability, refinances the individual liabili-
ties with a single nonrecourse liability.
To apply the second tier, partnerships
must determine the amount of the liability
that encumbers each asset. This allows
the partnerships to determine the section
704(c) minimum gain in each asset. See
§1.704–3(a)(2).
The proposed regulations provide that
if a partnership holds multiple properties
subject to a single liability, the liability
may be allocated among the properties
based on any reasonable method. Under
the proposed regulations, a method is not
reasonable if it allocates to any property
an amount that exceeds the fair market
value of the property. Thus, for example,
the liability may be allocated to the prop-
erties based on the relative fair market
value of each property.
The portion of the nonrecourse liability
allocated to each item of partnership
property is treated as a separate loan
under §1.752–3(a)(2). The proposed reg-
ulations provide that once a liability is al-
located among the properties, a partner-
ship may not change the method for
allocating the liability. However, if one of
the properties is no longer subject to the
liability, the portion of the liability allo-
cated to that property must be reallocated
to the properties still subject to the liabil-
ity so that the amount allocated to any
property does not exceed the fair market
value of such property at the time of the
reallocation.
If the outstanding principal of a liabil-
ity is reduced, the reduction will affect the
amount of section 704(c) minimum gain
under the second tier. The proposed regu-
lations provide that as the outstanding
principal of a liability is reduced, the re-
duction in principal outstanding is allo-
cated among the properties in the same
proportion that the principal originally
was allocated to the properties.
These rules affect only the calculation
of section 704(c) minimum gain under the
second tier of §1.752–3(a).
Allocation of Single Liability Among
Multiple Partnerships
Some commentators also have re-
quested guidance on allocations of a non-
recourse liability among multiple partner-
ships. This situation may arise when a
partner contributes multiple properties
subject to the same nonrecourse liability
to more than one partnership. It also may
arise in a division of a partnership under
section 708. Although the proposed regu-
lations do not address this issue, the IRS
and Treasury request comments regarding
appropriate methods of allocating such li-
abilities.
Proposed Effective Date
These regulations are proposed to
apply to any liability incurred or assumed
by a partnership on or after the date final
regulations are published 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-
IRB 2000-5 2/1/00 3:38 PM Page 453

January 31, 20004542000–5 I.R.B.
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 regulations
do not impose a collection of information
on small entities, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 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.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury specifi-
cally request comments on the clarity of
the proposed regulations and how they
may be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled
for May 3, 2000, at 10 a.m., in Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC. Due to building security procedures,
visitors must enter at the 10
th
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 Internal Revenue
Building lobby more than 15 minutes be-
fore the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the “FOR FURTHER INFORMA-
TION CONTACT” section of this pream-
ble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons that wish to
present oral comments at the hearing must
submit timely written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(preferably a signed original and eight (8)
copies) by April 12, 2000.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Christopher Kelley, Office of
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 2. Section 1.752–3 is amended as
follows:
1. Paragraph (a)(3) is amended by
adding two sentences immediately before
the last sentence in the paragraph.
2. Paragraph (b) is redesignated as
paragraph (c).
3. New paragraph (b) is added.
4. Paragraph (d) is added.
The revision and additions read as fol-
lows:
§1.752–3 Partner’s share of nonrecourse
liabilities.
(a) * * *
(3) * * * Additionally, the partnership
may first allocate an excess nonrecourse
liability to a partner up to the amount of
built-in gain on section 704(c) property
(as defined under §1.704–3(a)(3)(ii)) that
is allocable to the partner on the property
subject to that nonrecourse liability to the
extent that such built-in gain exceeds the
gain described in paragraph (a)(2) of this
section with respect to such property. To
the extent a partnership uses this addi-
tional method and the entire amount of
the excess nonrecourse liability is not al-
located to the contributing partner, the
partnership must allocate the remaining
amount of the excess nonrecourse liability
under one of the other methods in this
paragraph (a)(3).* * *
(b) Allocation of a single nonrecourse
liability among multiple properties—(1)
In general. For purposes of determining
the amount of taxable gain under para-
graph (a)(2) of this section, if a partner-
ship holds multiple properties subject to a
single nonrecourse liability, the partner-
ship may allocate the liability among the
multiple properties under any reasonable
method. A method is not reasonable if it
allocates to any item of property an
amount of the liability in excess of the fair
market value of the property at the time
the liability is incurred. The portion of
the nonrecourse liability allocated to each
item of partnership property is then
treated as a separate loan under paragraph
(a)(2) of this section. In general, a part-
nership may not change the method of al-
locating a single nonrecourse liability
under this paragraph (b) while any portion
of the liability is outstanding. However,
if one or more of the multiple properties
subject to the liability is no longer subject
to the liability, the portion of the property
allocated to that property must be reallo-
cated among the properties still subject to
the liability so that the amount of the lia-
bility allocated to any property does not
exceed the fair market value of such prop-
erty at the time of reallocation.
(2) Reductions in principal. For this
paragraph (b), when the outstanding prin-
cipal of a partnership liability is reduced,
the reduction of outstanding principal is
allocated among the multiple properties in
the same proportion that the partnership
liability originally was allocated to the
properties under paragraph (b)(1) of this
section.
* * * * *
(d) Effective date. This section applies
to partnership liabilities incurred or as-
sumed on or after the date final regula-
tions are published in the Federal Regis-
ter.
Par. 3 The first sentence of paragraph
(a) of §1.752–5 is revised to read as fol-
lows:
§1.752–5 Effective dates and transition
rules
(a)In general. Except as otherwise
provided in §1.752–3(d), unless a partner-
ship makes an election under paragraph
(b)(1) of this section to apply the provi-
sions of §§1.752–1 through 1.752–4 ear-
lier, §§1.752–1 through 1.752–4 apply to
any liability incurred or assumed by a
partnership on or after December 28,
1991, other than a liability incurred or as-
sumed by the partnership pursuant to a
IRB 2000-5 2/1/00 3:38 PM Page 454

2000–5 I.R.B.455January 31, 2000
written binding contract in effect prior to
December 28, 1991 and at all times there-
after. * * *
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 12, 2000, 8:45 a.m., and published in the issue of
the Federal Register for January 13, 2000, 65 F.R.
2081)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Partnership Mergers and
Divisions
REG–111119–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations on the tax conse-
quences of partnership mergers and divi-
sions. The proposed regulations affect
partnerships and their partners. This doc-
ument also contains a notice of public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by April 10, 2000. Requests to
speak (with outlines of oral comments) at
the public hearing scheduled for May 4,
2000, must be submitted by April 13,
2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–111119–99),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–111119–99), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option of the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at:
http://www.irs.ustreas.gov/tax_regs/regsli
st.html. The public hearing will be held
in room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Dan
Carmody, (202) 622-3080; concerning
submissions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
This document proposes to amend sec-
tions 708, 743, and 752 of the Income Tax
Regulations (26 CFR part 1) regarding
partnership mergers and divisions.
Partnership Mergers
Background
Section 708(b)(2)(A) provides that in
the case of a merger or consolidation of
two or more partnerships, the resulting
partnership is, for purposes of section
708, considered the continuation of any
merging or consolidating partnership
whose members own an interest of more
than 50 percent in the capital and profits
of the resulting partnership. Section
1.708–1(b)(2)(i) of the Income Tax Regu-
lations provides that if the resulting part-
nership can be considered a continuation
of more than one of the merging partner-
ships, the resulting partnership is the con-
tinuation of the partnership that is cred-
ited with the contribution of the greatest
dollar value of assets to the resulting part-
nership. If none of the members of the
merging partnerships own more than a 50
percent interest in the capital and profits
of the resulting partnership, all of the
merged partnerships are considered termi-
nated, and a new partnership results. The
taxable years of the merging partnerships
that are considered terminated are closed
under section 706(c).
Although section 708 and the applicable
regulations provide which partnership con-
tinues when two or more partnerships
merge, the statute and regulations do not
prescribe a form for the partnership merger.
(Often, state merger statutes do not provide
a particular form for a partnership merger.)
In revenue rulings, however, the IRS has
prescribed the form of a partnership merger
for Federal income tax purposes.
In Rev. Rul. 68–289 (1968–1 C.B.
314), three existing partnerships (P1, P2,
and P3) merged into one partnership with
P3 continuing under section
708(b)(2)(A). The revenue ruling holds
that P1 and P2, the two terminating part-
nerships, are treated as having contributed
all of their respective assets and liabilities
to P3, the resulting partnership, in ex-
change for a partnership interest in P3.
P1 and P2 are considered terminated and
the partners of P1 and P2 receive interests
in P3 with a basis under section 732(b) in
liquidation of P1 and P2 (Assets-Over
Form). Rev. Rul. 77–458 (1977–2 C.B.
220), and Rev. Rul. 90–17 (1990–1 C.B.
119), also follow the Assets-Over Form
for a partnership merger.
Explanation of Provisions
A. Form of a Partnership Merger
The IRS and Treasury are aware that tax-
payers may accomplish a partnership
merger by undertaking transactions in ac-
cordance with jurisdictional laws that fol-
low a form other than the Assets-Over
Form. For example, the terminating part-
nership could liquidate by distributing its
assets and liabilities to its partners who then
contribute the assets and liabilities to the re-
sulting partnership (Assets-Up Form). In
addition, the partners in the terminating
partnership could transfer their terminating
partnership interests to the resulting part-
nership in exchange for resulting partner-
ship interests, and the terminating partner-
ship could liquidate into the resulting
partnership (Interest-Over Form).
In the partnership incorporation area, a
taxpayer’s form generally is respected if
the taxpayer actually undertakes, under
the relevant jurisdictional law, all the
steps of a form that is set forth in one of
three situations provided in Rev. Rul.
84–111 (1984–2 C.B. 88). The three situ-
ations that Rev. Rul. 84–111 sets forth are
the Assets-Over Form, Assets-Up Form,
and Interest-Over Form. Rev. Rul.
84–111 explains that, depending on the
form chosen to incorporate the partner-
ship, the adjusted basis and holding peri-
ods of the various assets received by the
corporation and the adjusted basis and
holding periods of the stock received by
the former partners can vary. Like part-
nership incorporations, each form of a
partnership merger has potentially differ-
IRB 2000-5 2/1/00 3:38 PM Page 455

January 31, 20004562000–5 I.R.B.
ent tax consequences.
Under the Assets-Up Form, partners
could recognize gain under sections
704(c)(1)(B) and 737 (and incur state or
local transfer taxes) when the terminating
partnership distributes the assets to the
partners. However, under the Assets-
Over Form, gain under sections
704(c)(1)(B) and 737 is not triggered.
See §§1.704–4(c)(4) and 1.737–2(b). Ad-
ditionally, under the Assets-Up Form, be-
cause the adjusted basis of the assets con-
tributed to the resulting partnership is
determined first by reference to section
732 (as a result of the liquidation) and
then section 723 (by virtue of the contri-
bution), in certain circumstances, the ad-
justed basis of the assets contributed may
not be the same as the adjusted basis of
the assets in the terminating partnership.
These circumstances occur if the partners’
aggregate adjusted basis of their interests
in the terminating partnership does not
equal the terminating partnership’s ad-
justed basis in its assets. Under the As-
sets-Over Form, because the resulting
partnership’s adjusted basis in the assets it
receives is determined solely under sec-
tion 723, the adjusted basis of the assets
in the resulting partnership is the same as
the adjusted basis of the assets in the ter-
minating partnership.
The regulations propose to respect the
form of a partnership merger for Federal
income tax purposes if the partnerships
undertake, pursuant to the laws of the ap-
plicable jurisdiction, the steps of either
the Assets-Over Form or the Assets-Up
Form. (This rule applies even if none of
the merged partnerships are treated as
continuing for Federal income tax pur-
poses.) Generally, when partnerships
merge, the assets move from one partner-
ship to another at the entity level, or in
other words, like the Assets-Over Form.
However, if as part of the merger, the
partnership titles the assets in the part-
ners’ names, the proposed regulations
treat the transaction under the Assets-Up
Form. If partnerships use the Interest-
Over Form to accomplish the result of a
merger, the partnerships will be treated as
following the Assets-Over Form for Fed-
eral income tax purposes.
In the context of partnership incorpora-
tions, Rev. Rul. 84–111 distinguishes
among all three forms of incorporation.
However, with respect to the Interest-
Over Form, the revenue ruling respects
only the transferors’ conveyances of part-
nership interests, while treating the re-
ceipt of the partnership interests by the
transferee corporation as the receipt of the
partnership’s assets (i.e., the Assets-Up
Form). The theory for this result, based
largely on McCauslen v. Commissioner,
45 T.C. 588 (1966), is that the transferee
corporation can only receive assets since
it is not possible, as a sole member, for it
to receive and hold interests in a partner-
ship (i.e., a partnership cannot have only
one member; so, the entity is never a part-
nership in the hands of the transferee cor-
poration).
Adherence to the approach followed in
Rev. Rul. 84–111 creates problems in the
context of partnership mergers that are
not present with respect to partnership in-
corporations. Unlike the corporate rules,
the partnership rules impose certain tax
results on partners based upon a concept
that matches a contributed asset to the
partner that contributed the asset. Sec-
tions 704(c) and 737 are examples of such
rules. The operation of these rules breaks
down if the partner is treated as contribut-
ing an asset that is different from the asset
that the partnership is treated as receiving.
Given that the hybrid treatment of the
Interest-Over Form transactions utilized
in Rev. Rul. 84–111 is difficult to apply in
the context of partnership mergers, an-
other characterization will be applied to
such transactions. The Assets-Over Form
generally will be preferable for both the
IRS and taxpayers. For example, when
partnerships merge under the Assets-Over
Form, gain under sections 704(c)(1)(B)
and 737 is not triggered. Moreover, the
basis of the assets in the resulting partner-
ship is the same as the basis of the assets
in the terminating partnership, even if the
partners’ aggregate adjusted basis of their
interests in the terminating partnership
does not equal the terminating partner-
ship’s adjusted basis in its assets.
If partnerships merge under applicable
law without implementing a form, the
proposed regulations treat the partner-
ships as following the Assets-Over Form.
This approach is consistent with the treat-
ment of partnership to corporation elec-
tive conversions under the check-the-box
regulations and technical terminations
under section 708(b)(1)(B), other form-
less movements of a partnership’s assets.
B. Adverse Tax Consequences of the As-
sets-Over Form
The IRS and Treasury are aware that
certain adverse tax consequences may
occur for partnerships that merge in a
transaction that will be taxed in accor-
dance with the Assets-Over Form. These
proposed regulations address some of the
adverse tax consequences regarding sec-
tion 752 liability shifts and buyouts of ex-
iting partners.
1. Section 752 Revisions
If a highly leveraged partnership (the
terminating partnership) merges with an-
other partnership (the resulting partner-
ship), all of the partners in the terminating
partnership could recognize gain because
of section 752 liability shifts. Under the
Assets-Over Form, the terminating part-
nership becomes a momentary partner in
the resulting partnership when the termi-
nating partnership contributes its assets
and liabilities to the resulting partnership
in exchange for interests in the resulting
partnership. If the terminating partner-
ship (as a momentary partner in the result-
ing partnership) is considered to receive a
deemed distribution under section 752
(after netting increases and decreases in
liabilities under §1.752–1(f)) that exceeds
the terminating partnership’s adjusted
basis of its interests in the resulting part-
nership, the terminating partnership
would recognize gain under section 731.
The terminating partnership’s gain then
would be allocated to each partner in the
terminating partnership under section
704(b). In this situation, a partner in the
terminating partnership could recognize
gain even though the partner’s adjusted
basis in its resulting partnership interest
or its share of partnership liabilities in the
resulting partnership is large enough to
avoid the recognition of gain, provided
that the decreases in liabilities in the ter-
minating partnership are netted against
the increases in liabilities in the resulting
partnership.
The proposed regulations clarify that
when two or more partnerships merge
under the Assets-Over Form, increases or
decreases in partnership liabilities associ-
ated with the merger are netted by the
partners in the terminating partnership
and the resulting partnership to determine
the effect of the merger under section 752.
The IRS and Treasury consider it appro-
priate to treat the merger as a single trans-
IRB 2000-5 2/1/00 3:38 PM Page 456

2000–5 I.R.B.457January 31, 2000
action for determining the net liability
shifts under section 752. Therefore, a
partner in the terminating partnership will
recognize gain on the contribution under
section 731 only if the net section 752
deemed distribution exceeds that part-
ner’s adjusted basis of its interest in the
resulting partnership.
2. Buyout of a Partner
Another adverse tax consequence may
occur when a partner in the terminating
partnership does not want to become a
partner in the resulting partnership and
would like to receive money or property
instead of an interest in the resulting part-
nership. Under the Assets-Over Form, the
terminating partnership will not recognize
gain or loss under section 721 when it
contributes its property to the resulting
partnership in exchange for interests in
the resulting partnership. However, if, in
order to facilitate the buyout of the exiting
partner, the resulting partnership transfers
money or other consideration to the termi-
nating partnership in addition to the re-
sulting partnership interests, the terminat-
ing partnership may be treated as selling
part of its property to the resulting part-
nership under section 707(a)(2)(B). Any
gain or loss recognized by the terminating
partnership generally would be allocated
to all the partners in the terminating part-
nership even though only the exiting part-
ner would receive the consideration.
The IRS and Treasury believe that,
under certain circumstances, when part-
nerships merge and one partner does not
become a partner in the resulting partner-
ship, the receipt of cash or property by
that partner should be treated as a sale of
that partner’s interest in the terminating
partnership to the resulting partnership,
not a disguised sale of the terminating
partnership’s assets. Accordingly, the
proposed regulations provide that if the
merger agreement (or similar document)
specifies that the resulting partnership is
purchasing the exiting partner’s interest in
the terminating partnership and the
amount paid for the interest, the transac-
tion will be treated as a sale of the exiting
partner’s interest to the resulting partner-
ship. This treatment will apply even if the
resulting partnership sends the considera-
tion to the terminating partnership on be-
half of the exiting partner, so long as the
designated language is used in the rele-
vant document.
In this situation, the exiting partner is
treated as selling a partnership interest in
the terminating partnership to the result-
ing partnership (and the resulting partner-
ship is treated as purchasing the partner’s
interest in the terminating partnership)
immediately prior to the merger. Imme-
diately after the sale, the resulting part-
nership becomes a momentary partner in
the terminating partnership. Conse-
quently, the resulting partnership and ul-
timately its partners (determined prior to
the merger) inherit the exiting partner’s
capital account in the terminating part-
nership and any section 704(c) liability of
the exiting partner. If the terminating
partnership has an election in effect
under section 754 (or makes an election
under section 754), the resulting partner-
ship will have a special basis adjustment
regarding the terminating partnership’s
property under section 743. The pro-
posed regulations provide that the result-
ing partnership’s basis adjustments under
section 743 must be ultimately allocated
solely to the partners who were partners
in the resulting partnership immediately
before the merger; the adjustments do not
affect the common basis of the resulting
partnership’s assets.
C. Merger as Part of a Larger
Transaction
The proposed regulations provide that
if the merger is part of a larger series of
transactions, and the substance of the
larger series of transactions is inconsistent
with following the form prescribed for the
merger, the form may not be respected,
and the larger series of transactions may
be recast in accordance with their sub-
stance. An example illustrating the appli-
cation of this rule is included in the pro-
posed regulations.
D. Measurement of Dollar Value of
Assets
As discussed above, the regulations
currently provide that in a merger of part-
nerships, if the resulting partnership can
be considered a continuation of more than
one of the merging partnerships, the re-
sulting partnership is the continuation of
the partnership that is credited with the
contribution of the greatest dollar value of
assets to the resulting partnership. Com-
mentators have questioned whether this
rule refers to the gross or net value of the
assets of a partnership. The proposed reg-
ulations provide that the value of assets of
a partnership is determined net of the
partnership’s liabilities.
E. Effective Date
The regulations are proposed to apply
to mergers occurring on or after the date
final regulations are published in the Fed-
eral Register.
Partnership Divisions
Background
Section 708(b)(2)(B) provides that, in
the case of a division of a partnership
into two or more partnerships, the re-
sulting partnerships (other than any re-
sulting partnership the members of
which had an interest of 50 percent or
less in the capital and profits of the prior
partnership) are considered a continua-
tion of the prior partnership. Section
1.708–1(b)(2)(ii) provides that any other
resulting partnership is not considered a
continuation of the prior partnership but
is considered a new partnership. If the
members of none of the resulting part-
nerships owned an interest of more than
50 percent in the capital and profits of
the prior partnership, the prior partner-
ship is terminated. Where members of a
partnership that has been divided do not
become members of a resulting partner-
ship that is considered a continuation of
the prior partnership, such partner’s in-
terest is considered liquidated as of the
date of the division.
Section 708(b)(2)(B) and the applica-
ble regulations do not prescribe a particu-
lar form for the division involving contin-
uing partnerships. The IRS has not
addressed in published guidance how the
assets and liabilities of the prior partner-
ship move into the resulting partnerships.
Taxpayers generally have followed either
the Assets-Over Form or the Assets-Up
Form for partnership divisions.
Under the Assets-Over Form, the prior
partnership transfers certain assets to a re-
sulting partnership in exchange for inter-
ests in the resulting partnership. The
prior partnership then immediately dis-
tributes the resulting partnership interests
to partners who are designated to receive
interests in the resulting partnership.
Under the Assets-Up Form, the prior
IRB 2000-5 2/1/00 3:38 PM Page 457

January 31, 20004582000–5 I.R.B.
partnership distributes certain assets to
some or all of its partners who then con-
tribute the assets to a resulting partnership
in exchange for interests in the resulting
partnership.
Explanation of Provisions
A. Form of a Partnership Division
As with partnership mergers, the IRS
and Treasury recognize that different tax
consequences can arise depending on the
form of the partnership division. Because
of the potential different tax results that
could occur depending on the form fol-
lowed by the partnership, the regulations
propose to respect for Federal income tax
purposes the form of a partnership divi-
sion accomplished under laws of the ap-
plicable jurisdiction if the partnership un-
dertakes the steps of either the
Assets-Over Form or the Assets-Up
Form. Thus, the same forms allowed for
partnership mergers will be allowed for
partnership divisions.
Generally, an entity cannot be classi-
fied as a partnership if it has only one
member. This universally has been held
to be the case in classifying transactions
where interests in a partnership are trans-
ferred to a single person, so that the part-
nership goes out of existence. McCauslen
v. Commissioner, 45 T.C. 588 (1966);
Rev. Rul. 99–6, 1999–6 I.R.B. 6; Rev.
Rul. 67–65, 1967–1 C.B. 168; Rev. Rul.
55–68, 1955–1 C.B. 372. However, in at
least one instance involving the contribu-
tion of assets by an existing partnership to
a newly-formed partnership, regulations
have provided that the momentary exis-
tence of the new partnership will be re-
spected for Federal income tax purposes.
See §1.708–1(b)(1)(iv). Pursuant to the
proposed regulations, under the Assets-
Over Form of a partnership division, the
prior partnership’s momentary ownership
of all the interests in a resulting partner-
ship will not prevent the resulting partner-
ship from being classified as a partnership
on formation.
The example in current
§1.708–1(b)(2)(ii) indicates that when a
partnership is not considered a continua-
tion of the prior partnership under section
708(b)(2)(B) (partnership considered a
new partnership under current
§1.708–1(b)(2)(ii)), the new partnership
is created under the Assets-Up Form. The
regulations propose to modify this result
and provide examples illustrating that
partnerships can divide and create a new
partnership under either the Assets-Over
Form or the Assets-Up Form.
Consistent with partnership mergers, if
a partnership divides using a form other
than the two prescribed, it will be treated
as undertaking the Assets-Over Form.
These proposed regulations use four
terms to describe the form of a partner-
ship division. Two of these terms, prior
partnership and resulting partnership, de-
scribe partnerships that exist under the ap-
plicable jurisdictional law. The prior part-
nership is the partnership that exists under
the applicable jurisdictional law before
the division, and the resulting partner-
ships are the partnerships that exist under
the applicable jurisdictional law after the
division. The other two terms, divided
partnership and recipient partnership, are
Federal tax concepts. A divided partner-
ship is a partnership that is treated, for
Federal income tax purposes, as transfer-
ring assets in connection with a division,
and a recipient partnership is a partner-
ship that is treated, for Federal income tax
purposes, as receiving assets in connec-
tion with a division. The divided partner-
ship must be a continuation of the prior
partnership. Although the divided part-
nership is considered one continuing part-
nership for Federal income tax purposes,
it may actually be two different partner-
ships under the applicable jurisdictional
law (i.e., the prior partnership and a dif-
ferent resulting partnership that is consid-
ered a continuation of the prior partner-
ship for Federal income tax purposes).
Finally, because in a formless division
it generally will be unclear which partner-
ship should be treated, for Federal income
tax purposes, as transferring assets (i.e,
the divided partnership) to another part-
nership (i.e., the recipient partnership)
where more than one partnership is a con-
tinuation of the prior partnership, the pro-
posed regulations provide that the contin-
uing resulting partnership with the assets
having the greatest fair market value (net
of liabilities) will be treated as the divided
partnership. This issue also is present
where the partnership that, in form, trans-
fers assets is not a continuation of the
prior partnership, but more than one of
the other resulting partnerships are con-
tinuations of the prior partnership. The
same rule applies to these situations.
B. Consequences under Sections
704(c)(1)(B) and 737
Gain under sections 704(c)(1)(B) and
737 may be triggered when section 704(c)
property or substituted section 704(c)
property is distributed to certain partners.
These rules often will be implicated in the
context of partnership divisions.
Where a division is accomplished in a
transaction that is taxed in accordance
with the Assets-Over Form, the partner-
ship interest in the recipient partnership
will be treated as a section 704(c) asset to
the extent that the interest is received by
the divided partnership in exchange for
section 704(c) property. Section
1.704–4(d)(1). Accordingly, the distribu-
tion of the partnership interests in the re-
cipient partnership by the divided partner-
ship generally will trigger section
704(c)(1)(B) where the interests in the re-
cipient partnership are received by a part-
ner of the divided partnership other than
the partner who contributed the section
704(c) property to the divided partner-
ship. In addition, section 737 may be trig-
gered if a partner who contributed section
704(c) property to the divided partnership
receives an interest in the recipient part-
nership that is not attributable to the sec-
tion 704(c) property.
Where a division is accomplished
under the Assets-Up Form, assets are dis-
tributed directly to the partners who will
hold interests in the recipient partnership.
The distribution could trigger section
704(c)(1)(B) or 737 depending on the
identity of the distributed asset and the
distributee partner.
The regulations under section 737 pro-
vide an exception for certain partnership
divisions. Section 737 does not apply
when a transferor partnership transfers all
the section 704(c) property contributed by
a partner to a second partnership in a sec-
tion 721 exchange, followed by a distrib-
ution of an interest in the transferee part-
nership in complete liquidation of the
interest of the partner that originally con-
tributed the section 704(c) property to the
transferor partnership. Section
1.737–2(b)(2). This rule, however, may
not apply to many partnership divisions
because the original contributing partner
often remains a partner in the divided
partnership. No similar rule is provided
IRB 2000-5 2/1/00 3:38 PM Page 458

2000–5 I.R.B.459January 31, 2000
under section 704(c)(1)(B).
In many instances, the application of
sections 704(c)(1)(B) and 737 will be ap-
propriate when a partnership divides
under either the Assets-Over Form or the
Assets-Up Form. Consider the following
example: A, B, C, and D form a partner-
ship. A contributes appreciated property
X ($0 basis and $200 value), B con-
tributes property Y ($200 basis and $200
value), and C and D each contribute $200
cash. The partnership subsequently di-
vides into two partnerships using the As-
sets-Over Form, distributing interests in
the recipient partnership in accordance
with each partner’s pro rata interest in the
prior partnership. Property X remains in
the prior partnership, and property Y is
contributed to the recipient partnership.
Under these facts, section 737 could be
avoided if an exception were created for
the distribution of the recipient partner-
ship interests. If, subsequent to the divi-
sion, half of property Y is distributed to A,
section 737 would not be triggered be-
cause property X (the section 704(c)
property) is no longer in the same partner-
ship as property Y.
While the IRS and Treasury generally
believe that it is appropriate to apply sec-
tions 704(c)(1)(B) and 737 in the context
of partnership divisions, comments are in-
vited on whether it would be appropriate
to expand the exceptions to these sections
in certain circumstances relating to divi-
sive transactions.
C. Division as Part of a Larger
Transaction
The proposed regulations provide the
same rule for partnership divisions that
applies to partnership mergers.
D. Effective Date
The regulations are proposed to apply
to divisions occurring on or after the date
final regulations are published in the Fed-
eral 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 on small entities a collec-
tion of information requirement, the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Therefore, a Regula-
tory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and the Department
of Treasury specifically request com-
ments on the clarity of the proposed regu-
lations and how they may be made easier
to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for May 4, 2000, beginning at 10 a.m., in
room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security
procedures, visitors must enter at the
10th Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must pre-
sent photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 15
minutes before the hearing starts. For in-
formation about having your name
placed on the building access list to at-
tend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons that wish to
present oral comments at the hearing must
submit timely written comments and must
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (preferably a signed original and
eight (8) copies) by April 13, 2000.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Mary Beth Collins, Office of
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.708–1 is amended as
follows:
1. Paragraph (b) is amended by remov-
ing paragraph (b)(2) and by redesignating
each paragraph listed in the first column
of the following table as the paragraph
listed in the second column as indicated in
the following table:
Old Redesignated
ParagraphParagraph
(b)(1)(i)(b)(1)
(b)(1)(i)(a)(b)(1)(i)
(b)(1)(i)(b)(b)(1)(ii)
(b)(1)(ii)(b)(2)
(b)(1)(iii)(b)(3)
(b)(1)(iii)(a)(b)(3)(i)
(b)(1)(iii)(b)(b)(3)(ii)
(b)(1)(iv)(b)(4)
(b)(1)(v)(b)(5)
1. Paragraphs (c) and (d) are added to
read as follows:
§1.708–1 Continuation of partnership.
* * * * *
(c) Merger or consolidation—(1) Gen-
eral rule. If two or more partnerships
merge or consolidate into one partnership,
the resulting partnership shall be consid-
ered a continuation of the merging or con-
solidating partnership the members of
which own an interest of more than 50
percent in the capital and profits of the re-
IRB 2000-5 2/1/00 3:38 PM Page 459

January 31, 20004602000–5 I.R.B.
sulting partnership. If the resulting part-
nership can, under the preceding sen-
tence, be considered a continuation of
more than one of the merging or consoli-
dating partnerships, it shall, unless the
Commissioner permits otherwise, be con-
sidered the continuation of that partner-
ship which is credited with the contribu-
tion of assets having the greatest fair
market value (net of liabilities) to the re-
sulting partnership. Any other merging or
consolidating partnerships shall be con-
sidered as terminated. If the members of
none of the merging or consolidating part-
nerships have an interest of more than 50
percent in the capital and profits of the re-
sulting partnership, all of the merged or
consolidated partnerships are terminated,
and a new partnership results. The tax-
able years of such merging or consolidat-
ing partnerships which are considered ter-
minated shall be closed in accordance
with the provisions of section 706(c), and
such partnerships shall file their returns
for a taxable year ending upon the date of
termination, i.e., the date of merger or
consolidation. The resulting partnership
shall file a return for the taxable year of
the merging or consolidating partnership
that is considered as continuing. The re-
turn shall state that the resulting partner-
ship is a continuation of such merging or
consolidating partnership and shall in-
clude the names and addresses of the
merged or consolidated partnerships. The
respective distributive shares of the part-
ners for the periods prior to and subse-
quent to the date of merger or consolida-
tion shall be shown as a part of the return.
(2) Form of a merger or
consolidation—(i) Assets-over form.
When two or more partnerships merge or
consolidate into one partnership under the
applicable jurisdictional law without un-
dertaking a form for the merger or consol-
idation, or undertake a form for the
merger or consolidation that is not de-
scribed in paragraph (c)(2)(ii) of this sec-
tion, any merged or consolidated partner-
ship that is considered terminated under
paragraph (c)(1) of this section is treated
as undertaking the assets-over form for
Federal income tax purposes. Under the
assets-over form, the merged or consoli-
dated partnership that is considered termi-
nated under paragraph (c)(1) of this sec-
tion contributes all of its assets and
liabilities to the resulting partnership in
exchange for an interest in the resulting
partnership; and, immediately thereafter,
the terminated partnership distributes in-
terests in the resulting partnership to its
partners in liquidation of the terminated
partnership.
(ii) Assets-up form. Despite the part-
ners’ transitory ownership of the termi-
nated partnership’s assets and liabilities,
the form of a partnership merger or con-
solidation will be respected for Federal
income tax purposes if the merged or con-
solidated partnership that is considered
terminated under paragraph (c)(1) of this
section distributes its assets and liabilities
to its partners in liquidation of the part-
ners’ interests in the terminated partner-
ship; and, immediately thereafter, the
partners in the terminated partnership
contribute the distributed assets and lia-
bilities to the resulting partnership in ex-
change for interests in the resulting part-
nership.
(3) Sale of an interest in the merging or
consolidating partnership. In a transac-
tion characterized under the assets-over
form, a sale of an interest in the termi-
nated partnership to the resulting partner-
ship that occurs as part of a merger or
consolidation under section 708(b)(2)(A),
as described in paragraph (c)(2)(i) of this
section, will be respected as a sale of a
partnership interest if the merger agree-
ment (or similar document) specifies that
the resulting partnership is purchasing in-
terests from a particular partner in the
merging or consolidating partnership and
the consideration that is transferred for
each interest sold. See section 741 and
§1.741–1 for determining the selling part-
ner’s gain or loss on the sale or exchange
of the partnership interest.
(4) Examples. The following examples
illustrate the rules in paragraphs (c)(1)
through (3) of this section:
Example 1. Partnership AB, in whose capital and
profits A and B each own a 50-percent interest, and
partnership CD, in whose capital and profits C and
D each own a 50-percent interest, merge on Septem-
ber 30, 1999, and form partnership ABCD. Partners
A, B, C, and D are on a calendar year, and partner-
ship AB and partnership CD are also on a calendar
year. After the merger, the partners have capital and
profits interests as follows: A, 30 percent; B, 30 per-
cent; C, 20 percent; and D, 20 percent. Since A and
B together own an interest of more than 50 percent
in the capital and profits of partnership ABCD, such
partnership shall be considered a continuation of
partnership AB and shall continue to file returns on a
calendar year basis. Since C and D own an interest
of less than 50 percent in the capital and profits of
partnership ABCD, the taxable year of partnership
CD closes as of September 30, 1999, the date of the
merger, and partnership CD is terminated as of that
date. Partnership ABCD is required to file a return
for the taxable year January 1 to December 31,
1999, indicating thereon that, until September 30,
1999, it was partnership AB. Partnership CD is re-
quired to file a return for its final taxable year, Janu-
ary 1 through September 30, 1999.
Example 2. (i) Partnership X, in whose capital
and profits A owns a 40-percent interest and B owns
a 60-percent interest, and partnership Y, in whose
capital and profits B owns a 60-percent interest and
C owns a 40-percent interest, merge on September
30, 1999. The dollar-value of the partnership X as-
sets (net of liabilities) is $100X, and the dollar-value
of the partnership Y assets (net of liabilities) is
$200X. The merger is accomplished under state law
by partnership Y contributing its assets and liabili-
ties to partnership X in exchange for interests in
partnership X, with partnership Y then liquidating,
distributing interests in partnership X to B and C.
(ii) B, a partner in both partnerships prior to the
merger, owns a greater than 50-percent interest in
the resulting partnership following the merger. Ac-
cordingly, because the dollar-value of partnership
Y’s assets (net of liabilities) was greater than that of
partnership X’s, under paragraph (c)(1) of this sec-
tion, X will be considered to terminate in the merger.
As a result, even though, for state law purposes, the
transaction was undertaken with partnership Y con-
tributing its assets and liabilities to partnership X
and distributing interests in partnership X to its part-
ners, pursuant to paragraph (c)(2)(i) of this section,
for Federal income tax purposes, the transaction will
be treated as if partnership X contributed its assets to
partnership Y in exchange for interests in partner-
ship Y and then liquidated, distributing interests in
partnership Y to A and B.
Example 3. (i) Partnership X and partnership Y
merge when the partners of partnership X transfer
their partnership X interests to partnership Y in ex-
change for partnership Y interests. Immediately
thereafter, partnership X liquidates into partnership
Y. The resulting partnership is considered a continu-
ation of partnership Y, and partnership X is consid-
ered terminated.
(ii) The partnerships are treated as undertaking
the assets-over form described in paragraph (c)(2)(i)
of this section because the partnerships undertook a
form that is not the assets-up form described in para-
graph (c)(2)(ii) of this section. Accordingly, for
Federal income tax purposes, partnership X is
deemed to contribute its assets and liabilities to part-
nership Y in exchange for interests in partnership Y;
and, immediately thereafter, partnership X is
deemed to have distributed the interests in partner-
ship Y to its partners in liquidation of their interests
in partnership X.
Example 4. (i) A, B, and C are partners in part-
nership X. D, E, and F are partners in Partnership Y.
Partnership X and partnership Y merge within the
meaning of section 708(b)(2)(A), and the resulting
partnership is considered a continuation of partner-
ship Y. Partnership X is considered terminated.
Under state law, partnerships X and Y undertake the
assets-over form of paragraph (c)(2)(i) of this sec-
tion to accomplish the partnership merger. C does
not want to become a partner in partnership Y, and
partnership X does not have the resources to buy C’s
IRB 2000-5 2/1/00 3:38 PM Page 460

2000–5 I.R.B.461January 31, 2000
interest before the merger. C, partnership X, and
partnership Y enter into an agreement that specifies
that partnership Y will purchase C’s interest in part-
nership X for $150 immediately before the merger.
As part of the merger, partnership X receives from
partnership Y $150 that will be distributed to C im-
mediately before the merger, and interests in part-
nership Y in exchange for partnership X’s assets and
liabilities. Partnership X has made an election under
section 754.
(ii) Because the merger agreement satisfies the
requirements of paragraph (c)(3) of this section, C
will be treated as selling its interest in partnership X
to partnership Y for $150 immediately before the
merger. See section 741 and §1.741–1 to determine
the amount and character of C’s gain or loss on the
sale or exchange of its interest in partnership X.
(iii) Because the merger agreement satisfies the
requirements of paragraph (c)(3) of this section,
partnership Y is considered to have purchased C’s
interest in partnership X for $150 immediately be-
fore the merger. See §1.704–1(b)(2)(iv)(l
) for deter-
mining partnership Y’s capital account in partner-
ship X. Partnership Y’s adjusted basis of its interest
in partnership X is determined under section 742
and §1.742–1. To the extent any built-in gain or loss
on section 704(c) property in partnership X would
have been allocated to C (including any allocations
with respect to property revaluations under section
704(b) (reverse section 704(c) allocations)), see sec-
tion 704 and §1.704–3(a)(7) for determining the
built-in gain or loss or reverse section 704(c) alloca-
tions apportionable to partnership Y. Similarly, after
the merger is completed, the built-in gain or loss and
reverse section 704(c) allocations attributable to C’s
interest are apportioned to D, E, and F under section
704(c) and §1.704–3(a)(7).
(iv) Because partnership X has an election under
section 754 in effect, partnership Y, as a momentary
partner in partnership X, will have a special basis
adjustment regarding the basis of partnership X’s
property under section 743 and §1.743–1. See sec-
tion 743 and §1.743–1 for determining the amount
of the adjustment. After the merger, the adjustment
is allocated solely to D, E, and F—the partners in
partnership Y immediately before the merger.
(v) Under paragraph (c)(2)(i) of this section, part-
nership X contributes assets and liabilities attributable
to the interests of A and B to partnership Y in ex-
change for interests in partnership Y; and, immediately
thereafter, partnership X distributes the interests in
partnership Y to A and B in liquidation of their inter-
ests in partnership X. At the same time, partnership X
distributes assets to partnership Y in liquidation of
partnership Y’s interest in partnership X.
(5) Prescribed form not followed in
certain circumstances.(i) If any transac-
tions described in paragraph (c)(2) or (3)
of this section are part of a larger series of
transactions, and the substance of the
larger series of transactions is inconsistent
with following the form prescribed in
such paragraph, the Commissioner may
disregard such form, and may recast the
larger series of transactions in accordance
with their substance.
(ii) Example. The following example il-
lustrates the rules in paragraph (c)(5) of
this section:
Example. A, B, and C are equal partners in part-
nership ABC. ABC holds no section 704(c) prop-
erty. D and E are equal partners in partnership DE.
B and C want to exchange their interest in ABC for
all of the interests in DE. However, rather than ex-
changing partnership interests, DE merges with
ABC by undertaking the assets-up form described in
paragraph (c)(2)(ii) of this section, with D and E re-
ceiving title to the DE assets and then contributing
the assets to ABC in exchange for interests in ABC.
As part of a prearranged transaction, the assets ac-
quired from DE are contributed to a new partner-
ship, and the interests in the new partnership are dis-
tributed to B and C in complete liquidation of their
interests in ABC. The merger and division in this
example represent a series of transactions that in
substance are an exchange of interests in ABC for
interests in DE. Even though paragraph (c)(2)(ii) of
this section provides that the form of a merger will
be respected for Federal income tax purposes if the
steps prescribed under the asset-up form are fol-
lowed, and paragraph (d)(2)(i) of this section pro-
vides a form that will be followed for Federal in-
come tax purposes in the case of partnership
divisions, these forms will not be respected for Fed-
eral income tax purposes under these facts, and the
transactions will be recast in accordance with their
substance as a taxable exchange of interests in ABC
for interests in DE.
(6) Effective date. This paragraph (c) is
applicable to partnership mergers occur-
ring on or after the date final regulations
are published in the Federal Register.
(d) Division of a partnership—(1) Gen-
eral rule. Upon the division of a partner-
ship into two or more partnerships, any re-
sulting partnership (as defined in paragraph
(d)(3)(iv) of this section) or resulting part-
nerships shall be considered a continuation
of the prior partnership (as defined in para-
graph (d)(3)(ii) of this section) if the mem-
bers of the resulting partnership or partner-
ships had an interest of more than 50
percent in the capital and profits of the prior
partnership. Any other resulting partner-
ship will not be considered a continuation
of the prior partnership but will be consid-
ered a new partnership. If the members of
none of the resulting partnerships owned an
interest of more than 50 percent in the capi-
tal and profits of the prior partnership, none
of the resulting partnerships will be consid-
ered a continuation of the prior partnership
and the prior partnership will be considered
to have terminated. Where members of a
partnership which has been divided into
two or more partnerships do not become
members of a resulting partnership which is
considered a continuation of the prior part-
nership, such partner’s interests shall be
considered liquidated as of the date of the
division. The resulting partnership that is
regarded as continuing shall file a return for
the taxable year of the partnership that has
been divided. The return shall state that the
partnership is a continuation of the prior
partnership and shall set forth separately
the respective distributive shares of the
partners for the periods prior to and subse-
quent to the date of division.
(2) Form of a division—(i) Assets-over
form. When a partnership divides into two
or more partnerships under applicable ju-
risdictional law without undertaking a
form for the division, or undertakes a
form that is not described in paragraph
(d)(2)(ii) of this section, the transaction
will be characterized under the assets-
over form for Federal income tax pur-
poses.
(A) Assets-over form where at least one
resulting partnership is a continuation of
the prior partnership. In a division under
the assets-over form where at least one re-
sulting partnership is a continuation of the
prior partnership, the divided partnership
(as defined in paragraph (d)(3)(i) of this
section) contributes certain assets and lia-
bilities to a recipient partnership (as de-
fined in paragraph (d)(3)(iv) of this sec-
tion) or recipient partnerships in exchange
for interests in such recipient partnership
or partnerships; and, immediately there-
after, distributes the interests in such re-
cipient partnership or partnerships to
some or all of its partners in partial or
complete liquidation of the partners’ in-
terests in the divided partnership.
(B) Assets-over form where none of the
resulting partnerships is a continuation of
the prior partnership. In a division under
the assets-over form where none of the re-
sulting partnerships is a continuation of
the prior partnership, the prior partnership
will be treated as contributing all of its as-
sets and liabilities to new resulting part-
nerships in exchange for interests in the
resulting partnerships; and, immediately
thereafter, the prior partnership will be
treated as liquidating by distributing the
interests in the new resulting partnerships
to the prior partnership’s partners.
(ii) Assets-up form—(A) Assets-up
form where the partnership distributing
assets is a continuation of the prior part-
nership. Despite the partners’ transitory
ownership of some of the prior partner-
ship’s assets and liabilities, the form of a
partnership division will be respected for
IRB 2000-5 2/1/00 3:38 PM Page 461

January 31, 20004622000–5 I.R.B.
Federal income tax purposes if the di-
vided partnership, which by definition is a
continuing partnership, distributes certain
assets and liabilities to some or all of its
partners in partial or complete liquidation
of the partners’ interests in the divided
partnership; and, immediately thereafter,
such partners contribute the distributed
assets and liabilities to a recipient partner-
ship or partnerships in exchange for inter-
ests in such recipient partnership or part-
nerships.
(B) Assets-up form where none of the
resulting partnerships are a continuation
of the prior partnership. If none of the re-
sulting partnerships are a continuation of
the prior partnership, then despite the
partners’ transitory ownership of some or
all of the prior partnership’s assets and li-
abilities, the form of a partnership divi-
sion will be respected for Federal income
tax purposes if the prior partnership dis-
tributes certain assets and liabilities to
some or all of its partners in partial or
complete liquidation of the partners’ in-
terests in the prior partnership; and, im-
mediately thereafter, such partners con-
tribute the distributed assets and liabilities
to a resulting partnership or partnerships
in exchange for interests in such resulting
partnership or partnerships. If the prior
partnership does not liquidate under the
applicable jurisdictional law, then with re-
spect to the assets and liabilities that, in
form, are not transferred to a new result-
ing partnership, the prior partnership will
be treated as transferring these assets and
liabilities to a new resulting partnership
under the assets over form described in
paragraph (d)(2)(i)(B) of this section.
(3) Definitions—(i) Divided partner-
ship—For purposes of paragraph (d) of
this section, the divided partnership is the
partnership which is treated, for Federal
income tax purposes, as transferring the
assets and liabilities to the recipient part-
nership or partnerships, either directly
(under the assets-over form) or indirectly
(under the assets-up form). If the result-
ing partnership that, in form, transferred
the assets and liabilities in connection
with the division is a continuation of the
prior partnership, then such resulting part-
nership will be treated as the divided part-
nership. If a partnership divides into two
or more partnerships and only one of the
resulting partnerships is a continuation of
the prior partnership, then the resulting
partnership that is a continuation of the
prior partnership will be treated as the di-
vided partnership. If a partnership di-
vides into two or more partnerships with-
out undertaking a form for the division
that is recognized under paragraph (d)(2)
of this section, or if the resulting partner-
ship that had, in form, transferred assets
and liabilities is not considered a continu-
ation of the prior partnership, and more
than one resulting partnership is consid-
ered a continuation of the prior partner-
ship, the continuing resulting partnership
with the assets having the greatest fair
market value (net of liabilities) will be
treated as the divided partnership.
(ii) Prior partnership—For purposes of
paragraph (d) of this section, the prior
partnership is the partnership subject to
division that exists under applicable juris-
dictional law before the division.
(iii) Recipient partnership—For pur-
poses of paragraph (d) of this section, a
recipient partnership is a partnership that
is treated as receiving, for Federal income
tax purposes, assets and liabilities from a
divided partnership, either directly (under
the assets-over form) or indirectly (under
the assets-up form).
(iv) Resulting partnership—For pur-
poses of paragraph (d) of this section, a
resulting partnership is a partnership re-
sulting from the division that exists under
applicable jurisdictional law after the di-
vision. For example, where a prior part-
nership divides into two partnerships,
both partnerships existing after the divi-
sion are resulting partnerships.
(4) Examples. The following examples
illustrate the rules in paragraphs (d)(1),
(2), and (3) of this section:
Example 1. Partnership ABCD is in the real es-
tate and insurance business. A owns a 40-percent in-
terest, and B, C, and D each owns a 20-percent inter-
est, in the capital and profits of the partnership. The
partnership and the partners report their income on a
calendar year. They agree to separate the real estate
and insurance business as of November 1, 1999, and
to form two partnerships; partnership AB to take
over the real estate business, and partnership CD to
take over the insurance business. Because members
of resulting partnership AB owned more than a 50-
percent interest in the capital and profits of partner-
ship ABCD (A, 40 percent, and B, 20 percent), part-
nership AB shall be considered a continuation of
partnership ABCD. Partnership AB is required to
file a return for the taxable year January 1 to Decem-
ber 31, 1999, indicating thereon that until November
1, 1999, it was partnership ABCD. Partnership CD
is considered a new partnership formed on Novem-
ber 1, 1999, and is required to file a return for the
taxable year it adopts pursuant to section 706(b) and
the applicable regulations.
Example 2. (i) Partnership ABCD owns proper-
ties W, X, Y, and Z, and divides into partnership AB
and partnership CD. Under paragraph (d)(1) of this
section, partnership AB is considered a continuation
of partnership ABCD and partnership CD is consid-
ered a new partnership. Partnership ABCD distrib-
utes property Y to C and titles property Y in C’s
name. Partnership ABCD distributes property Z to
D and titles property Z in D’s name. C and D then
contribute properties Y and Z, respectively, to part-
nership CD in exchange for interests in partnership
CD. Properties W and X remain in partnership AB.
(ii) Under paragraph (d)(2)(ii) of this section,
partnership ABCD will be treated as following the
assets-up form for Federal income tax purposes.
Example 3. (i) Partnership ABCD owns three
parcels of property: property X, with a value of
$500; property Y, with a value of $300; and property
Z, with a value of $200. A and B each own a 40-per-
cent interest in the capital and profits of partnership
ABCD, and C and D each own a 10 percent interest
in the capital and profits of partnership ABCD. On
November 1, 1999, partnership ABCD divides into
three partnerships (AB1, AB2, and CD) by con-
tributing property X to a newly formed partnership
(AB1) and distributing all interests in such partner-
ship to A and B as equal partners, and by contribut-
ing property Z to a newly formed partnership (CD)
and distributing all interests in such partnership to C
and D as equal partners in exchange for all of their
interests in partnership ABCD.
(ii) Partnerships AB1 and AB2 both are consid-
ered a continuation of partnership ABCD, while
partnership CD is considered a new partnership
formed on November 1, 1999. Under paragraph
(d)(2)(i)(A) of this section, partnership ABCD will
be treated as following the assets-over form, with
partnership ABCD contributing property X to part-
nership AB1 and property Z to partnership CD, and
distributing the interests in such partnerships to the
designated partners.
Example 4. (i) The facts are the same as in exam-
ple 3, except that partnership ABCD divides into
three partnerships by operation of state law, without
undertaking a form.
(ii) Under the last sentence of paragraph (d)(3)(i)
of this section, partnership AB1 will be treated as the
resulting partnership that is the divided partnership.
Under paragraph (d)(2)(i)(A) of this section, part-
nership ABCD will be treated as following the as-
sets-over form, with partnership ABCD contributing
property Y to partnership AB2 and property Z to
partnership CD, and distributing the interests in such
partnerships to the designated partners.
Example 5. (i) The facts are the same as in exam-
ple 3, except that partnership ABCD divides into
three partnerships by contributing property X to
newly-formed partnership AB1 and property Y to
newly-formed partnership AB2 and distributing all
interests in each partnership to A and B in exchange
for all of their interests in partnership ABCD.
(ii) Because resulting partnership CD is not a
continuation of the prior partnership (partnership
ABCD), partnership CD cannot be treated, for Fed-
eral income tax purposes, as the partnership that
transferred assets (i.e., the divided partnership), but
instead must be treated as a recipient partnership.
Under the last sentence of paragraph (d)(3)(i) of this
section, partnership AB1 will be treated as the re-
IRB 2000-5 2/1/00 3:38 PM Page 462

2000–5 I.R.B.463January 31, 2000
sulting partnership that is the divided partnership.
Under paragraph (d)(2)(i)(A) of this section, part-
nership ABCD will be treated as following the as-
sets-over form, with partnership ABCD contributing
property Y to partnership AB2 and property Z to
partnership CD, and distributing the interests in such
partnerships to the designated partners.
Example 6. (i) Partnership ABCDE owns Black-
acre, Whiteacre, and Redacre, and divides into part-
nership AB, partnership CD, and partnership DE.
Under paragraph (d)(1) of this section, partnership
ABCDE is considered terminated (and, hence, none
of the resulting partnerships are a continuation of the
prior partnership) because none of the members of
the new partnerships (partnership AB, partnership
CD, and partnership DE) owned an interest of more
than 50 percent in the capital and profits of partner-
ship ABCDE.
(ii) Partnership ABCDE distributes Blackacre to
A and B and titles Blackacre in the names of A and
B. A and B then contribute Blackacre to partnership
AB in exchange for interests in partnership AB.
Partnership ABCDE will be treated as following the
assets-up form described in paragraph (d)(2)(ii)(B)
of this section for Federal income tax purposes.
(iii) Partnership ABCDE distributes Whiteacre to
C and D and titles Whiteacre in the names of C and
D. C and D then contribute Whiteacre to partnership
CD in exchange for interests in partnership CD.
Partnership ABCDE will be treated as following the
assets-up form described in paragraph (d)(2)(ii)(B)
of this section for Federal income tax purposes.
(iv) Partnership ABCDE does not liquidate under
state law so that, in form, the assets in new partner-
ship DE are not considered to have been transferred
under state law. Partnership ABCDE will be treated
as undertaking the assets-over form described in
paragraph (d)(2)(i)(B) of this section for Federal in-
come tax purposes with respect to the assets of part-
nership DE. Thus, partnership ABCDE will be
treated as contributing Redacre to partnership DE in
exchange for interests in partnership DE; and, im-
mediately thereafter, partnership ABCDE will be
treated as distributing interests in partnership DE to
D and E in liquidation of their interests in partner-
ship ABCDE. Partnership ABCDE then terminates.
(5) Prescribed form not followed in
certain circumstances. If any transactions
described in paragraph (d)(2) of this sec-
tion are part of a larger series of transac-
tions, and the substance of the larger se-
ries of transactions is inconsistent with
following the form prescribed in such
paragraph, the Commissioner may disre-
gard such form, and may recast the larger
series of transactions in accordance with
their substance.
(6) Effective date. This paragraph (d) is
applicable to partnership divisions occur-
ring on or after the date final regulations
are published in the Federal Register.
Par. 3. Section 1.743–1 is amended by
adding two sentences to the end of para-
graph (h)(1).
§1.743–1 Optional adjustment to basis of
partnership property.
* * * * *
(h) * * *
(1) * * * When a resulting partnership
that is considered a continuation of a
merged or consolidated partnership under
section 708(b)(2)(A) has a basis adjust-
ment in property held by the merged or
consolidated partnership that is consid-
ered terminated under §1.708–1(c)(1) (as
a result of the resulting partnership ac-
quiring an interest in such merged or con-
solidated partnership, see
§1.708–1(c)(3)), the resulting partnership
will continue to have the same basis ad-
justments with respect to property distrib-
uted (see §1.708–1(c)(4), Example 4(v))
by the terminated partnership to the re-
sulting partnership, regardless of whether
the resulting partnership makes a section
754 election. The portion of the resulting
partnership’s adjusted basis in its assets
attributable to the basis adjustment with
respect to the property distributed by the
terminating partnership must be segre-
gated and allocated solely to the partners
who were partners in the resulting part-
nership immediately before the merger or
consolidation.
* * * * *
Par. 4. Section 1.752–1 is amended as
follows:
1. A sentence is added to the end of
paragraph (f).
2. The current Example in paragraph
(g) is redesignated as Example 1.
3. Example 2is added in paragraph (g).
§1.752–1 Treatment of partnership liabil-
ities.
* * * * *
(f) * * * When two or more partner-
ships merge or consolidate under section
708(b)(2)(A), as described in
§1.708–1(c)(2)(i), increases and de-
creases in partnership liabilities associ-
ated with the merger or consolidation are
netted by the partners in the terminating
partnership and the resulting partnership
to determine the effect of the merger
under section 752.
(g) * * *
Example 1.* * *
Example 2. Merger or consolidation of partner-
ships holding property encumbered by liabilities. (i)
B owns a 70 percent interest in partnership T. Part-
nership T’s sole asset is property X, which is encum-
bered by a $900 liability. Partnership T’s adjusted
basis in property X is $600, and the value of prop-
erty X is $1,000. B’s adjusted basis in its partner-
ship T interest is $420. B also owns a 20 percent in-
terest in partnership S. Partnership S’s sole asset is
property Y, which is encumbered by a $100 liability.
Partnership S’s adjusted basis in property Y is $200,
the value of property Y is $1,000, and B’s adjusted
basis in its partnership S interest is $40.
(ii) Partnership T and partnership S merge under
section 708(b)(2)(A). Under section 708(b)(2)(A)
and §1.708–1(c)(1), partnership T is considered ter-
minated and the resulting partnership is considered a
continuation of partnership S. Partnerships T and S
undertake the form described in §1.708–1(c)(2)(i)
for the partnership merger. Under §1.708–1(c)(2)(i),
partnership T contributes property X and its $900 li-
ability to partnership S in exchange for an interest in
partnership S. Immediately thereafter, partnership T
distributes the interests in partnership S to its part-
ners in liquidation of their interests in partnership T.
B owns a 25 percent interest in partnership S after
partnership T distributes the interests in partnership
S to B.
(iii) Under paragraph (f) of this section, B nets
the increases and decreases in its share of partner-
ship liabilities associated with the merger of partner-
ship T and partnership S. Before the merger, B’s
share of partnership liabilities was $650 (B had a
$630 share of partnership liabilities in partnership T
and a $20 share of partnership liabilities in partner-
ship S immediately before the merger). B’s share of
S’s partnership liabilities after the merger is $250
(25 percent of S’s total partnership liabilities of
$1,000). Accordingly, B has a $400 net decrease in
its share of S’s partnership liabilities. Thus, B is
treated as receiving a $400 distribution from part-
nership S under section 752(b). Because B’s ad-
justed basis in its partnership S interest before the
deemed distribution under section 752(b) is $460
($420 + $40), B will not recognize gain under sec-
tion 731. After the merger, B’s adjusted basis in its
partnership S interest is $60.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 10, 2000, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2000, 65 F.R.
1572)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Definition of Hyperinflationary
Currency for Purposes of
Section 988
REG–116567–99
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Notice of proposed rulemak-
ing and notice of public hearing
SUMMARY: This document contains
IRB 2000-5 2/1/00 3:38 PM Page 463

January 31, 20004642000–5 I.R.B.
proposed regulations concerning when a
currency will be considered hyperinfla-
tionary for purposes of section 988.
These regulations are intended to prevent
distortions associated with the computa-
tion of income and expense arising from
section 988 transactions denominated in
hyperinflationary currencies. This docu-
ment also provides notice of a public
hearing on these regulations.
DATES: Written and electronic comments
must be received by April 20, 2000. Re-
quests to speak (with outlines of oral
comments) at the public hearing sched-
uled for May 17, 2000 at 10 a.m. must be
submitted by April 20, 2000.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–116567–99),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC. 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (REG–116567–99),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS site
at http://www.irs.ustreas.gov/tax-
regs/regslist.html. The public hearing is in
room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW., Wash-
ington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Roger M. Brown at (202) 622-3830;
concerning submissions of comments, the
hearing, and/or requests to be placed on
the building access list to attend the hear-
ing, contact Guy R. Traynor at (202)-622-
7180 (not toll-free numbers) .
SUPPLEMENTARY INFORMATION:
Background
This document contains a proposed
amendment to the Income Tax Regula-
tions (26 CFR part 1) under section 988 of
the Internal Revenue Code (Code). On
March 17, 1992, the IRS and Treasury
published final regulations in theFederal
Registerat 57 FR 9172 relating to the
taxation of section 988 transactions, in-
cluding, inter alia, transactions denomi-
nated in hyperinflationary currencies.
Also on March 17, 1992, proposed regu-
lations were published in the Federal
Registerat (57 FR 9217 [INTL–15–91,
1992–1 C.B. 1202]) relating to the treat-
ment of certain financial instruments de-
nominated in hyperinflationary curren-
cies. The proposed regulations did not
separately define hyperinflationary cur-
rency. Rather, they simply made refer-
ence to the definition in the final regula-
tions, §1.988–1(f).
Further, T.D. 8860 on page 437 final-
ized the proposed regulations issued in
1992. This notice of proposed rulemak-
ing is intended to accompany the publica-
tion of these final regulations and propose
a change in the period of years that are
considered in determining whether a cur-
rency is hyperinflationary for purposes of
section 988.
Explanation of Provisions
For purposes of section 988, the term
hyperinflationary currencyis defined in
§1.988– 1(f), which utilizes the definition
in §1.985–1(b)(2)(ii)(D). This definition
was developed in the context of the Dollar
Approximate Separate Transactions
Method (DASTM) regulations, §1.985–3,
and generally considers the cumulative
effects of inflation over the base period in
determining whether a currency is hyper-
inflationary. The base period consists of
the thirty-six calendar month period im-
mediately preceding the first day of the
current calendar year. Use of this base
period is generally appropriate in the con-
text of DASTM because a qualified busi-
ness unit needs to know in advance if it is
subject to §1.985–3 calculations. In part,
this is because of the translation period re-
quirements of §1.985–3(c)(7).
However, failure to take the current
year’s inflation into account for purposes
of computing foreign currency gain or
loss under section 988 may lead to distor-
tions in income and expense arising from
certain items whose cash flows reflect hy-
perinflationary conditions because infla-
tion may rise dramatically in single year.
Accordingly, the IRS and Treasury be-
lieve that for purposes of section 988, it is
more appropriate to consider the cumula-
tive inflation rate over the thirty-six
month period ending on the last day of the
taxpayer’s (or the qualified business
unit’s) current taxable year. See also
§1.905–3T(d)(4)(i) (including current
year inflation in determining whether a
currency is hyperinflationary for purposes
of section 905). The change in the base
period in this notice of proposed rulemak-
ing, however, applies only for the pur-
poses of section 988 and not for the pur-
pose of determining whether a taxpayer
(or QBU) is subject to the provisions of
§1.985–3. However, other Code provi-
sions may be affected by this change, due
to the relationship of their substantive rule
to section 988. See, e.g., §1.267(f)–1(e)
(relating to the application of the loss dis-
allowance rule of section 267(a)(1) as ap-
plied to related party, nonfunctional cur-
rency loans).
Proposed Effective Date
These regulations are proposed to
apply to transactions entered into after
February 14, 2000.Until these proposed
regulations are finalized, the existing final
regulations under §1.988–1(f) shall re-
main in effect.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and, because these regula-
tions do not impose a collection of infor-
mation on small entities, the provisions of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Small Business
Administration for comment on its impact
on small businesses.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic and
written comments (a signed original and
eight (8) copies, if written) that are sub-
mitted timely to the IRS. In particular,
the IRS and Treasury are interested in
comments relating to the change in the
IRB 2000-5 2/1/00 3:38 PM Page 464

measurement of the base period, and sug-
gesting other standards that may be ap-
plied in determining whether a currency
should be considered hyperinflationary
for purposes of section 988. Examples of
the latter category of comments would be
suggestions of alternative time periods
(base periods) and hyperinflationary
thresholds (e.g., different from the current
100% cumulative inflation rate) which
may be used in determining whether a
currency is hyperinflationary. All com-
ments will be available for public inspec-
tion and copying.
A public hearing has been scheduled
for May 17, 2000, beginning at 10 a.m. in
room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW., Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the Consti-
tution Avenue entrance, located 1111
Constitution Avenue. In addition, all visi-
tors must present photo identification to
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 this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments by April 20, 2000, and submit
an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
April 20, 2000. A period of ten (10) min-
utes will be allotted to each person for
making comments. An agenda showing
the scheduling of 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 Roger M. Brown of the Office of
the Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury Department also
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.988–1 paragraph (f) is re-
vised to read as follows:
§1.988–1 Certain definitions and special
rules.
* * * * *
(f) Hyperinflationary currency—(1)
Definition.For purposes of section 988, a
hyperinflationary currency means a cur-
rency described in §1.985–1(b)(2)(ii)(D).
However, the base period means the
thirty-six calendar month period ending
on the last day of the taxpayer’s (or quali-
fied business unit’s) current taxable year.
Thus, for example, if for 1996, 1997, and
1998, a country’s annual inflation rates
are 6 percent, 11 percent, and 90 percent,
respectively, the cumulative inflation rate
for the three-year base period is 124%
[((1.06 x 1.11 x 1.90) - 1.0 = 1.24) x 100
= 124%]. Accordingly, assuming the
QBU has a calendar year as its taxable
year, the currency of the country is hyper-
inflationary for the 1998 taxable year.
(2)Effective date.Paragraph (f)(1)
shall apply to transactions entered into
after February 14, 2000.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 12, 2000, 8:45 a.m., and published in the issue of
the Federal Register for January 13, 2000, 65 F.R.
2084)
2000–5 I.R.B.465January 31, 2000
IRB 2000-5 2/1/00 3:38 PM Page 465

January 31, 2000i2000–5 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 Contribution 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 Procedral 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
IRB 2000-5 2/1/00 3:38 PM Page 466

2000–5 I.R.B.iiJanuary 31, 2000
Numerical Finding List
1
Bulletins 2000–1 through 2000–4
Announcements:
2000–1, 2000–2 I.R.B. 294
2000–2, 2000–2 I.R.B. 295
2000–3, 2000–2 I.R.B. 296
2000–4, 2000–3 I.R.B. 317
2000–5, 2000–4 I.R.B. 427
2000–6, 2000–4 I.R.B. 428
Notices:
2000–1, 2000–2 I.R.B. 288
2000–3, 2000–4 I.R.B. 413
2000–4, 2000–3 I.R.B. 313
2000–5, 2000–3 I.R.B. 314
2000–6, 2000–3 I.R.B. 315
2000–7, 2000–4 I.R.B. 419
2000–8, 2000–4 I.R.B. 420
Proposed Regulations:
REG–101492–98, 2000–3 I.R.B. 326
REG–106012–98, 2000–2 I.R.B. 290
REG–105606–99, 2000–4 I.R.B. 421
REG–116704–99, 2000–3 I.R.B. 325
Revenue Procedures:
2000–1, 2000–1 I.R.B. 4
2000–2, 2000–1 I.R.B. 73
2000–3, 2000–1 I.R.B. 103
2000–4, 2000–1 I.R.B. 115
2000–5, 2000–1 I.R.B. 158
2000–6, 2000–1 I.R.B. 187
2000–7, 2000–1 I.R.B. 227
2000–8, 2000–1 I.R.B. 230
2000–9, 2000–2 I.R.B. 280
2000–10, 2000–2 I.R.B. 287
2000–11, 2000–3 I.R.B. 309
2000–12, 2000–4 I.R.B. 387
Revenue Rulings:
2000–1, 2000–2 I.R.B. 250
2000–2, 2000–3 I.R.B. 305
2000–3, 2000–3 I.R.B. 297
2000–4, 2000–4 I.R.B. 331
Treasury Decisions:
8849, 2000–2 I.R.B. 245
8850, 2000–2 I.R.B. 265
8851, 2000–2 I.R.B. 275
8852, 2000–2 I.R.B.253
8853, 2000–4 I.R.B.377
8854, 2000–3 I.R.B.306
8855, 2000–4 I.R.B.374
8856, 2000–3 I.R.B.298
8857, 2000–4 I.R.B.365
8858, 2000–4 I.R.B.332
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–27 through
1999–52 is in Internal Revenue Bulletin 2000–1,
dated January 3, 2000.
IRB 2000-5 2/1/00 3:38 PM Page 467

January 31, 2000iii2000–5 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 2000–1 through 2000–4
Notices:
97–19
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–52
Modified by
Notice 2000–3, 2000–4 I.R.B. 413
99–8
Obsoleted by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
Revenue Procedures:
92–13
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–13A
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
94–12
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
96–13
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–27
Superseded by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
98–64
Superseded by
Rev. Proc. 2000–9, 2000–2 I.R.B. 280
99–1
Superseded by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
99–2
Superseded by
Rev. Proc. 2000–2, 2000–1 I.R.B. 73
99–3
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
99–4
Superseded by
Rev. Proc. 2000–4, 2000–1 I.R.B. 115
99–5
Superseded by
Rev. Proc. 2000–5, 2000–1 I.R.B. 158
99–6
Superseded by
Rev. Proc. 2000–6, 2000–1 I.R.B. 187
99–7
Superseded by
Rev. Proc. 2000–7, 2000–1 I.R.B. 227
99–8
Superseded by
Rev. Proc. 2000–8, 2000–1 I.R.B. 230
99–49
Modified and amplified by both
Notice 2000–4, 2000–3 I.R.B. 313 and
Rev. Rul. 2000–4, 2000–4 I.R.B.331
Revenue Procedures continued
99–51
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
Treasury Decisions:
8734
Modified by
T.D. 8856, 2000–3, I.R.B. 298
8804
Modified by
T.D. 8856, 2000–3, I.R.B. 298
1
A cumulative list of previously published items in
Internal Revenue Bulletins 1999–27 through
1999–52 is in Internal Revenue Bulletin 2000–1,
dated January 3, 2000.
IRB 2000-5 2/1/00 3:38 PM Page 468

IRB 2000-5 2/1/00 3:38 PM Page 471

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, OP:FS:FP:P:1, Room 5617, 1111 Constitution Avenue NW, Washington,
DC 20224.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
IRB 2000-5 2/1/00 3:38 PM Page 472