Internal Revenue Bulletin 2001-3 (PDF rendition): IRS Revenue Procedures

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

INCOME TAX
Rev. Rul. 2001–3, page 319.
Federal rates; adjusted federal rates; adjusted feder-
al long-term rate, and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for January 2001.
Rev. Rul. 2001–4, page 295.
Aircraft maintenance costs. Costs incurred by a taxpay-
er to perform work on its aircraft airframe as part of a heavy
maintenance visit generally are deductible as ordinary and
necessary business expenses under section 162 of the
Code. However, costs incurred in conjunction with a heavy
maintenance visit must be capitalized to the extent they
materially add to the value of, substantially prolong the use-
ful life of, or adapt the airframe to a new or different use. In
addition, costs incurred as part of a plan of rehabilitation,
modernization, or improvement must be capitalized. Rev.
Proc. 99–49 modified and amplified.
T.D. 8911, page 321.
Final regulations under sections 7508 and 7508A of the
Code authorize the Service to postpone certain tax-related
deadlines due either to service in a combat zone or a
Presidentially declared disaster. The regulations list the
types of taxpayers who are affected and the acts for which
the deadlines may be postponed. The regulations also pro-
vide that the Service may specify additional acts that may be
postponed in other guidance, such as revenue rulings, rev-
enue procedures, notices, announcements, or news releas-
es.
T.D. 8913, page 300.
Final regulations under section 355(d) of the Code relate to
recognition of gain on certain distributions of stock or secu-
rities of a controlled corporation.
REG–107566–00, page 346.
Proposed regulations under section 355(e) of the Code gen-
erally require corporations to recognize gain on certain dis-
tributions of stock or securities of a subsidiary corporation if
the distribution is part of a plan that also involves the acqui-
sition by one or more persons of a 50 percent or greater
interest in the corporation making the distribution or the cor-
poration being distributed. A public hearing is scheduled for
May 15, 2001.
Notice 2001–5, page 327.
This notice provides guidance to partnerships regarding the
need for both the terminated partnership and the new part-
nership to file a final short-year partnership tax return fol-
lowing a partnership termination under section 708(b)(1)(B)
of the Code.
Notice 2001–12, page 328.
Cost-of-living adjustments for 2001. This notice clarifies
Rev. Proc. 2001–13, on page 337 of this Bulletin, to provide
that the inflation-adjustment amounts set forth in Part I of
section 3 of that revenue procedure are the applicable
amounts for 2001 in accordance with the recently enacted
legislation. Rev. Proc. 2001–13 clarified.
Rev. Proc. 2001–12, page 335.
This procedure details safe harbor conditions under which
the transfer of a REMIC noneconomic residual interest or
FASIT ownership interest is presumed to be accomplished
without an intention to impede the assessment or collection
of tax. Taxpayers may rely on the safe harbors from
February 4, 2000 (the date proposed regulations were filed
with the Federal Register), until the date specified in future
published guidance.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–3
January 16, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
(Continued on the next page)

January 16, 20012001–3 I.R.B.
Rev. Proc. 2001–13, page 337.
Cost-of-living adjustments for 2001. This procedure pro-
vides cost-of-living adjustments for the tax rate tables for indi-
viduals, estates, and trusts, the standard deduction amounts,
the personal exemption, and several other items that use the
adjustment method provided for the tax rate tables. The
Service also provides the adjustment for eligible long-term
care premiums and another item that uses the adjustment
method provided for eligible long-term care premiums. Also,
see Notice 2001–12, page 328 of this Bulletin, for a deter-
mination of the applicable inflation-adjustment amounts for
2001.
Rev. Proc. 2001–14, page 343.
This procedure sets forth the maximum face amount of qual-
ified zone academy bonds that may be issued by each State,
the District of Columbia, and the possessions of the United
States during 2001.
EMPLOYMENT TAX
Rev. Proc. 2001–9, page 328.
Electronic filing, Form 940. This procedure provides tax-
payers, reporting agents, transmitters, and software devel-
opers with the reqiurements for electronically filing Form
940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return, as part of the Form 940 e-fileProgram. Rev. Proc.
96–17 modified.
Announcement 2001–7, page 357.
This document contains a correction to Announcement
2000–97, 2000–48 I.R.B. 557. Employers are advised that
the use of Code V (Income from the exercise of nonstatuto-
ry stock options) in box 12 of Form W-2 is optional for the
2001 Form W-2.
EXCISE TAX
Notice 2001–6, page 327.
Mileage awards. This notice provides guidance on the
application of the excise tax on the amount paid for air trans-
portation to amounts paid for frequent flyer miles. Under the
notice, amounts paid for mileage awards that cannot be
redeemed for taxable transportation are not subject to tax.
ADMINISTRATIVE
Rev. Proc. 2001–9, page 328.
Electronic filing, Form 940. This procedure provides tax-
payers, reporting agents, transmitters, and software devel-
opers with the requirements for electronically filing Form
940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return, as part of the Form 940 e-file Program. Rev. Proc.
96–17 modified.
Announcement 2001–6, page 357.
An updated edition of Publication 547, Casualties, Disasters,
and Thefts (Business and Nonbusiness) (revised December
2000), will be available soon.
Announcement 2001–7, page 357.
This document contains a correction to Announcement 2000-
97, 2000–48 I.R.B. 557. Employers are advised that the use
of Code V (Income from the exercise of nonstatutory stock
options) in box 12 of Form W-2 is optional for the 2001 Form
W-2.
Announcement 2001–8, page 357.
An updated edition of Publication 583, Starting a Business
and Keeping Records (revised December 2000), is now
available.
Announcement 2001–9, page 357.
Test of mediation procedure for appeals. This
announcement extends the test of the mediation procedure
set forth in Announcement 98–99, 1998–2 C.B. 650, for an
additional one-year period beginning on January 16, 2001,
the date this announcement is published in the Internal
Revenue Bulletin.

2001–3 I.R.B.January 16, 2001
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless oth-
erwise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Ser-
vice personnel in the disposition of other cases. In applying
published rulings and procedures, the effect of subsequent
legislation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same
conclusions in other cases unless the facts and circum-
stances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Ad-
ministrative Rulings. Bank Secrecy Act Administrative Rul-
ings are issued by the Department of the Treasury’s Office
of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual
basis, and are published in the first Bulletin of the succeed-
ing semiannual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 1.—Tax Imposed
The Service provides inflation adjustments to
the tax rate tables for individuals, trusts, and es-
tates for taxable years beginning in 2001. In addi-
tion, the amounts of certain reductions allowed
against the unearned income of minor children in
computing the “kiddie tax” are adjusted. Also ad-
justed are the amounts used to determine whether
a parent may elect to report the “kiddie tax” on
the parent’s return. See Rev. Proc. 2001–13, page
337.
Section 32.—Earned Income
The Service provides inflation adjustments to the
limitations on the earned income tax credit for tax-
able years beginning in 2001. See Rev. Proc.
2001–13, page 337.
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 2001. See Rev. Rul. 2001–3,
page 319.
Section 59.—Other Definitions
and Special Rules for the
Alternative Minimum Tax
The Service provides an inflation adjustment to
the exemption amount used in computing the alter-
native minimum tax for a minor child subject to the
“kiddie tax” for taxable years beginning in 2001.
See Rev. Proc. 2001–13, page 337.
Section 63.—Taxable Income
Defined
The Service provides inflation adjustments to the
standard deduction amounts (including the limita-
tion in the case of certain dependents, and the addi-
tional standard deduction for the aged or blind) for
taxable years beginning in 2001. See Rev. Proc.
2001–13, page 337.
Section 68.—Overall Limitation
on Itemized Deductions
The Service provides inflation adjustments to the
overall limitation on itemized deductions for taxable
years beginning in 2001. See Rev. Proc. 2001–13,
page 337.
Section 132.—Certain Fringe
Benefits
The Service provides inflation adjustments to the
limitations on the exclusion of income for a quali-
fied transportation fringe for taxable years begin-
ning in 2001. See Rev. Proc. 2001–13, page 337.
Section 135.—Income From
United States Savings Bonds
Used to Pay Higher Education
Tuition and Fees
The Service provides inflation adjustments to the
limitation on the exclusion of income from United
States savings bonds for taxpayers who pay quali-
fied higher education expenses for taxable years be-
ginning in 2001. See Rev. Proc. 2001–13, page 337.
Section 151.—Allowance of
Deductions for Personal
Exemptions
The Service provides inflation adjustments to the
personal exemption and to the threshold amounts of
adjusted gross income above which the exemption
amount phases out for taxable years beginning in
2001. See Rev. Proc. 2001–13, page 337.
Section 162.—Trade or Business
Expenses
26 CFR 1.162–1: Business expenses.
(Also sections 263; 263A; sections 1.162–4,
1.263(a)–1, 1.263A–1)
Aircraft maintenance costs.Costs in-
curred by a taxpayer to perform work on
its aircraft airframe as part of a heavy
maintenance visit generally are deductible
as ordinary and necessary business ex-
penses under section 162 of the Code.
However, costs incurred in conjuction
with a heavy maintenance visit must be
capitalized to the extent they materially
add to the value of, substantially prolong
the useful life of, or adapt the airframe to
a new or different use. In addition, costs
incurred as part of a plan of rehabilitation,
modernization, or improvement must be
capitalized.
Rev. Rul. 2001–4
ISSUE
Are costs incurred by a taxpayer to per-
form work on its aircraft airframe, includ-
ing the costs of a “heavy maintenance
visit,” deductible as ordinary and neces-
sary business expenses under § 162 of the
Internal Revenue Code, or must they be
capitalized under §§ 263 and 263A?
FACTS
Xis a commercial airline engaged in the
business of transporting passengers and
freight throughout the United States and
abroad. To conduct its business, X owns
or leases various types of aircraft. As a
condition of maintaining its operating li-
cense and airworthiness certification for
these aircraft, Xis required by the Federal
Aviation Administration “FAA” to estab-
lish and adhere to a continuous mainte-
nance program for each aircraft within its
fleet. These programs, which are designed
by Xand the aircraft’s manufacturer and
approved by the FAA, are incorporated
into each aircraft’s maintenance manual.
The maintenance manuals require a vari-
ety of periodic maintenance visits at vari-
ous intervals during the operating lives of
each aircraft. The most extensive of these
for Xis termed a “heavy maintenance
visit” (also known in the industry as a “D
check,” “heavy C check,” or “overhaul”),
which is required to be performed by X
approximately every eight years of aircraft
operation. The purpose of a heavy main-
tenance visit, according to X’s mainte-
nance manual, is to prevent deterioration
of the inherent safety and reliability levels
of the aircraft equipment and, if such dete-
rioration occurs, to restore the equipment
to their inherent levels.
In each of the following three situa-
tions, Xreasonably anticipated at the time
the aircraft was placed in service that the
aircraft would be useful in its trade or
business for up to 25 years, taking into ac-
count the repairs and maintenance neces-
sary to keep the aircraft in an ordinarily
efficient operating condition. In addition,
each of the aircraft in the following three
situations is fully depreciated for federal
income tax purposes at the time of the
heavy maintenance visit.
2001–3 I.R.B.295January 16, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

January 16, 20012962001–3 I.R.B.
Situation 1
In 2000, Xincurred $2 million for the
labor and materials necessary to perform a
heavy maintenance visit on the airframe of
Aircraft 1, which Xacquired in 1984 for
$15 million (excluding the cost of engines).
To perform the heavy maintenance visit, X
extensively disassembled the airframe, re-
moving items such as its engines, landing
gear, cabin and passenger compartment
seats, side and ceiling panels, baggage
stowage bins, galleys, lavatories, floor
boards, cargo loading systems, and flight
control surfaces. As specified by X’s main-
tenance manual for Aircraft 1, Xthen per-
formed certain tasks on the disassembled
airframe for the purpose of preventing dete-
rioration of the inherent safety and reliabil-
ity levels of the airframe. These tasks in-
cluded lubrication and service; operational
and visual checks; inspection and func-
tional checks; restoration of minor parts
and components; and removal, discard, and
replacement of certain life-limited single
cell parts, such as cartridges, canisters,
cylinders, and disks.
Whenever the execution of a task re-
vealed cracks, corrosion, excessive wear,
or dysfunctional operation, Xwas re-
quired by the maintenance manual to re-
store the airframe to an acceptable condi-
tion. This restoration involved burnishing
corrosion; repairing cracks, dents,
gouges, punctures, or scratches by bur-
nishing, blending, stop-drilling, or apply-
ing skin patches or doublers over the af-
fected area; tightening or replacing loose
or missing fasteners, rivets, screws, bolts,
nuts, or clamps; repairing or replacing
torn or damaged seals, gaskets, or valves;
repairing or replacing damaged or miss-
ing placards, decals, labels, or stencils;
additional cleaning, lubricating, or paint-
ing; further inspecting or testing, includ-
ing the use of sophisticated non-destruc-
tive inspection methods; repairing
fiberglass or laminated parts; replacing
bushings, bearings, hinges, handles,
switches, gauges, or indicators; repairing
chaffed or damaged wiring; repairing or
adjusting various landing gear or flight
surface control cables; replacing light
bulbs, window panes, lenses, or shields;
replacing anti-skid materials and stops on
floors, pedals, and stairways; replacing
floor boards; and performing minor re-
pairs on ribs, spars, frames, longerons,
stringers, beams, and supports.
In addition to the tasks described
above, Xalso performed additional work
as part of the heavy maintenance visit for
Aircraft 1. This work included applying
corrosion prevention and control com-
pounds; stripping and repainting the air-
craft exterior; and cleaning, repairing, and
painting airframe interior items such as
seats, carpets, baggage stowage bins, ceil-
ing and sidewall panels, lavatories, gal-
leys, and passenger service units. Other
additional work included implementing
certain outstanding service bulletins
(“SBs”) issued by the aircraft manufactur-
er and airworthiness directives (“ADs” )
issued by the FAA. Implementing these
SBs and ADs involved inspecting specific
skin locations and applying doublers over
the areas where cracks were found;
inspecting bolts or fasteners at specific
locations, and replacing those found to be
broken, worn, or missing; and installing
structural reinforcements between body
frames in a small area in the lower aft
fuselage to reduce skin wrinkling and
replacing a small number of the wrinkled
skin panels in this area with stronger skin
panels.
None of the work performed by Xas
part of the heavy maintenance visit
(including the execution of SBs and ADs)
for Aircraft 1 resulted in a material
upgrade or addition to its airframe or
involved the replacement of any (or a sig-
nificant portion of any) major component
or substantial structural part of the air-
frame. This work maintained the relative
value of the aircraft. The value of the air-
craft declines as it ages even if the heavy
maintenance work is performed.
After 45 days, the heavy maintenance
visit was completed, and Aircraft 1 was
reassembled, tested, and returned to X’s
fleet. Xthen continued to use Aircraft 1
for the same purposes and in the same
manner that it did prior to the perfor-
mance of the heavy maintenance visit.
The performance of the heavy mainte-
nance visit did not extend the useful life
of the airframe beyond the 25-year useful
life that Xanticipated when it acquired the
airframe
.
Situation 2
Also in 2000, Xincurred costs to per-
form work in conjunction with a heavy
maintenance visit on the airframe of
Aircraft 2. The heavy maintenance visit
on Aircraft 2 involved all of the same
work described in Situation 1. In addi-
tion, Xfound significant wear and corro-
sion of fuselage skins of Aircraft 2 that
necessitated more extensive work than
was performed on Aircraft 1. Namely, X
decided to remove all of the skin panels
on the belly of Aircraft 2’s fuselage and
replace them with new skin panels. The
replaced skin panels represented a signifi-
cant portion of all of the skin panels of
Aircraft 2, and the work performed mate-
rially added to the value of the airframe.
Because Aircraft 2 was already out of
service and its airframe disassembled for
the heavy maintenance visit, Xalso per-
formed certain modifications to the air-
frame. These modifications involved
installing a cabin smoke and fire detection
and suppression system, a ground proxim-
ity warning system, and an air phone sys-
tem to enable passengers to send and
receive voice calls, faxes, and other elec-
tronic data while in flight.
Situation 3
Also in 2000, Xdecided to make sub-
stantial improvements to Aircraft 3, which
was 22 years old and nearing the end of its
anticipated useful life, for the purpose of
increasing its reliability and extending its
useful life. X’s improvement of Aircraft
3 involved many modifications to the
structure, exterior, and interior of the air-
frame. The modifications included
removing all the belly skin panels on the
aircraft’s fuselage and replacing them
with new skin panels; replacing the metal
supports under the lavatories and galleys;
removing the wiring in the leading edges
of both wings and replacing it with new
wiring; removing the fuel tank bladders,
harnesses, wiring systems, and connectors
and replacing them with new components;
opening every lap joint on the airframe
and replacing the epoxy and rivets used to
seal the lap joints with a non-corrosive
sealant and larger rivets; reconfiguring
and upgrading the avionics and the equip-
ment in the cockpit; replacing all the
seats, overhead bins, sidewall panels, par-
titions, carpeting, windows, galleys, lava-
tories, and ceiling panels with new items;
installing a cabin smoke and fire detection
system, and a ground proximity warning
system; and painting the exterior of the
aircraft. The work performed on Aircraft
3 also included modifications necessary to

terminate every aging aircraft AD applic-
able to Aircraft 3.
In order to upgrade the airframe to the
desired level, X performed much of the
same work that would be performed dur-
ing a heavy maintenance visit (as
described in Situation1). The result of
the work performed on Aircraft 3 was to
materially increase the value of the air-
frame and substantially prolong its useful
life.
LAW
Section 162 and § 1.162–1(a) of the
Income Tax Regulations allow a deduc-
tion for all the ordinary and necessary
expenses paid or incurred during the tax-
able year in carrying on any trade or busi-
ness, including “incidental repairs.”
Section 1.162–4 allows a deduction for
the cost of incidental repairs that neither
materially add to the value of the proper-
ty nor appreciably prolong its useful life,
but keep it in an ordinarily efficient oper-
ating condition. However, § 1.162–4 also
provides that the cost of repairs in the
nature of replacements that arrest deterio-
ration and appreciably prolong the life of
the property must be capitalized and
depreciated in accordance with § 167.
Section 263(a) provides that no deduc-
tion is allowed for (1) any amount paid out
for new buildings or permanent improve-
ments or betterments made to increase the
value of any property or estate or (2) any
amount expended in restoring property or
in making good the exhaustion thereof for
which an allowance has been made. See
also§ 1.263(a)–1(a).
Section 1.263(a)–1(b) provides that cap-
ital expenditures include amounts paid or
incurred to (1) add to the value, or substan-
tially prolong the useful life, of property
owned by the taxpayer, or (2) adapt prop-
erty to a new or different use. However,
that regulation also provides that amounts
paid or incurred for incidental repairs and
maintenance of property within the mean-
ing of § 162 and § 1.162–4 are not capital
expenditures under § 1.263(a)–1.
Section 263A provides that the direct
and indirect costs properly allocable to
real or tangible personal property pro-
duced by the taxpayer must be capitalized.
Section 263A(g)(1) provides that, for pur-
poses of § 263A, the term “produce”
includes construct, build, install, manu-
facture, develop, or improve.
The United States Supreme Court has
specifically recognized that the “decisive
distinctions [between capital and ordinary
expenditures] are those of degree and not of
kind,” and a careful examination of the par-
ticular facts of each case is required.
Deputy v. du Pont, 308 U.S. 488, 496
(1940), quoting Welch v. Helvering, 290
U.S. 111, 114 (1933). To determine
whether certain costs should be classified as
capital expenditures or as repair and main-
tenance expenses, “it is appropriate to con-
sider the purpose, the physical nature, and
the effect of the work for which the expen-
ditures were made.” American Bemberg
Corp. v. Commissioner, 10 T.C. 361, 376
(1948), aff ’d, 177 F.2d 200 (6th Cir. 1949).
Any properly performed repair, no mat-
ter how routine, could be considered to
prolong the useful life and increase the
value of the property if it is compared
with the situation existing immediately
prior to that repair. Consequently, courts
have articulated a number of ways to dis-
tinguish between deductible repairs and
non-deductible capital improvements.
For example, in Illinois Merchants Trust
Co. v. Commissioner, 4 B.T.A. 103, 106
(1926), acq., V-2 C.B. 2, the court
explained that repair and maintenance
expenses are incurred for the purpose of
keeping the property in an ordinarily effi-
cient operating condition over its probable
useful life for the uses for which the prop-
erty was acquired. Capital expenditures,
in contrast, are for replacements, alter-
ations, improvements, or additions that
appreciably prolong the life of the proper-
ty, materially increase its value, or make it
adaptable to a different use. In Estate of
Walling v. Commissioner, 373 F.2d 190,
192–193 (3
rd
Cir. 1966), the court
explained that the relevant distinction
between capital improvements and repairs
is whether the expenditures were made to
“put” or “keep” property in ordinary effi-
cient operating condition. In Plainfield-
Union Water Co. v. Commissioner, 39
T.C. 333, 338 (1962), nonacq. on other
grounds, 1964–2 C.B. 8., the court stated
that if the expenditure merely restores the
property to the state it was in before the
situation prompting the expenditure arose
and does not make the property more
valuable, more useful, or longer-lived,
then such an expenditure is usually con-
sidered a deductible repair. In contrast, a
capital expenditure is generally consid-
ered to be a more permanent increment in
the longevity, utility, or worth of the prop-
erty. The Supreme Court’s decision in
INDOPCO Inc. v. Commissioner, 503
U.S. 79 (1992) does not affect these gen-
eral principles. SeeRev. Rul. 94–12,
1994–1 C.B. 36; Ingram Industries, Inc. v.
Commissioner, T.C.M. 2000–323.
Even if the expenditures include the
replacement of numerous parts of an asset,
if the replacements are a relatively minor
portion of the physical structure of the
asset, or of any of its major parts, such that
the asset as whole has not gained material-
ly in value or useful life, then the costs
incurred may be deducted as incidental
repairs or maintenance expenses. See
Buckland v. United States, 66 F.Supp. 681,
683 (D. Conn. 1946) (costs to replace all
window sills in factory building were
deductible repairs). See also, e.g., Libby &
Blouin Ltd. v. Commissioner, 4 B.T.A. 910
(1926) (costs to replace all the tubing in
sugar evaporator, which were small parts in
a large machine, were deductible repairs).
The same conclusion is true even if such
minor portion of the asset is replaced with
new and improved materials. See, e.g.,
Badger Pipeline v. Commissioner, T.C.M.
1997–457 (costs to replace 1,000 feet of
pipeline in a 25-mile section of pipeline
were deductible repairs, regardless of
whether the new pipe was of better quality
or has a longer life).
If, however, a major component or a
substantial structural part of the asset is
replaced and, as a result, the asset as a
whole has increased in value, life
expectancy, or use then the costs of the
replacement must be capitalized. See,
e.g., Denver & Rio Grande Western R.R.
Co. v. Commissioner, 279 F.2d 368 (10th
Cir. 1960) (costs to replace major portion
of a viaduct - all of the floor planks and
85-90% of the stringers - were capital
expenditures); P. Dougherty Co. v.
Commissioner, 159 F.2d 269, 272 (4th
Cir. 1946) (costs to replace entire stern
section of barge with new materials were
capital expenditures); Vanalco Inc. v.
Commissioner, T.C.M. 1999-265 (cost to
replace the cell lining, an essential and
substantial component of the cell, was
required to be capitalized); Stark v.
Commissioner, T.C.M. 1999-1 (cost to
replace building roof were capital expen-
ditures); Rev. Rul. 88–57, 1988–2 C.B.
36, modified by Rev. Rul. 94–38, 1994–1
2001–3 I.R.B.297January 16, 2001

C.B. 35 (costs to perform major cyclical
rehabilitations on railroad freight train
cars as part of a plan of rehabilitation in
which all of the structural components
were either reconditioned or replaced
were capital expenditures).
In addition, although the high cost of
the work performed may be considered in
determining whether an expenditure is
capital in nature, cost alone is not dispos-
itive. Compare R.R. Hensler, Inc. v.
Commissioner, 73 T.C. 168, 177 (1979),
acq. in result, 1980–2 C.B. 1 (the fact that
taxpayer’s expense was large does not
change its character as ordinary);
Bucklandat 683 (replacements of rela-
tively minor proportions of the entire
physical asset constitute repairs even
where high in cost); and American
Bemberg, 10 T.C. 361 (1948) (deduction
allowed for drilling and grouting to pre-
vent cave-ins even though the total cost of
the expenditures exceeded $1.1 million),
with Wolfsen Land & Cattle Co. v.
Commissioner, 72 T.C. 1, 17 (1979) (costs
to dragline an irrigation ditch were capital
expenditures, in part, because they could
be as high as the cost to construct a new
ditch); and Stoeltzing v. Commissioner,
266 F.2d 374, 376 (3d Cir. 1959) (expen-
ditures could not be incidental repairs
because they exceeded by almost 200%
the cost of the building).
Similarly, the fact that a taxpayer is
required by a regulatory authority to make
certain repairs or to perform certain main-
tenance on an asset in order to continue
operating the asset in its business does not
mean that the work performed materially
increases the value of such asset, substan-
tially prolongs its useful life, or adapts it
to a new use. See, e.g., Midland Empire
Packing Co. v. Commissioner, 14 T.C.
635 (1950), acq., 1950–2 C.B. 3 (costs of
applying concrete liner to basement walls
and floors in order to satisfy federal meat
inspectors were deductible repairs); L&L
Marine Service Inc. v. Commissioner,
T.C.M. 1987–428 (work performed on
barges that was necessary to enable the
barges to continue to qualify for sea duty
was a deductible repair).
The characterization of any cost as a
deductible repair or capital improvement
depends on the context in which the cost is
incurred. Specifically, where an expendi-
ture is made as part of a general plan of
rehabilitation, modernization, and improve-
ment of the property, the expenditure must
be capitalized, even though, standing alone,
the item may be classified as one of repair
or maintenance. United States v. Wehrli,
400 F.2d 686, 689 (10th Cir. 1968).
Whether a general plan of rehabilitation
exists, and whether a particular repair or
maintenance item is part of it, are questions
of fact to be determined based upon all the
surrounding facts and circumstances,
including, but not limited to, the purpose,
nature, extent, and value of the work done.
Id. at 690. The existence of a written plan,
by itself, is not sufficient to trigger the plan
of rehabilitation doctrine. See Moss v.
Commissioner, 831 F.2d 833, 842 (9th Cir.
1987); Vanalco v. Commissioner, T.C.M.
1999–265.
In general, the courts have applied the
plan of rehabilitation doctrine to require a
taxpayer to capitalize otherwise
deductible repair and maintenance costs
where the taxpayer has a plan to make
substantial capital improvements to prop-
erty and the repairs are incidental to that
plan. See, e.g., California Casket Co. v.
Commissioner, 19 T.C. 32 (1952), acq.,
1953–1 C.B. 3 (costs of repairing the
foundation although not in the original
plan became, when undertaken, incidental
to and involved in the plan of completely
renovating and remodeling an old ware-
house building); Stoeltzingat 377 (costs
to renovate old building by shoring up
floors; constructing steps, landing and
new driveway; replacing wiring and
plumbing; installing new roof; plastering;
insulating; performing carpentry work;
patching the gutters; and removing rub-
bish must be capitalized as part of plan of
rehabilitation); Bank of Houston v.
Commissioner, T.C.M. 1960–110 (costs
incurred for various repairs incident to the
reconstruction and renovation of a bank
building must be capitalized as part of a
general plan of rehabilitation).
On the other hand, the courts and the
Service have not applied the plan of reha-
bilitation doctrine to situations where the
plan did not include substantial capital
improvements and repairs to the same
asset, the plan primarily involved repair
and maintenance items, or the work was
performed merely to keep the property in
an ordinarily efficient operating condi-
tion. See, e.g., Mossat 840 (repairs
incurred in conjunction with a hotel
remodeling project not required to be cap-
italized as part of a plan of rehabilitation
because the project’s capital expenditures
were not of the nature or scope necessary
to trigger the plan of rehabilitation doc-
trine); Schroeder v. Commissioner,
T.C.M. 1996–336 (costs of renovating
barns were not required to be capitalized
as part of a plan of rehabilitation where
most of the renovation costs were repairs
and maintenance to keep the barns in an
efficient operating condition); Rev. Rul.
70–392, 1970–2 C.B. 33 (costs incurred
to relocate existing capital assets in order
to install new assets intended to increase a
utility’s distribution voltage were not
required to be capitalized as part of a gen-
eral plan of rehabilitation because the
relocation merely kept the existing assets
in an ordinarily efficient operating condi-
tion).
ANALYSIS
In Situation 1, the heavy maintenance
visit on Aircraft 1 primarily involved
inspecting, testing, servicing, repairing,
reconditioning, cleaning, stripping, and
repainting numerous airframe parts and
components. The heavy maintenance
visit did not involve replacements, alter-
ations, improvements, or additions to the
airframe that appreciably prolonged its
useful life, materially increased its value,
or adapted it to a new or different use.
Rather, the heavy maintenance visit mere-
ly kept the airframe in an ordinarily effi-
cient operating condition over its antici-
pated useful life for the uses for which the
property was acquired. See Illinois
Merchant Trust Co.at 106; Estate of
Wallingat 192–193; Ingram Industries,
Inc.at 538–539. The fact that the taxpay-
er was required to perform the heavy
maintenance visit to maintain its airwor-
thiness certificate does not affect this
determination. See Midland Empire
Packingat 642.
Although the heavy maintenance visit
did involve the replacement of numerous
airframe parts with new parts, none of
these replacements required the substitu-
tion of any (or a significant portion of
any) major components or substantial
structural parts of the airframe so that the
airframe as a whole increased in value,
life expectancy, or use. Compare
Bucklandat 683 with P. Doughertyat 272.
Thus, the facts in Situation 1are distin-
guishable from those in Rev. Rul. 88–57
January 16, 20012982001–3 I.R.B.

in which all of the structural components
of a railroad freight car were either recon-
ditioned or replaced so that the car was
restored to a “like new” condition with a
new, additional service life of 12 to 14
years. Moreover, the heavy maintenance
visit also did not restore the airframe, or
make good exhaustion for which an
allowance had been made, within the
meaning of § 263(a)(2). In order to have
a restoration under § 263(a)(2), much
more extensive work would have to be
done so as to substantially prolong the
useful life of the airframe. See Denver &
Rio Grandeat 373. Thus, the costs of the
heavy maintenance visit constitute
expenses for incidental repairs and main-
tenance under §1.162-4.
Finally, the costs of the heavy mainte-
nance visit are not required to be capital-
ized under §§ 263 or 263A as part of a
plan of rehabilitation, modernization, or
improvement to the airframe. Because
the heavy maintenance visit involved only
repairs for the purpose of keeping the air-
frame in an ordinarily efficient operating
condition, it did not include the type of
substantial capital improvements neces-
sary to trigger the plan of rehabilitation
doctrine. See Schroeder v. Commissioner,
T.C.M. 1996–336; Mossat 842.
Accordingly, the costs incurred by Xfor
the heavy maintenance visit in Situation 1
may be deducted as ordinary and neces-
sary business expenses under §162.
In Situation 2, in addition to perform-
ing all of the work described in Situation
1 on Aircraft 2, Xreplaced all of the skin
panels on the belly of the fuselage and
installed a cabin smoke and fire detection
and suppression system, a ground proxim-
ity warning system and an air phone sys-
tem. Because the replacement of the skin
panels involved replacing a significant
portion of the airframe’s skin panels
(which in the aggregate represented a sub-
stantial structural part of the airframe)
thereby materially adding to the value of
and improving the airframe, the cost of
replacing the skin panels must be capital-
ized. See Vanalco, T.C.M. 1999–265; P.
Doughertyat 272. In addition, the addi-
tions and upgrades to Aircraft 2 in the
form of the fire protection, air phone, and
ground proximity warning systems must
be capitalized because they materially
improved the airframe. See Phillips and
Easton Supply Co. v. Commissioner, 20
T.C 455, 460 (1953). Accordingly, the
costs incurred by Xfor labor and materi-
als allocable to these capital improve-
ments must be treated as capital expendi-
tures under § 263. Moreover, because the
improvement of property constitutes
production within the meaning of
§ 263A(g)(1), Xis required to capitalize
under § 263A the direct costs and a prop-
er share of the allocable indirect costs
associated with these improvements.
Further, the mere fact that these capital
improvements were made at the same
time that the work described in Situation
1was performed on Aircraft 2 does not
require capitalization of the cost of the
heavy maintenance visit under the plan of
rehabilitation doctrine. Whether a gener-
al plan of rehabilitation exists is a ques-
tion of fact to be determined based on all
the facts and circumstances. See Wehrliat
690. X’s plan in Situation 2was not to
rehabilitate Aircraft 2, but merely to per-
form discrete capital improvements to the
airframe. See Mossat 839; Schroeder v.
Commissioner, T.C.M. 1996–336; Rev.
Rul. 70–392. For this reason, the facts of
Situation 2are distinguishable from Rev.
Rul. 88–57, which involved a major reha-
bilitation that constituted a plan of reha-
bilitation undertaken near the end of the
freight car’s life for the purpose of restor-
ing it to a “like new” condition.
Accordingly, the costs of the work
described in Situation 1are not part of a
general plan of rehabilitation, moderniza-
tion, or improvement to the airframe. The
costs incurred by Xfor the work per-
formed on Aircraft 2must be allocated
between capital improvements, which
must be capitalized under §§ 263 and
263A, and repairs and maintenance,
which may be deducted under § 162.
In Situation 3, Xis required to capital-
ize under § 263 the costs of all the work
performed on Aircraft 3. The work in
Situation 3involved replacements of
major components and significant por-
tions of substantial structural parts that
materially increased the value and sub-
stantially prolonged the useful life of the
airframe. See P. Doughertyat 272 and
Rev. Rul. 88–57. In addition, the value of
Aircraft 3 was materially increased as a
result of material additions, alterations
and upgrades that enabled Xto operate
Aircraft 3 in an improved way. See
Dominion Resources, 48 F. Supp. 2d 527,
553. In contrast to Situation 1, the exten-
siveness of the work performed on
Aircraft 3 constitutes a restoration within
the meaning of §263(a)(2). See, e.g.
Denver & Rio Grandeat 373.
Xperformed much of the same work on
Aircraft 3 that would be performed during a
heavy maintenance visit (as described in
Situtation 1) (“Situation 1-type work”).
Although these costs, standing alone, gen-
erally are deductible expenses under § 162,
in this context, they are incurred as part of
a general plan of rehabilitation, moderniza-
tion, and improvement to the airframe of
Aircraft 3 and Xis required to capitalize
under §§ 263 and 263A the costs of that
work. See Wehrliat 689–90. In this situa-
tion, Xplanned to perform substantial capi-
tal improvements to upgrade the airframe
of Aircraft 3 for the purpose of increasing
its reliability and extending its useful life.
SeeRev. Rul. 88–57. The Situation 1-type
work was incidental to X’s plan to upgrade
Aircraft 3. See California Casketat 38. The
effect of all the work performed on Aircraft
3, including the inspection, repair, and
maintenance items, is to materially increase
the value of the airframe and substantially
prolong its useful life. Thus, all the work
performed by Xon Aircraft 3 is part of a
general plan of rehabilitation, moderniza-
tion, and improvement to the airframe and
the costs associated with this work must be
capitalized under § 263. Further, because
the improvement of the airframe constitutes
production of property within the meaning
of § 263A(g)(1), Xis required to capitalize
under § 263A the direct costs and a proper
share of the allocable indirect costs associ-
ated with this improvement plan.
The conclusions in this ruling would be
the same whether X transported only
freight or only passengers.
HOLDINGS
Costs incurred by a taxpayer to perform
work on its aircraft airframe as part of a
heavy maintenance visit generally are
deductible as ordinary and necessary busi-
ness expenses under § 162. However, costs
incurred in conjunction with a heavy main-
tenance visit must be capitalized to the
extent they materially add to the value of,
substantially prolong the useful life of, or
adapt the airframe to a new or different use.
In addition, costs incurred as part of a plan
of rehabilitation, modernization, or
improvement must be capitalized.
2001–3 I.R.B.299January 16, 2001

APPLICATION
Any change in a taxpayer’s method of
accounting to conform with this revenue rul-
ing is a change in method of accounting to
which the provisions of §§ 446 and 481 and
the regulations thereunder apply. A taxpayer
wanting to change its method of accounting
to conform with the holding in this revenue
ruling must follow the automatic change in
accounting method provisions of Rev. Proc.
99–49, 1999–2 C.B. 725, provided the
change is made for the first taxable year end-
ing after January 16, 2001. However, the
scope limitations in section 4.02 of Rev.
Proc. 99–49 do not apply unless the taxpay-
er’s method of accounting for costs incurred
to perform work on its aircraft airframes is
an issue pending, within the meaning of sec-
tion 6.01(6) of Rev. Proc. 2000–38, 2000–40
I.R.B. 310, at the time the Form 3115 is filed
with the national office. If the taxpayer is
under examination, before an appeals office,
or before a federal court with respect to any
income tax issue, the taxpayer must provide
a copy of the Form 3115, Application for
Change in Accounting Method, to the exam-
ining agent, appeals officer, or counsel for
the government, as appropriate, at the same
time that it files the copy of the Form 3115
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the examining agent(s),
appeals officer, or counsel for the govern-
ment, as appropriate.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 99–49 is modified and ampli-
fied to include the prospective change in
accounting method in the APPENDIX.
Rev. Rul. 88–57 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Merrill D. Feldstein of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact Ms.
Feldstein or Beverly Katz at (202) 622-
4950 (not a toll-free call).
Section 170.—Charitable, Etc.,
Contributions and Gifts
The Service provides inflation adjustments to the
“insubstantial benefit” guidelines for calendar year
2001. Under the guidelines, a charitable contribution
is fully deductible even though the contributor re-
cieves “insubstantial benefits” from the charity. See
Rev. Proc. 2001–13, page 337.
Section 213.—Medical, Dental,
Etc., Expenses
The Service provides inflation adjustments to the
limitation on the amount of eligible long-term care
premiums includible in the term “medical care,” for
taxable years beginning in 2001. See Rev. Proc.
2001–13, page 337.
Section 220.—Medical Savings
Accounts
The Service provides inflation adjustments to the
amounts used to determine whether a health plan is a
“high deductible health plan” for purposes of deter-
mining whether an individual is eligible for a deduc-
tion for cash paid to a medical savings account for
taxable years beginning in 2001. See Rev. Proc.
2001–13, page 337.
Section 263.—Capital
Expenditures
26 CFR 1.263 (a)–1: Capital expenditures; in
general.
Costs incurred by a taxpayer in conjunction with
a heavy maintenance visit on an aircraft airframe
must be capitalized to the extent they materially add
to the value of, substantially prolong the useful life
of, or adapt the airframe to a new or different use. In
addition, costs incurred as part of a plan of rehabili-
tation, modernization, or improvement must be capi-
talized. See Rev. Rul. 2001–4, page 295.
Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
26 CFR 1.263A–1: Uniform capitalization of costs.
Costs incurred by a taxpayer in conjunction with
a heavy maintenance visit on an aircraft airframe
must be capitalized to the extent they materially add
to the value of, substantially prolong the useful life
of, or adapt the airframe to a new or different use. In
addition, costs incurred as part of a plan of rehabili-
tation, modernization, or improvement must be capi-
talized. See Rev. Rul. 2001–4, page 295.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 2001. See
Rev. Rul. 2001–3, page 319.
Section 355.—Distribution of
Stock and Securities of a
Controlled Coporation
26 CFR 1.355–6: Recognition of gain on certain
distributions of stock or securities in controlled
corporation.
T.D. 8913
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 355(d);
Recognition of Gain on Certain
Distributions of Stock or
Securities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to recognition of
gain on certain distributions of stock or
securities of a controlled corporation.
These final regulations affect corpora-
tions and their shareholders. These regu-
lations reflect the enactment of section
355(d) of the Internal Revenue Code by
the Omnibus Budget Reconciliation Act
of 1990.
DATES: Effective Date: These regula-
tions are effective December 20, 2000.
Applicability Date: These regulations
apply to distributions occurring after De-
cember 20, 2000, except they do not
apply to distributions occurring pursuant
to a written agreement which is (subject
to customary conditions) binding on De-
cember 20, 2000, and at all times there-
after.
FOR FURTHER INFORMATION CON-
TACT: Michael N. Kaibni, (202) 622-
7550 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On May 3, 1999, the IRS and Treasury
issued a notice of proposed rulemaking
(REG–106004–98, 1999–1 C.B. 1072) in
the Federal Register(64 F.R. 23554) set-
ting forth rules under section 355(d) of the
Internal Revenue Code relating to the
recognition of gain on certain distribu-
tions of stock or securities of a controlled
January 16, 20013002001–3 I.R.B.

corporation. Generally, section 355(d)
requires recognition of gain on a distribu-
tion of stock or securities of a controlled
corporation (Controlled) (as though the
Controlled stock or securities were sold to
the distributee at its fair market value) if,
immediately after the distribution, any
person holds disqualified stock of the dis-
tributing corporation (Distributing) or of
any distributed Controlled that constitutes
a 50 percent or greater interest.
Disqualified stock is stock in Distributing
acquired by purchase after October 9,
1990, and during the five-year period
(taking into account section 355(d)(6))
ending on the date of distribution (the
five-year period), or Controlled stock
either (1) acquired by purchase during the
five-year period or (2) distributed with
respect to either disqualified Distributing
stock or on Distributing securities
acquired by purchase during the five-year
period. No public hearing regarding these
proposed regulations was held. Written
comments to the notice were received.
After consideration of all the comments,
the proposed regulations are adopted as
revised by this Treasury decision. The
principal revisions are discussed below.
Explanation of Revisions and
Summary of Comments
1. Purposes of Section 355(d) Not
Violated
Generally, Congress intended section
355(d) to prevent taxpayers from using
section 355 to dispose of subsidiaries in
sale-like transactions, or to obtain a fair
market value stepped-up basis for future
dispositions, without incurring a corpo-
rate level tax. See H.R. Rep 101–881, at
341 (1990). Under proposed
§1.355–6(b)(3), section 355(d) does not
apply to a distribution that does not vio-
late its purposes (the purpose exception).
As proposed, the purpose exception
applies if the effect of the distribution and
any related transaction is that a disquali-
fied person neither increases an interest in
Distributing or Controlled nor obtains a
purchased basis in Controlled stock. A
disqualified personis any person that,
immediately after a distribution, holds
disqualified stock in Distributing or
Controlled that constitutes a 50 percent or
greater interest (under section 355(d)(4)
and proposed §1.355–6(c)). The pro-
posed regulations define purchased basis
as basis in Controlled stock that is dis-
qualified stock, unless the Controlled
stock and the Distributing stock on which
the Controlled stock is distributed are
treated as acquired by purchase solely
under the attribution rules of section
355(d)(8) and proposed §1.355–6(e)(1).
Commentators have expressed concern
that certain distributions of stock may
technically constitute disqualified distrib-
utions under the proposed regulations, yet
do not appear to violate the purposes of
section 355(d). Section 1.355–6(b)(3)
has been expanded and clarified in the
final regulations to prevent the application
of section 355(d) in the case of certain
transactions that do not violate its purpos-
es. (Under the final regulations, certain
references to stock include securities.)
The revisions are explained below.
a. Technical clarification of disqualified
person
The definition of “disqualified person”
in the proposed regulations could be read
to include persons who hold disqualified
stock in Distributing or Controlled but
who did not directly or indirectly pur-
chase that stock. This could result in cer-
tain distributions that should not violate
the purposes of section 355(d) neverthe-
less being disqualified distributions. The
final regulations clarify that the term “dis-
qualified person” includes only a person
that meets that definition because of its
own purchase of “disqualified stock” (or
who receives stock in Controlled with
respect to stock that the person pur-
chased).
b. Related transactions
Commentators suggested that some
“related acquisitions” of stock in
Distributing or Controlled prior to or fol-
lowing a distribution should not be taken
into account in determining if the purpose
rule applies. The IRS and Treasury agree
that in many cases a related acquisition
that increases a disqualified person’s
interest in Distributing or Controlled
should not be taken into account. In addi-
tion, the IRS and Treasury are concerned
that the proposed regulations could be
interpreted to allow taxpayers, by relying
on certain other related transactions, to
avoid section 355(d) inappropriately,
where a distribution of stock, if viewed
independently, would constitute a disqual-
ified distribution. For example, where a
distribution of Controlled stock to a
Distributing shareholder constitutes a dis-
qualified distribution, a subsequent but
related distribution of that stock should
not have the effect of “cleansing” the prior
disqualified distribution. Based on these
concerns, and a belief that other provi-
sions of the final regulations will ade-
quately address the effect of related trans-
actions (e.g., the anti-avoidance
provision, §1.355–6(b)(4)), the final regu-
lations remove the reference to related
transactions in the purpose rule.
c. Fractional shares
Some commentators requested that de
minimisincreases in interest in the stock
of Distributing or Controlled should be
disregarded in determining whether the
purpose rule applies. The final regula-
tions provide that an issuance of cash in
lieu of fractional shares is disregarded in
applying the purpose exception.
2. Disqualified Stock
Generally, under the proposed regula-
tions, disqualified stock is any stock in
Distributing or Controlled acquired by
purchase during the five-year period and
any Controlled stock received in a distrib-
ution to the extent attributable to distribu-
tions on any stock in Distributing
acquired by purchase during the five-year
period. The definition of disqualified
stock has been modified in the final regu-
lations. The final regulations provide that
stock of Distributing or Controlled that is
acquired by a purchase within the five-
year period (including such stock treated
as indirectly acquired by purchase under
section 355(d)(8) or §1.355–6(e)(1), (2),
(3) or (4) of the final regulations) ceases
to be acquired by that purchase if the basis
resulting from the purchase is eliminated.
Basis in the stock of a corporation (or in
an interest in another entity) is eliminated
if (and when) it would no longer be taken
into account by any person in determining
gain or loss on a sale or exchange of any
stock of such corporation (or an interest in
the other entity). Basis is not eliminated,
however, if it is allocated between stock
of two corporations under §1.358–2(a).
For example, under the proposed regu-
lations, a direct purchase by Distributing
2001–3 I.R.B.301January 16, 2001

of all of the stock in Controlled, followed
by a distribution of the Controlled corpo-
ration stock is a disqualified distribution.
Under the final regulations, because the
distribution of Controlled will result in an
elimination of the basis that resulted from
Distributing’s purchase of Controlled
stock, the Controlled stock would no
longer be treated as purchased. The
Controlled stock is therefore not disquali-
fied stock and the distribution of
Controlled would not be a disqualified
distribution. Further, any purchases of
stock of lower tier subsidiaries of
Controlled that arise under section
355(d)(8) as a result of Distributing’s pur-
chase of Controlled also would cease to
be treated as purchased when
Distributing’s basis in Controlled is elim-
inated. Thus, in the example above, if
Controlled has a subsidiary that would
have been deemed purchased by
Distributing when Distributing purchased
the Controlled stock, the stock of that sub-
sidiary would cease to be treated as pur-
chased when Distributing’s basis in
Controlled is eliminated.
In general, basis of stock resulting from a
purchase also is treated as eliminated if such
stock is transferred to another person in an
exchange or other transfer to which
§1.355–6(e)(2) or (3) (relating to carryover
basis and exchange basis transactions)
applies. The elimination of basis as a result
of the transfer, however, does not affect the
deemed purchase under §1.355–6(e)(2) or
(3) that arises as a result of the transfer.
Thus, for example, if A purchases Controlled
stock and subsequently transfers that stock to
Distributing in a reorganization qualifying
under section 368(a)(1)(B) in exchange for
Distributing stock, A’s basis in Controlled is
eliminated. Under §1.355–6(e)(3), A is
deemed to purchase the Distributing stock
on the date A purchased the Controlled stock.
The elimination of A’s basis in Controlled
does not affect A’s deemed purchase of its
stock in Distributing (i.e., A’s exchanged
basis in its Distributing stock resulting from
its deemed purchase of that stock is not elim-
inated). Also, Distributing is deemed under
§1.355–6(e)(2) to have purchased the
Controlled stock on the date A purchased the
Controlled stock. The elimination of A’s
basis in Controlled does not affect the
deemed purchase by Distributing of the
Controlled stock (i.e., Distributing’s carry-
over basis in its Controlled stock resulting
from its deemed purchase of that stock is not
eliminated).
Under section 355(d)(3)(b)(ii) and
§1.355–6(b)(2)(i)(B)(2), disqualified
stock includes Controlled stock received
in exchange for Distributing stock
acquired by purchase. In a split-off or
split-up, the distributee shareholder will
exchange its stock in Distributing for
Controlled stock in an exchange described
in §1.355–6(e)(3). Technically, under the
basis elimination rule, this would cause
the Distributing stock held by such share-
holder to no longer be treated as “acquired
by purchase” at the time of the distribu-
tion. As a result, the distributed
Controlled stock would not be received in
exchange for Distributing stock “acquired
by purchase,” and thus, would not be dis-
qualified stock. In order to prevent this
result, §1.355–(6)(b)(2)(iii)(B)(3) pro-
vides that basis resulting from a purchase
of Distributing stock that is exchanged for
Controlled stock is not eliminated
notwithstanding that §1.355–6(e)(3)
applies to the exchange.
The modified definition of disqualified
stock eliminates the need for the “pur-
chased interest no longer held” rule of
§1.355–6(b)(3)(iv) of the proposed regu-
lations, since transactions that result in the
purchased interest no longer being held
also will result in an elimination of basis.
Accordingly, that paragraph has been
deleted. Examples have been added illus-
trating the effect of the changes discussed.
3. Purchase
Section 355(d)(5) provides that, with
certain exceptions, a purchase means any
acquisition, but only if (1) the basis of the
property acquired in the hands of the
acquirer is not determined in whole or in
part by reference to the adjusted basis of
such property in the hands of the person
from whom acquired, or under section
1014(a), and (2) the property is not
acquired in an exchange to which section
351, 354, 355 or 356 applies. The pro-
posed regulations follow the statutory def-
inition of a purchase and provide exam-
ples of both purchase and non-purchase
acquisitions. See §1.355–6(d).
a. Section 338
An example in the proposed regulations
illustrates that if a section 338 election is
made pursuant to an acquisition of stock,
the stock acquired is treated as purchased
for purposes of section 355(d)(5)(A) (See
§1.355–6(d)(1)(iii) Example 2). The
example further illustrates that any stock
held by the acquired target (and deemed
sold to new target) also is purchased stock.
The final regulations provide that stock
acquired in a qualified stock purchase with
respect to which a section 338 election (or
a section 338(h)(10) election) is made is
not treated as purchased for purposes of
section 355(d)(5)(A). However, the final
regulations retain the rule that any stock
held by old target that is treated as pur-
chased by new target is treated as acquired
by purchase for purposes of section
355(d)(5)(A) (unless a section 338 elec-
tion or 338(h)(10) election also is made
with respect to that purchase).
b. Partnerships
Section 1.355–6(d)(2)(v)(A) of the final
regulations clarifies that an acquisition of
stock (or an interest in another entity) by a
partner pursuant to the liquidation of a
partnership interest is a purchase of the
stock (or other interest) acquired at the
time of the liquidation of the partnership.
Under §1.355–6(d)(2)(v)(B) of the final
regulations, if the adjusted basis of stock
(or an interest in another entity) held by a
partnership is increased under section
734(b), a proportionate amount of the
stock (or other interest) will be treated as
purchased at the time of the basis adjust-
ment. The amount purchased is deter-
mined by reference to the amount of the
basis adjustment over the fair market value
of the stock (or other interest) at the time
of the adjustment.
c. Transfers of cash, cash items,
marketable stock and debt of the
transferor
i. Transferred With Respect to an Active
Trade or Business
Under section 355(d)(5)(B), a purchase
includes any acquisition of property in an
exchange to which section 351 applies to
the extent the property is acquired in
exchange for any cash or cash item, any
marketable stock or security, or any debt
of the transferor. The proposed regula-
tions provide certain exceptions to pur-
chase treatment under section
January 16, 20013022001–3 I.R.B.

355(d)(5)(B). An acquisition of stock in
exchange for any cash or cash item, mar-
ketable stock or debt of the transferor in a
section 351 transaction generally is not a
purchase if the transferor transfers the
items as part of an active trade or business
and the transferred items do not exceed the
reasonable needs of the trade or business
(the active business exception). See
§1.355–6(d)(3)(iv). The proposed regula-
tions require, in part, that the transferee
continue the active conduct of the trade or
business. Commentators have expressed
concern that this requirement would pre-
vent a retransfer of the assets to a lower
tier corporation within the same affiliated
group. In §1.355–6(d)(3)(iv)(4)(E), the
final regulations clarify that a transfer of
assets does not fail to meet the active busi-
ness exception solely because the transfer-
ee transfers the assets to another member
of the transferee’s affiliated group if the
requirements for the active business
exception in §1.355–6(d)(3)(iv)(A)(1),
(2), (3) and (4) would be met if the trans-
feror had transferred the assets directly to
the final transferee.
ii. Transfers Between Members of the
Same Affiliated Group
Under the proposed regulations, an
acquisition of stock in exchange for any
cash or cash item, marketable stock or
security, or debt of the transferor in a sec-
tion 351 transaction is generally not a pur-
chase if the transferor corporation or cor-
porations, the transferee corporation
(whether formed in the transaction or
already existing), and any distributed con-
trolled corporation of the transferee cor-
poration are members of the same affiliat-
ed group as defined in section 1504(a)
before the section 351 transaction (if the
transferee corporation is in existence
before the transaction). See
§1.355–6(d)(3)(v) for additional require-
ments. The final regulations clarify that
the cash or cash item, marketable stock or
security, or debt of the transferor that is
transferred must not have been acquired
from a nonmember in a related transaction
in which section 362(a) or (b) applies to
determine the basis in the acquired assets.
Examples in the final regulations have
been modified to reflect this clarification.
See §1.355–6(d)(4)(iii) and (d)(5)(iii)
illustrating the effects of a forward and
reverse triangular merger, respectively.
The final regulations also eliminate the
requirement that distributed controlled
corporations be a member of the group
before the section 351 transaction.
iii. Certain Section 355 and Section 305
Distributions
Under §1.355–6(d)(1)(i)(B) of the pro-
posed regulations, stock acquired in a dis-
tribution to which section 355 applies,
whether in exchange for stock or pro rata,
is not a purchase within the meaning of
section 355(d). The final regulations in
§1.355–6(e)(4) modify this rule to pro-
vide that if a distributing corporation dis-
tributes any stock of a controlled corpora-
tion with respect to recently purchased
distributing stock in a distribution that
qualifies under section 355, the stock is
deemed to be acquired by purchase by the
distributee on the date the distributee
acquired the recently purchased distribut-
ing stock. For this purpose, recently pur-
chased distributing stock is stock in the
distributing corporation acquired by pur-
chase (determined without regard to the
attribution rules of section 355(d)(8) and
§1.355–6(e)(1)) by the distributee during
the five-year period with respect to that
distribution. A similar rule is added with
respect to distributions of stock under sec-
tion 305(a) to the extent section 307(a)
applies to determine the recipient’s basis.
4. Whether a Person Holds a 50 Percent
or Greater Interest
a. Exchanged basis rule and plan or
arrangement
Section 1.355–6(c) of the proposed reg-
ulations provides rules for determining if a
person holds a 50 percent or greater inter-
est in Distributing or Controlled. Under
section 355(d)(7)(B) and §1.355–6(c)(4), if
two or more persons act pursuant to a plan
or arrangement with respect to acquisitions
of stock or securities in Distributing or
Controlled, those persons are treated as one
person for purposes of section 355(d). A
rule has been added to the final regulations
clarifying the application of this rule in the
context of an exchanged basis transaction
with respect to purchased stock. If two or
more persons do not act pursuant to a plan
or arrangement with respect to an acquisi-
tion of stock in a corporation (the first cor-
poration), a subsequent exchange basis
acquisition will not result in such persons
being treated as one person, even if the
acquisition of the second corporation’s
stock is pursuant to a plan or arrangement.
An example has been added illustrating the
effect of this rule.
b. Options
Section 1.355–6(c)(3) of the proposed
and final regulations generally provides
that options outstanding when the distrib-
ution occurs are treated as exercised when
issued or last transferred if two criteria are
met. First, the deemed exercise would
cause a person to be a disqualified person.
Second, immediately after the distribu-
tion, taking into account all the facts and
circumstances, it is reasonably certain the
option will be exercised. Commentators
suggested that the “reasonably certain to
be exercised” test be replaced with a
“principal purpose to avoid section
355(d)” standard patterned on the regula-
tions under section 382. The IRS and
Treasury continue to believe, however,
that the more objective standard of the
proposed regulations is appropriate.
In response to a comment, the final reg-
ulations exclude from the definition of
options cash settlement options, phantom
stock, stock appreciation rights, and
national principal contracts. However, to
the extent that such instruments are exer-
cisable into stock, they still would be sub-
ject to the deemed exercise rule of the
final regulations under §1.355–6(c)(3)(v)
as an “other instrument that provides for
the right to purchase, issue, redeem, or
transfer stock.” The final regulations
have also added a rule for substituted
options treating the substituted option as
issued on the date the original option was
issued.
5. Statistical Sampling
Under §1.355–6(f)(1) of the proposed
regulations, a distributing corporation
must determine whether a disqualified
person holds its stock or the stock of any
distributed controlled corporation. Under
§1.355–6(f)(4), a distributing corporation
may, absent actual knowledge with regard
to a particular shareholder, presume that
no less-than-five-percent shareholder of a
corporation acquired stock or securities
by purchase during the five-year period.
In §1.355–6(f)(5) Example 3, the final
regulations clarify that application of sta-
tistical sampling procedures to estimate
2001–3 I.R.B.303January 16, 2001

the basis of shares acquired in certain
reorganizations does not have the effect of
giving actual knowledge of a purchase of
stock beyond the sample group.
6. Administrative Remedies
A comment urged the adoption of vari-
ous forms of administrative relief from
the recognition of gain in a disqualified
distribution. The suggested forms of
relief included the issuance of private let-
ter rulings granting tax free treatment in
appropriate cases, gain recognition agree-
ments, stock basis waivers, or some com-
bination of the above. Section 355(d)
applies at a specific time (at the time of
the disqualified distribution) and requires
Distributing to recognize gain as if it had
sold Controlled at its fair market value at
that time. Accordingly, the IRS and
Treasury Department do not believe that it
would be appropriate to adopt any of
these administrative relief provisions.
Basis reduction or gain recognition agree-
ments could result in either a complete
avoidance or a deferral of gain recogni-
tion. Moreover, the IRS and Treasury do
not believe that granting exceptions to
section 355(d) by private letter ruling is
appropriate. However, the final regula-
tions include a new provision stating that
the Commissioner may provide by guid-
ance published in the Internal Revenue
Bulletin that other distributions are not
disqualified distributions because they do
not violate the purposes of section 355(d).
Special Analyses
It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, these regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Michael N. Kaibni of the Office of
the Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355–6 also issued under 26
U.S.C. 355(d)(9). * * *
Par. 2. Section 1.355–0 is amended by
revising the section heading, adding intro-
ductory text, removing the existing entry
for §1.355–6, and adding new entries for
§1.355–6 to read as follows:
§1.355–0 Table of Contents.
To facilitate the use of §§1.355–1
through 1.355–6, this section lists the fol-
lowing major paragraphs in those sections.
* * * * *
§1.355–6 Recognition of gain on certain
distributions of stock or securities in
controlled corporation.
a. Conventions.
1. Examples.
2. Five-year period.
3. Distributing securities.
4. Marketable securities.
b. General rules and purposes of section
355(d).
1. Disqualified distributions in general.
2. Disqualified stock.
i. In general.
ii. Purchase.
iii. Exceptions.
(A) Purchase eliminated.
(B) Deemed purchase eliminated.
(C) Elimination of basis.
(1) General rule.
(2) Special rule for transferred and
exchanged basis property.
(3) Special rule for Split-offs and Split-
ups.
(D) Special rule if basis allocated
between two corporations.
3. Certain distributions not disqualified
distributions because purposes of section
355(d) not violated.
i.In general.
ii. Disqualified person.
iii. Purchased basis.
iv. Increase in interest because payment
of cash in lieu of fractional shares.
v.Other exceptions.
vi. Examples.
4.Anti-avoidance rule.
i.In general.
ii. Example.
c.Whether a person holds a 50 percent
or greater interest.
1.In general.
2.Valuation.
3.Effect of options, warrants, convert-
ible obligations, and other similar inter-
ests.
i. Application.
ii. General rule.
iii. Options deemed newly issued and
substituted options.
A) Exchange, adjustment, or alteration
of existing option.
B) Certain compensatory options.
C) Substituted options.
iv. Effect of treating an option as exer-
cised.
A) In general.
B) Stock purchase agreement or similar
arrangement.
v. Instruments treated as options.
vi. Instruments generally not treated as
options.
A) Escrow, pledge, or other security
agreements.
B) Compensatory options.
(1) General rule.
(2) Exception.
C) Certain stock conversion features.
D) Options exercisable only upon death,
disability, mental incompetency, or sepa-
ration from service.
E) Rights of first refusal.
F) Other enumerated instruments.
vii. Reasonably certain that the option
will be exercised.
A) In general.
B) Stock purchase agreement or similar
arrangement.
viii. Examples.
4. Plan or arrangement.
January 16, 20013042001–3 I.R.B.

i. In general.
ii. Understanding.
iii. Examples.
iv. Exception.
(A) Subsequent disposition.
(B) Example.
d. Purchase.
1. In general.
i. Definition of purchase under section
355(d)(5)(A).
ii. Section 355 distributions.
iii. Example.
2. Exceptions to definition of purchase
under section 355(d)(5)(A).
i. Acquisition of stock in a transaction
which includes other property or money.
A) Transferors and shareholders of
transferor or distributing corporations.
(1) In general.
(2) Exception.
B) Transferee corporations.
(1) In general.
(2) Exception.
C) Examples.
ii. Acquisition of stock in a distribution
to which section 305(a) applies.
iii. Section 1036(a) exchange.
iv. Section 338 elections.
(A) In general.
(B) Example.
(v) Partnership distribution.
(A) Section 732(b).
(B) Section 734(b).
3. Certain section 351 exchanges treated
as purchases.
i. In general.
A) Treatment of stock received by trans-
feror.
B) Multiple classes of stock.
ii. Cash item, marketable stock.
iii. Exception for certain acquisitions.
A) In general.
B) Example.
iv. Exception for assets transferred as
part of an active trade or business.
A) In general.
B) Active conduct of a trade or business.
C) Reasonable needs of the trade or
business.
D) Consideration of all facts and cir-
cumstances.
E) Successive transfers.
v. Exception for transfer between mem-
bers of the same affiliated group.
A) In general.
B) Examples.
4. Triangular asset reorganizations.
i. Definition.
ii. Treatment.
iii. Example.
5. Reverse triangular reorganizations
other than triangular asset reorganiza-
tions.
i. In general.
ii. Letter ruling and closing agreement.
iii. Example.
6. Treatment of group structure changes.
i. In general.
ii. Adjustments to basis of higher-tier
members.
iii. Example.
7. Special rules for triangular asset reor-
ganizations, other reverse triangular reor-
ganizations, and group structure changes.
e. Deemed purchase and timing rules.
1. Attribution and aggregation.
i. In general.
ii. Purchase of additional interest.
iii. Purchase between persons treated as
one person.
iv. Purchase by a person already treated
as holding stock under section
355(d)(8)(A).
v. Examples.
2. Transferred basis rule.
3. Exchanged basis rule.
i. In general.
ii. Example.
(4) Certain section 355 or section 305
distributions.
(i) Section 355.
(ii) Section 305.
(5) Substantial diminution of risk.
(i) In general.
(ii) Property to which suspension
applies.
iii. Risk of loss substantially diminished.
iv. Special class of stock.
f. Duty to determine stockholders.
1. In general.
2. Deemed knowledge of contents of
securities filings.
3. Presumptions as to securities filings.
4. Presumption as to less-than-five-per-
cent shareholders.
5. Examples.
g. Effective date.
Par. 3. Section 1.355–6 is revised to
read as follows:
§1.355–6 Recognition of gain on certain
distributions of stock or securities in con-
trolled corporation—(a) Conventions— (1)
Examples. For purposes of the examples in
this section, unless otherwise stated, as-
sume that P, S, T, X, Y, N, HC, D, D1, D2,
D3, and C are corporations, A and B are in-
dividuals, shareholders are not treated as
one person under section 355(d)(7), stock
has been owned for more than five years
and section 355(d)(6) and paragraph (e)(4)
of this section do not apply, no election
under section 338 (if available) is made,
and all transactions described are respected
under general tax principles, including the
step transaction doctrine. No inference
should be drawn from any example as to
whether any requirements of section 355
other than those of section 355(d), as speci-
fied, are satisfied.
(2) Five-year period. For purposes of
this section, the term five-year period
means the five-year period (determined
after applying section 355(d)(6) and para-
graph (e)(4) of this section) ending on the
date of the distribution, but in no event
beginning earlier than October 10, 1990.
(3) Distributing securities. For pur-
poses of determining if stock of any con-
trolled corporation received in the distrib-
ution is disqualified stock described in
section 355(d)(3)(B)(ii)(II) (relating to a
distribution of controlled corporation
stock on any securities in the distributing
corporation acquired by purchase during
the five-year period), references in this
section to stock of a corporation that is or
becomes a distributing corporation in-
cludes securities of the corporation. Sim-
ilarly, a reference to stock in paragraph
(c)(4) of this section (relating to a plan or
arrangement) includes securities.
(4) Marketable securities. Unless oth-
erwise stated, any reference in this section
to marketable stock includes marketable
securities.
(b) General rules and purposes of sec-
tion 355(d)—(1) Disqualified distribu-
tions in general. In the case of a disquali-
fied distribution, any stock or securities in
the controlled corporation shall not be
treated as qualified property for purposes
of section 355(c)(2) or 361(c)(2). In gen-
eral, a disqualified distribution is any dis-
tribution to which section 355 (or so
much of section 356 as relates thereto) ap-
plies if, immediately after the distribu-
tion—
(i) Any person holds disqualified stock
in the distributing corporation that consti-
tutes a 50 percent or greater interest in
such corporation; or
2001–3 I.R.B.305January 16, 2001

(ii) Any person holds disqualified stock
in the controlled corporation (or, if stock
of more than one controlled corporation is
distributed, in any controlled corporation)
that constitutes a 50 percent or greater in-
terest in such corporation.
(2) Disqualified stock—(i) In general.
Disqualified stockis—
(A) Any stock in the distributing corpo-
ration acquired by purchase during the
five-year period; and
(B) Any stock in any controlled corpo-
ration—
(1) Acquired by purchase during the
five-year period; or
(2) Received in the distribution to the
extent attributable to distributions on any
stock in the distributing corporation ac-
quired by purchase during the five-year
period.
(ii) Purchase. For the definition of a
purchase for purposes of section 355(d)
and this section, see section 355(d)(5) and
paragraph (d) of this section.
(iii) Exceptions—(A) Purchase elimi-
nated. Stock (or an interest in another en-
tity) that is acquired by purchase (includ-
ing stock (or another interest) that is
treated as acquired by purchase under
paragraph (e)(2), (3), or (4) of this sec-
tion) ceases to be acquired by that pur-
chase if (and when) the basis resulting
from the purchase is eliminated. For pur-
poses of this paragraph (b)(2)(iii), basis
resulting from the purchase is basis in the
stock (or in an interest in another entity)
that is directly purchased during the five-
year period or that is treated as acquired
by purchase during such period under
paragraph (e)(2), (3), or (4) of this sec-
tion.
(B) Deemed purchase eliminated.
Stock (or an interest in another entity) that
is deemed purchased under section
355(d)(8) or paragraph (e)(1) of this sec-
tion shall cease to be treated as purchased
if (and when) the basis resulting from the
purchase that effects the deemed purchase
is eliminated.
(C) Elimination of basis—(1) General
rule. Basis in the stock of a corporation
(or in an interest in another entity) is elim-
inated if (and when) it would no longer be
taken into account by any person in deter-
mining gain or loss on a sale or exchange
of any stock of such corporation (or an in-
terest in the other entity). Basis is not
eliminated, however, if it is allocated be-
tween stock of two corporations under
§1.358–2(a).
(2) Special rule for transferred and ex-
changed basis property. Basis of stock
(or an interest in another entity) resulting
from a purchase (the first purchase) is
eliminated if (and when) such stock (or
other interest) is subsequently transferred
to another person in an exchange or other
transfer to which paragraph (e)(2) or (3)
of this section applies (the second pur-
chase). The elimination of basis in stock
(or in another interest) resulting from the
first purchase, however, does not elimi-
nate the basis resulting from the second
purchase in the stock (or other interest)
that is treated as acquired by purchase by
the acquirer in a transaction to which
paragraph (e)(2) of this section applies or
by the person making the exchange in a
transaction to which paragraph (e)(3) of
this section applies.
(3) Special rule for Split-offs and Split-
ups. Under section 355(d)(3)(B)(ii) and
paragraph (b)(2)(i)(B)(2) of this section,
disqualified stock includes controlled cor-
poration stock received in exchange for
distributing corporation stock acquired by
purchase. Solely for purposes of deter-
mining whether controlled corporation
stock received in a distribution in ex-
change for distributing corporation stock
is disqualified stock described in that sec-
tion and paragraph immediately after the
distribution, paragraph (b)(2)(iii)(C)(2) of
this section does not apply to the ex-
change to eliminate basis resulting from a
purchase of that distributing corporation
stock (notwithstanding that paragraph
(e)(3) of this section applies to the ex-
change).
(D) Special rule if basis allocated be-
tween two corporations. If the share-
holder of a distributing corporation, pur-
suant to §1.358–2, allocates basis
resulting from a purchase between the
stock of two or more corporations then,
following such allocation, the determina-
tion of whether such basis has been elimi-
nated shall be made separately with re-
spect to the stock of each such
corporation.
(3) Certain distributions not disquali-
fied distributions because purposes of
section 355(d) not violated—(i) In gen-
eral. Notwithstanding the provisions of
section 355(d)(2) and this paragraph (b), a
distribution is not a disqualified distribu-
tion if the distribution does not violate the
purposes of section 355(d) as provided in
this paragraph (b)(3). A distribution does
not violate the purposes of section 355(d)
if the effect of the distribution is neither—
(A) To increase ownership (combined
direct and indirect) in the distributing cor-
poration or any controlled corporation by
a disqualified person; nor
(B) To provide a disqualified person
with a purchased basis in the stock of any
controlled corporation.
(ii) Disqualified person. A disqualified
person is any person (taking into account
section 355(d)(7) and paragraph (c)(4) of
this section) that, immediately after a dis-
tribution, holds (directly or indirectly
under section 355(d)(8) and paragraph
(e)(1) of this section) disqualified stock in
the distributing corporation or controlled
corporation that—
(A) The person—
(1) Acquired by purchase under section
355(d)(5) or (8) and paragraphs (d) and
(e) of this section during the five-year pe-
riod, or
(2) Received in the distribution to the
extent attributable to distributions on any
stock in the distributing corporation
acquired by purchase under section
355(d)(5) or (8) and paragraphs (d) and
(e) of this section by that person during
the five-year period; and
(B) Constitutes a 50 percent or greater
interest in such corporation (under section
355(d)(4) and paragraph (c) of this sec-
tion).
(iii) Purchased basis. In general, a pur-
chased basis is basis in controlled corpo-
ration stock that is disqualified stock.
However, basis in controlled corporation
stock that is disqualified stock will not be
treated as purchased basis if the controlled
corporation stock and any distributing
corporation stock with respect to which
the controlled corporation stock is distrib-
uted are treated as acquired by purchase
solely under the attribution rules of sec-
tion 355(d)(8) and paragraph (e)(1) of this
section. The prior sentence will not apply,
however, if the distributing corporation
stock is treated as acquired by purchase
under the attribution rules as a result of
the acquisition of an interest in a partner-
ship (the purchased partnership), and fol-
lowing the distribution, the controlled
corporation stock is directly held by the
purchased partnership (or a chain of part-
January 16, 20013062001–3 I.R.B.

nerships that includes the purchased part-
nership).
(iv) Increase in interest because of
payment of cash in lieu of fractional
shares. Any increase in direct or indirect
ownership in the distributing corporation
or any controlled corporation by a dis-
qualified person because of a payment of
cash in lieu of issuing fractional shares
will be disregarded for purposes of para-
graph (b)(3)(i)(A) of this section if the
payment of the cash is solely to avoid the
expense and inconvenience of issuing
fractional share interests, and does not
represent separately bargained for con-
sideration.
(v) Other exceptions. The Commissioner
may provide by guidance published in the
Internal Revenue Bulletin that other distribu-
tions are not disqualified distributions
because they do not violate the purposes of
section 355(d).
(vi) Examples. The following exam-
ples illustrate this paragraph (b)(3):
Example 1. Stock distributed in spin-off; no pur-
chased basis. D owns all of the stock of D1, and D1
owns all the stock of C. A purchases 60 percent of the
D stock for cash. Within five years of A’s purchase,
D1 distributes the C stock to D. A is treated as having
purchased 60 percent of the stock of both D1 and C on
the date A purchases 60 percent of the D stock under
the attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section. The C stock received by D is
attributable to a distribution on purchased D1 stock
under section 355(d)(3)(B)(ii). Accordingly, the D1
and C stock each is disqualified stock under section
355(d)(3) and paragraph (b)(2) of this section, and A is
a disqualified person under paragraph (b)(3)(ii) of this
section. However, the purposes of section 355(d)
under paragraph (b)(3)(i) of this section are not violat-
ed. A did not increase direct or indirect ownership in
D1 or C. In addition, D’s basis in the C stock is not a
purchased basis under paragraph (b)(3)(iii) of this sec-
tion because both the D1 and the C stock are treated as
acquired by purchase solely under the attribution rules
of section 355(d)(8) and paragraph (e)(1) of this sec-
tion. Accordingly, D1’s distribution of the C stock to
D is not a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 2. Stock distributed in spin-off; pur-
chased basis. The facts are the same as Example 1,
except that D immediately further distributes the C
stock to its shareholders (including A) pro rata. The
D and C stock each is disqualified stock under sec-
tion 355(d)(3) and paragraph (b)(2) of this section,
and A is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are
violated. A did not increase direct or indirect own-
ership in D or C. However, A’s basis in the C stock
is a purchased basis under paragraph (b)(3)(iii) of
this section because the D stock is not treated as
acquired by purchase solely under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of
this section. Accordingly, the further distribution is
a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section.
Example 3. Stock distributed in split-off with
ownership increase; purchased basis. The facts are
the same as Example 1, except that D immediately
further distributes the C stock to A in exchange for
A’s purchased stock in D. The C stock received by
A is attributable to a distribution on purchased D
stock under section 355(d)(3)(B)(ii), and A’s basis in
the C stock is determined by reference to the adjust-
ed basis of A’s purchased D stock under paragraph
(e)(3) of this section. (Under paragraph
(b)(2)(iii)(B)(3) of this section, the basis resulting
from A’s purchase of D stock is not eliminated sole-
ly for purposes of determining if the C stock
acquired by A is disqualified stock immediately after
the distribution, notwithstanding that paragraph
(e)(3) of this section applies to the exchange.)
Accordingly, the D stock and the C stock each is dis-
qualified stock under section 355(d)(3) and para-
graph (b)(2) of this section, and A is a disqualified
person under paragraph (b)(3)(ii) of this section.
The purposes of section 355(d) under paragraph
(b)(3)(i) of this section are violated because A
increased its ownership in C from a 60 percent indi-
rect interest to a 100 percent direct interest, and
because A’s basis in the C stock is a purchased basis
under paragraph (b)(3)(iii) of this section.
Accordingly, the further distribution is a disqualified
distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 4. Stock distributed in spin-off; pur-
chased basis. D1 owns all the stock of C. D pur-
chases all of the stock of D1 for cash. Within five
years of D’s purchase of D1, P acquires all of the
stock of D1 from D in a section 368(a)(1)(B) reor-
ganization that is not a reorganization under section
368(a)(1)(A) by reason of section 368(a)(2)(E), and
D1 distributes all of its C stock to P. P is treated as
having acquired the D1 stock by purchase on the
date D acquired it under the transferred basis rule of
section 355(d)(5)(C) and paragraph (e)(2) of this
section. P is treated as having purchased all of the C
stock on the date D purchased the D1 stock under the
attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section, and the C stock received by P
is attributable to a distribution on purchased D1
stock under section 355(d)(3)(B)(ii). Accordingly,
the D1 and C stock each is disqualified stock under
section 355(d)(3) and paragraph (b)(2) of this sec-
tion, and P is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are
violated. P did not increase direct or indirect owner-
ship in D1 or C. However, P’s basis in the C stock
is a purchased basis under paragraph (b)(3)(iii) of
this section because the D1 stock is not treated as
acquired by purchase solely under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of
this section. Accordingly, D1’s distribution of the C
stock to P is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 5. Stock distributed in split-off with
ownership increase; no purchased basis. P owns 50
percent of the stock of D, the remaining D stock is
owned by unrelated persons, D owns all the stock of
C, and A purchases all of the P stock from the P
shareholders. Within five years of A’s purchase, D
distributes all of the C stock to P in exchange for P’s
D stock. A is treated as having purchased 50 percent
of the stock of both D and C on the date A purchas-
es the P stock under the attribution rules of section
355(d)(8) and paragraph (e)(1) of this section. The
C stock received by P is attributable to a distribution
on purchased D stock under section 355(d)(3)(B)(ii).
Accordingly, the D stock and the C stock each is dis-
qualified stock under section 355(d)(3) and para-
graph (b)(2) of this section, and A is a disqualified
person under paragraph (b)(3)(ii) of this section. The
purposes of section 355(d) under paragraph (b)(3)(i)
of this section are violated because, even though P’s
basis in the C stock is not a purchased basis under
paragraph (b)(3)(iii) of this section, A increased its
direct or indirect ownership in C from a 50 percent
indirect interest to a 100 percent indirect interest.
Accordingly, D’s distribution of the C stock to P is a
disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
Example 6. Stock distributed in split-off with no
ownership increase; no purchased basis. A purchas-
es all of the stock of T. T later merges into D in a
section 368(a)(1)(A) reorganization and A
exchanges its purchased T stock for 60 percent of the
stock of D. D owns all of the stock of D1 and D2,
D1 and D2 each owns 50 percent of the stock of D3,
and D3 owns all of the stock of C. Within five years
of A’s purchase of the T stock, D3 distributes the C
stock to D1 in exchange for all of D1’s D3 stock. A
is treated as having acquired 60 percent of the D
stock by purchase on the date A purchases the T
stock under paragraph (e)(3) of this section. A is
treated as having purchased 60 percent of the stock
of D1, D2, D3, and C on the date A purchases the T
stock under the attribution rules of section 355(d)(8)
and paragraph (e)(1) of this section. The C stock
received by D1 is attributable to a distribution on
purchased D3 stock under section 355(d)(3)(B)(ii).
Accordingly, the D3 stock and the C stock each is
disqualified stock under section 355(d)(3) and para-
graph (b)(2) of this section, and A is a disqualified
person under paragraph (b)(3)(ii) of this section.
However, the purposes of section 355(d) under para-
graph (b)(3)(i) of this section are not violated. A did
not increase direct or indirect ownership in D3 or C,
and D1’s basis in the C stock is not a purchased basis
under paragraph (b)(3)(iii) of this section because
the D3 stock is treated as acquired by purchase sole-
ly under the attribution rules of section 355(d)(8)
and paragraph (e)(1) of this section. Accordingly,
D3’s distribution of the C stock to D1 is not a dis-
qualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
Example 7. Purchased basis eliminated by liqui-
dation; stock distributed in spin-off. P owns 30 per-
cent of the stock of D, D owns all of the stock of D1,
and D1 owns all of the stock of C. P purchases the
remaining 70 percent of the D stock for cash. Within
five years of P’s purchase, P liquidates D in a trans-
action qualifying under sections 332 and 337(a), and
D1 then distributes the stock of C to P. Prior to the
liquidation, P is treated as having purchased 70 per-
cent of the stock of D1 and C on the date P purchas-
es the D stock under the attribution rules of section
355(d)(8)(B) and paragraph (e)(1) of this section.
After the liquidation, however, under paragraph
(b)(2)(iii) of this section, P is not treated as having
acquired by purchase the D1 or the C stock under
section 355(d)(8)(B) and paragraph (e)(1) of this
section because P’s basis in the D stock is eliminat-
ed in the liquidation of D. Under section 334(b)(1),
2001–3 I.R.B.307January 16, 2001

P’s basis in the D1 stock is determined by reference
to D’s basis in the D1 stock and not by reference to
P’s basis in D. Paragraph (d)(2)(i)(B) of this section
does not treat the D1 stock as newly purchased in P’s
hands because no gain or loss was recognized by D
in the liquidation. Accordingly, neither the D1 stock
nor the C stock is disqualified stock under section
355(d)(3) and paragraph (b)(2) of this section in P’s
hands, and the distribution is not a disqualified dis-
tribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 8. Purchased basis eliminated by
upstream merger; stock distributed in spin-off. D
owns all of the stock of D1, and D1 owns all of the
stock of C. P purchases 60 percent of the D stock for
cash. Within five years of P’s purchase, D merges
into P in a section 368(a)(1)(A) reorganization, with
the D shareholders other than P receiving solely P
stock in exchange for their D stock, and D1 then dis-
tributes the stock of C to P. Prior to the merger, P is
treated as having purchased 60 percent of the stock
of D1 and C on the date P purchases the D stock
under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. After the merger,
however, under paragraph (b)(2)(iii) of this section,
P is not treated as having acquired by purchase the
D1 or the C stock under section 355(d)(8)(B) and
paragraph (e)(1) of this section because P’s basis in
the D stock is eliminated in the merger. Under sec-
tion 362(b), P’s basis in the D1 stock is determined
by reference to D’s basis in the D1 stock and not by
reference to P’s basis in D. Paragraph (d)(2)(i)(B) of
this section does not treat the D1 stock as newly pur-
chased in P’s hands because no gain or loss was rec-
ognized by D in the merger. Accordingly, neither the
D1 stock nor the C stock is disqualified stock under
section 355(d)(3) and paragraph (b)(2) of this sec-
tion in P’s hands, and the distribution is not a dis-
qualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
Example 9. Purchased basis eliminated by distri-
bution; stock distributed in spin-off. A purchases all
the stock of C for cash on Date 1. D acquires all of
the stock of C from A in a section 368(a)(1)(B) reor-
ganization that is not a reorganization under section
368(a)(1)(A) by reason of section 368(A)(1)(E). A
receives ten percent of the D stock in the transaction.
The remaining D stock is owned by B. Within five
years of A’s purchase of the C stock, D distributes all
the stock of C pro rata to A and B. Under the trans-
ferred basis rule of paragraph (e)(2) of this section,
D is treated as having purchased all of the C stock on
the date A acquired it. Under the exchanged basis
rule of paragraph (e)(3) of this section, A is treated
as having purchased its D stock on Date 1 and A is
treated as having purchased ten percent of the C
stock on Date 1 under the attribution rules of section
355(d)(8) and paragraph (e)(3) of this section.
Moreover, under paragraph (b)(2)(iii)(C) of this sec-
tion, A’s basis in the C stock resulting from A’s Date
1 purchase of C stock is eliminated. After the distri-
bution, A’s and B’s bases in their C stock are deter-
mined by reference to the bases of their D stock
under §1.358–2(a)(2) (and not by reference to D’s
basis in the C stock). D’s basis in the stock of C
resulting from its deemed purchase of that stock
under paragraph (e)(2) of this section is eliminated
by the distribution of the C stock because it would
no longer be taken into account by any person in
determining gain or loss on the sale of C stock.
Therefore, the C stock distributed to A and B is not
disqualified stock as a result of D’s purchase of C.
However, A’s basis in its D stock resulting from its
deemed purchase of that stock under paragraph
(e)(3) of this section is not eliminated. Therefore,
A’s ten percent interest in the stock of D is disquali-
fied stock. Furthermore, A’s ten percent interest in
the stock of C is disqualified stock because the dis-
tribution of the C stock is attributable to A’s D stock
that was acquired by purchase. However, there has
not been a disqualified distribution because no per-
son, immediately after the distribution, holds dis-
qualified stock in either D or C that constitutes a 50
percent or greater interest in such corporation.
Example 10. Allocation of purchased basis ana-
lyzed separately. (i) P owns all the stock of D. D
purchases all the stock of D1 for cash on Date 1. D1
owns all the stock of C (which owns all the stock of
C1) and S. Within five years of Date 1, D1 distrib-
utes all the stock of C to D. The D1 and C stock each
is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section, and D is a disquali-
fied person under paragraph (b)(3)(ii) of this section.
The purposes of section 355(d) under paragraph
(b)(3)(i) of this section are violated. D did not
increase direct or indirect ownership in D1 or C.
However, D’s basis in the C stock is a purchased
basis under paragraph (b)(3)(iii) of this section
because the D1 stock is not treated as acquired by
purchase solely under the attribution rules of section
355(d)(8) and paragraph (e)(1) of this section.
Accordingly, the distribution is a disqualified distri-
bution under section 355(d) and paragraph (b)(1) of
this section. D’s basis in the D1 stock is allocated
pursuant to §1.358–2 between the D1 stock and the
C stock. Therefore, under paragraph (e)(4) of this
section, the C stock is deemed to be acquired by pur-
chase on Date 1, the date D purchased all the stock
of D1. If thereafter, and within five years of Date 1,
C were to distribute all the stock of C1 to D, that dis-
tribution would also be a disqualified distribution
because of D’s deemed purchase of the stock of C.
(ii) Following the distribution of the stock of C by
D1, and within five years of Date 1, D distributes all
the stock of D1 to P. Under paragraph (b)(2)(iii)(D)
of this section, the determination of whether D’s
basis in D1 has been eliminated shall be made with-
out regard to D’s allocated basis in C. After the dis-
tribution, P’s basis in the D1 stock is determined by
reference to its basis in its D stock under
§1.358–2(a)(2) (and not by reference to D’s basis in
the D1 stock). D’s basis in the D1 stock resulting
from the purchase of that stock is eliminated by the
distribution of the D1 stock because it would no
longer be taken into account by any person in deter-
mining gain or loss on the sale of D1 stock.
Therefore, the D1 stock distributed to P is not dis-
qualified stock as a result of D’s purchase of D1.
Moreover, a subsequent distribution of the S stock
by D1 to P would not be a disqualified distribution
because both the D1 and S stock would cease to be
treated as purchased when D’s basis in D1 has been
eliminated.
(4) Anti-avoidance rule—(i) In general.
Notwithstanding any provision of section
355(d) or this section, the Commissioner
may treat any distribution as a disqualified
distribution under section 355(d)(2) and
paragraph (b)(1) of this section if the distri-
bution or another transaction or transactions
are engaged in or structured with a principal
purpose to avoid the purposes of section
355(d) or this section with respect to the
distribution. Without limiting the preced-
ing sentence, the Commissioner may deter-
mine that the existence of a related person,
intermediary, pass-through entity, or similar
person (an intermediary) should be disre-
garded, in whole or in part, if the interme-
diary is formed or availed of with a princi-
pal purpose to avoid the purposes of section
355(d) or this section.
(ii) Example. The following example
illustrates this paragraph (b)(4):
Example. Post-distribution redemption. B whol-
ly owns D, which wholly owns C. With a principal
purpose to avoid the purposes of section 355(d), A,
B, D, and C engage in the following transactions. A
purchases 45 of 100 shares of the only class of D
stock. Within five years after A’s purchase, D dis-
tributes all of its 100 shares in C to A and B pro rata.
D then redeems 20 shares of B’s D stock, and C
redeems 20 shares of B’s C stock. After the redemp-
tion, A owns 45 shares and B owns 35 shares in each
of D and C. Under paragraph (b)(4)(i) of this sec-
tion, the Commissioner may treat A as owning dis-
qualified stock in D and C that constitutes a 50 per-
cent or greater interest in D and C immediately after
the distribution. Under that treatment, the distribu-
tion is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
(c) Whether a person holds a 50 per-
cent or greater interest—(1) In general.
Under section 355(d)(4), 50 percent or
greater interest means stock possessing at
least 50 percent of the total combined vot-
ing power of all classes of stock entitled
to vote or at least 50 percent of the total
value of shares of all classes of stock.
(2) Valuation. For purposes of section
355(d)(4) and this section, all shares of
stock within a single class are considered
to have the same value. But see paragraph
(c)(3)(vii)(A) of this section (determina-
tion of whether it is reasonably certain
that an option will be exercised).
(3) Effect of options, warrants, convert-
ible obligations, and other similar inter-
ests—(i) Application. This paragraph
(c)(3) provides rules to determine when
an option is treated as exercised for pur-
poses of section 355(d) (other than section
355(d)(6)). Except as provided in this
paragraph (c)(3), an option is not treated
as exercised for purposes of section
355(d). This paragraph (c)(3) does not
affect the determination of whether an
instrument is an option or stock under
general principles of tax law (such as sub-
stance over form).
January 16, 20013082001–3 I.R.B.

(ii) General rule. In determining
whether a person has acquired by pur-
chase a 50 percent or greater interest
under section 355(d)(4), an option to
acquire stock (as described in paragraphs
(c)(3)(v) and (vi) of this section) that has
not been exercised when a distribution
occurs is treated as exercised on the date
it was issued or most recently transferred
if—
(A) Its exercise (whether by itself or in
conjunction with the deemed exercise of
one or more other options) would cause a
person to become a disqualified person;
and
(B) Immediately after the distribution,
it is reasonably certain (as described in
paragraph (c)(3)(vii) of this section) that
the option will be exercised.
(iii) Options deemed newly issued and
substituted options—(A) Exchange,
adjustment, or alteration of existing
option. For purposes of this paragraph
(c)(3), each of the following is treated as a
new issuance or transfer of an existing
option only if it materially increases the
likelihood that an option will be exer-
cised—
(1) An exchange of an option for anoth-
er option or options;
(2) An adjustment to the terms of an
option (including an adjustment pursuant
to the terms of the option);
(3) An adjustment to the terms of the
underlying stock (including an adjustment
pursuant to the terms of the stock);
(4) A change to the capital structure of
the issuing corporation; and
(5) An alteration to the fair market
value of issuing corporation stock through
an asset transfer (other than regular, ordi-
nary dividends) or through any other
means.
(B) Certain compensatory options. An
option described in paragraph
(c)(3)(vi)(B)(2) of this section is treated
as issued on the date it becomes transfer-
able.
(C) Substituted options. If an option
(existing option) is exchanged for another
option or options (substituted option or
options) and paragraph (c)(3)(iii)(A) of
this section does not apply to treat such
exchange as a new issuance or transfer of
the existing option, the substituted option
or options will be treated as issued or
most recently transferred on the date that
the existing option was issued or most
recently transferred.
(iv) Effect of treating an option as exer-
cised—(A) In general. For purposes of
section 355(d), an option that is treated as
exercised under this paragraph (c)(3) is
treated as exercised both for purposes of
determining the percentage of the voting
power of stock owned by the holder and for
purposes of determining the percentage of
the value of stock owned by the holder.
(B) Stock purchase agreement or simi-
lar arrangement. If a stock purchase
agreement or similar arrangement is
deemed exercised, the purchaser is treated
as having purchased the stock under the
terms of the agreement or arrangement as
though all covenants had been satisfied
and all contingencies met. The agreement
or arrangement is deemed to have been
exercised as of the date it is entered into or
most recently assigned.
(v) Instruments treated as options. For
purposes of this paragraph (c)(3), except
to the extent provided in paragraph
(c)(3)(vi) of this section, the following are
treated as options: A call option, warrant,
convertible obligation, the conversion
feature of convertible stock, put option,
redemption agreement (including a right
to cause the redemption of stock), notion-
al principal contract (as defined in
§1.446–3(c)) that provides for the pay-
ment of amounts in stock, stock purchase
agreement or similar arrangement, or any
other instrument that provides for the
right to purchase, issue, redeem, or trans-
fer stock (including an option on an
option).
(vi) Instruments generally not treated as
options. For purposes of this paragraph
(c)(3), the following are not treated as
options, unless issued, transferred, or listed
with a principal purpose to avoid the appli-
cation of section 355(d) or this section:
(A) Escrow, pledge, or other security
agreements. An option that is part of a
security arrangement in a typical lending
transaction (including a purchase money
loan), if the arrangement is subject to cus-
tomary commercial conditions. For this
purpose, a security arrangement includes,
for example, an agreement for holding
stock in escrow or under a pledge or other
security agreement, or an option to
acquire stock contingent upon a default
under a loan.
(B) Compensatory options—(1)
General rule. An option to acquire stock
in a corporation with customary terms and
conditions, provided to an employee,
director, or independent contractor in con-
nection with the performance of services
for the corporation or a person related to it
under section 355(d)(7)(A) (and that is
not excessive by reference to the services
performed) and that—
(i) Is nontransferable within the mean-
ing of §1.83–3(d); and
(ii) Does not have a readily ascertain-
able fair market value as defined in
§1.83–7(b).
(2) Exception. Paragraph (c)(3)(vi)-
(B)(1) of this section ceases to apply to an
option that becomes transferable.
(C) Certain stock conversion features.
The conversion feature of convertible
stock, provided that—
(1) The stock is not convertible for at
least five years after issuance or transfer;
and
(2) The terms of the conversion feature
do not require the tender of any consider-
ation other than the stock being converted.
(D) Options exercisable only upon
death, disability, mental incompetency, or
separation from service. Any option
entered into between stockholders of a
corporation (or a stockholder and the cor-
poration) with respect to the stock of
either stockholder that is exercisable only
upon the death, disability, mental incom-
petency of the stockholder, or, in the case
of stock acquired in connection with the
performance of services for the corpora-
tion or a person related to it under section
355(d)(7)(A) (and that is not excessive by
reference to the services performed), the
stockholder’s separation from service.
(E) Rights of first refusal. Abona fide
right of first refusal regarding the corpo-
ration’s stock with customary terms,
entered into between stockholders of a
corporation (or between the corporation
and a stockholder).
(F) Other enumerated instruments.
Any other instruments specified in regula-
tions, a revenue ruling, or a revenue pro-
cedure. See §601.601(d)(2) of this chap-
ter.
(vii) Reasonably certain that the option
will be exercised—(A) In general. The
determination of whether, immediately
after the distribution, an option is reason-
2001–3 I.R.B.309January 16, 2001

ably certain to be exercised is based on all
the facts and circumstances. In applying
the previous sentence, the fair market
value of stock underlying an option is
determined by taking into account control
premiums and minority and blockage dis-
counts.
(B) Stock purchase agreement or simi-
lar arrangement. A stock purchase agree-
ment or similar arrangement is treated as
reasonably certain to be exercised if the
parties’ obligations to complete the trans-
action are subject only to reasonable clos-
ing conditions.
(viii) Examples. The following exam-
ples illustrate this paragraph (c)(3):
Example 1. D owns all of the stock of C. A pur-
chases 40 percent of D’s only class of stock and an
option to purchase D stock from D, that if deemed
exercised, would result in A owning a total of 60 per-
cent of the stock of D. Assume that no control pre-
mium or minority or blockage discount applies to the
D stock underlying the option. The option permits A
to acquire the D stock at $30 per share, and D’s stock
has a fair market value of $27 per share on the date
the option is issued. The option is subject to no con-
tingencies or restrictive covenants, may be exercised
within five years after its issuance, and is not
described in paragraph (c)(3)(vi) of this section
(regarding instruments generally not treated as
options). Within five years of A’s purchase of the D
stock and option, D distributes the stock of its sub-
sidiary C pro rata and A receives 40 percent of the C
stock in the distribution. Immediately after the dis-
tribution, D’s stock has a fair market value of $30
per share and C’s stock has a fair market value of
$15 per share. At the time of the distribution, A
exchanges A’s option for an option to purchase 20
percent of the D stock at $20 per share and an option
to purchase 20 percent of the C stock at $10 per
share. The exchange of the options in D for options
in D and C did not materially increase the likelihood
that the options would be exercised. Nonetheless,
based on all the facts and circumstances, it is rea-
sonably certain, immediately after the distribution,
that A will exercise its options. Under paragraph
(c)(3)(iii)(C) of this section, the substituted options
are treated as issued on the date the original option
was issued. Accordingly, the options are treated as
exercised by A on the date that A purchased the orig-
inal option. A is treated as owning 60 percent of the
D stock and 60 percent of the C stock that is dis-
qualified stock, and the distribution is a disqualified
distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 2. D owns all of the stock of C. A pur-
chases 37 percent of D’s only class of stock. B owns
38 percent of the D stock, and the remaining 25 per-
cent is owned by 20 individuals, each of whom owns
less than five percent of D’s stock. A purchases an
option to purchase an additional 14 percent of the D
stock from shareholders other than B for $50 per
share. The option is subject to no contingencies or
restrictive covenants, may be exercised within five
years after its issuance, and is not described in para-
graph (c)(3)(vi) of this section. Within five years of
A’s purchase of the option and 37 percent interest in
D, D distributes the stock of its subsidiary C pro rata
and A receives 37 percent of the C stock in the dis-
tribution. At the time of the distribution, A
exchanges its option for an option to purchase 14
percent of the D stock at $25 per share and an option
to purchase 14 percent of the C stock at $25 per
share. Assume that, although a shareholder that
owned no D or C stock would pay only $20 per share
for D or C stock immediately after the distribution, a
shareholder in A’s position would pay $30 per share
for 14 percent of the stock of D or C because of the
control premium which attaches to the shares. The
control premium is taken into account under para-
graph (c)(3)(vii)(A) of this section to determine
whether A is reasonably certain to exercise the
options. The exchange of the options in D for
options in D and C did not materially increase the
likelihood that the options would be exercised.
Nonetheless, based on all the facts and circum-
stances, it is reasonably certain, immediately after
the distribution, that A will exercise its options.
Under paragraph (c)(3)(iii)(C) of this section, the
substituted options are treated as issued on the date
the original option was issued. Accordingly, the
options are treated as exercised by A on the date that
A purchased the original option. Under paragraph
(c)(2) of this section, all shares of D and C are con-
sidered to have the same value to determine the
amount of stock A is treated as purchasing under the
options. A is treated as owning 51 percent of the D
stock and 51 percent of the C stock that is disquali-
fied stock, and the distribution is a disqualified dis-
tribution under section 355(d)(2).
(4) Plan or arrangement—(i) In gener-
al. Under section 355(d)(7)(B), if two or
more persons act pursuant to a plan or
arrangement with respect to acquisitions
of stock in the distributing corporation or
controlled corporation, those persons are
treated as one person for purposes of sec-
tion 355(d).
(ii) Understanding. For purposes of
section 355(d)(7)(B), two or more per-
sons who are (or will after an acquisition
become) shareholders (or are treated as
shareholders under paragraph (c)(3)(ii) of
this section) act pursuant to a plan or
arrangement with respect to an acquisi-
tion of stock only if they have a formal or
informal understanding among them-
selves to make a coordinated acquisition
of stock. A principal element in deter-
mining if such an understanding exists is
whether the investment decision of each
person is based on the investment deci-
sion of one or more other existing or
prospective shareholders. However, the
participation by creditors in formulating a
plan for an insolvency workout or a reor-
ganization in a title 11 or similar case
(whether as members of a creditors’ com-
mittee or otherwise) and the receipt of
stock by creditors in satisfaction of
indebtedness pursuant to the workout or
reorganization do not cause the creditors
to be considered as acting pursuant to a
plan or arrangement.
(iii) Examples. The following exam-
ples illustrate paragraph (c)(4)(ii) of this
section:
Example 1. D has 1,000 shares of common stock
outstanding. A group of 20 unrelated individuals
who previously owned no D stock (the Group) agree
among themselves to acquire 50 percent or more of
D’s stock. The Group is not a person under section
7701(a)(1). Subsequently, pursuant to their under-
standing, the members of the Group purchase 600
shares of D common stock from the existing D
shareholders (a total of 60 percent of the D stock),
with each member purchasing 30 shares. Under
paragraph (c)(4)(ii) of this section, the members of
the Group have a formal or informal understanding
among themselves to make a coordinated acquisition
of stock. Their interests are therefore aggregated
under section 355(d)(7)(B), and they are treated as
one person that purchased 600 shares of D’s stock
for purposes of section 355(d).
Example 2. D has 1,000 shares of outstanding
stock owned by unrelated individuals. D’s manage-
ment is concerned that D may become subject to a
takeover bid. In separate meetings, D’s management
meets with potential investors who own no stock and
are friendly to management to convince them to
acquire D’s stock based on an understanding that D
will assemble a group that in the aggregate will
acquire more than 50 percent of D’s stock.
Subsequently, 15 of these investors each purchases
four percent of D’s outstanding stock. Under para-
graph (c)(4)(ii) of this section, the 15 investors have
a formal or informal understanding among them-
selves to make a coordinated acquisition of stock.
Their interests are therefore aggregated under sec-
tion 355(d)(7)(B), and they are treated as one person
that purchased 600 shares of D stock for purposes of
section 355(d).
Example 3. (i) D has 1,000 shares of outstanding
stock owned by unrelated individuals. An invest-
ment advisor advises its clients that it believes D’s
stock is undervalued and recommends that they
acquire D stock. Acting on the investment advisor’s
recommendation, 20 unrelated individuals each pur-
chases 30 shares of the outstanding D stock. Each
client’s decision was not based on the investment
decisions made by one or more other clients.
Because there is no formal or informal understand-
ing among the clients to make a coordinated acquisi-
tion of D stock, their interests are not aggregated
under section 355(d)(7)(B) and they are treated as
making separate purchases.
(ii) The facts are the same as in paragraph (i) of
this Example 3, except that the investment advisor is
also the underwriter (without regard to whether it is
a firm commitment or best efforts underwriting) for
a primary or secondary offering of D stock. The
result is the same.
(iii) The facts are the same as in paragraph (i) of
this Example 3, except that, instead of an investment
advisor recommending that clients purchase D stock,
the trustee of several trusts qualified under section
401(a) sponsored by unrelated corporations causes
each trust to purchase the D stock. The result is the
same, provided that the trustee’s investment decision
made on behalf of each trust was not based on the
January 16, 20013102001–3 I.R.B.

investment decision made on behalf of one or more
of the other trusts.
(iv) Exception—(A) Subsequent dispo-
sition. If two or more persons do not act
pursuant to a plan or arrangement within
the meaning of this paragraph (c)(4) with
respect to an acquisition of stock in a cor-
poration (the first corporation), a subse-
quent acquisition in which such persons
exchange their stock in the first corpora-
tion for stock in another corporation (the
second corporation) in a transaction in
which the basis of the second corpora-
tion’s stock in the hands of such persons
is determined in whole or in part by ref-
erence to the basis of their stock in the
first corporation, will not result in such
persons being treated as one person, even
if the acquisition of the second corpora-
tion’s stock is pursuant to a plan or
arrangement.
(B) Example. The following example
illustrates this paragraph (c)(4)(iv):
Example. In an initial public offering of D stock
on Date 1, 100 investors independently purchase one
percent each of the D stock. Two years later, D
merges into P (in a reorganization described in sec-
tion 368(a)(1)(A)) and, pursuant to the plan of reor-
ganization, the D shareholders exchange their D
stock for 50 percent of the stock of P. The D share-
holders approve the plan by a two-thirds vote, as
required by state law. Under section 358(a), each
shareholder’s basis in its P stock is determined by
reference to the basis of the D stock it purchased.
Under paragraph (e)(3) of this section, the former D
shareholders are treated as purchasing their P stock
on Date 1. The investors do not become a single per-
son under paragraph (c)(4) of this section with
respect to the deemed purchase of the P stock on
Date 1 by virtue of their acquisition of the P stock
pursuant to the merger on Date 2.
(d) Purchase—(1) In general—(i)
Definition of purchase under section
355(d)(5)(A). Under section 355(d)–(5)-
(A), except as otherwise provided in sec-
tion 355(d)(5)(B) and (C), a purchase
means any acquisition, but only if—
(A) The basis of the property acquired
in the hands of the acquirer is not deter-
mined—
(1) In whole or in part by reference to the
adjusted basis of such property in the hands
of the person from whom acquired; or
(2) Under section 1014(a); and
(B) The property is not acquired in an
exchange to which section 351, 354, 355,
or 356 applies.
(ii) Section 355 distributions.
Paragraph (d)(1)(i)(B) of this section
includes all section 355 distributions,
whether in exchange (in whole or in part)
for stock or pro rata.
(iii) Example. The following example
illustrates this paragraph (d)(1):
Example. Section 304(a)(1) acquisition. A, who
owns all of the stock of P and T, sells the T stock to
P for cash. The T stock is not marketable stock
under section 355(d)(5)(B)(ii) and paragraph
(d)(3)(ii) of this section. A is treated under section
304(a)(1) as receiving a distribution in redemption
of the P stock. Under section 302(d), the deemed
redemption is treated as a section 301 distribution.
Assume that under sections 304(b)(2) and 301(c)(1),
all of the distribution is a dividend. A and P are treat-
ed in the same manner as if A had transferred the T
stock to P in exchange for stock of P in a transaction
to which section 351(a) applies, and P had then
redeemed the stock P was treated as issuing in the
transaction. Under section 362(a), P’s basis in the T
stock is determined by reference to A’s adjusted
basis in the T stock, and there is no basis increase in
the T stock because A recognizes no gain on the
deemed transfer. Accordingly, P’s acquisition of the
T stock from A is not a purchase by P under section
355(d)(5)(A)(i)(I) and paragraphs (d)(1)(i)(A)(1)
and (d)(2)(i)(B) of this section.
(2) Exceptions to definition of purchase
under section 355(d)(5)(A). The follow-
ing acquisitions are not treated as pur-
chases under section 355(d)(5)(A):
(i) Acquisition of stock in a transaction
which includes other property or money—
(A) Transferors and shareholders of
transferor or distributing corporations—
(1) In general. An acquisition of stock
permitted to be received by a transferor of
property without the recognition of gain
under section 351(a), or permitted to be
received without the recognition of gain
under section 354, 355, or 356 is not a
purchase to the extent section 358(a)(1)
applies to determine the recipient’s basis
in the stock received, whether or not the
recipient recognizes gain under section
351(b) or 356. But see paragraph (e)(3) of
this section (interest received in exchange
for purchased interest in exchanged basis
transaction treated as purchased).
(2) Exception. To the extent there is
received in the exchange or distribution,
in addition to stock described in para-
graph (d)(2)(i)(A)(1) of this section, stock
that is other property under section 351(b)
or 356(a)(1), the stock is treated as pur-
chased on the date of the exchange or dis-
tribution for purposes of section 355(d).
(B) Transferee corporations—(1) In gen-
eral. An acquisition of stock by a corpora-
tion is not a purchase to the extent section
334(b) or 362(a) or (b) applies to determine
the corporation’s basis in the stock
received. But see section 355(d)(5)(C) and
paragraph (e)(2) of this section (purchased
property transferred in transferred basis
transaction is treated as purchased by trans-
feree).
(2) Exception. If a corporation acquires
stock, the stock is treated as purchased on
the date of the stock acquisition for pur-
poses of section 355(d)—
(i) If the liquidating corporation recog-
nizes gain or loss with respect to the trans-
ferred stock as described in section
334(b)(1); or
(ii) To the extent the basis of the trans-
ferred stock is increased through the
recognition of gain by the transferor under
section 362(a) or (b).
(C) Examples. The following examples
illustrate this paragraph (d)(2)(i):
Example 1.(i) A owns all the stock of T. T
merges into D in a transaction qualifying under sec-
tion 368(a)(1)(A), with A exchanging all of the T
stock for D stock and $100 cash. Under section
356(a)(1), A recognizes $100 of the realized gain on
the transaction. Under section 358(a)(1), A’s basis in
the D stock equals A’s basis in the T stock, decreased
by the $100 received and increased by the gain rec-
ognized, also $100. Under paragraph (d)(2)(i)(A) of
this section, A is not treated as having purchased the
D stock for purposes of section 355(d)(5).
(ii) The facts are the same as in paragraph (i) of
this Example 1, except that rather than D stock and
$100 cash, A receives D stock and stock in C, a cor-
poration not a party to the reorganization, with a fair
market value of $100. Under section 358(a)(2), A’s
basis in the C stock is its fair market value, or $100.
Under paragraph (d)(2)(i)(A)(2) of this section, A is
treated as having purchased the C stock, but not the
D stock, for purposes of section 355(d)(5).
Example 2. A purchases all of the stock of D,
which is not marketable stock, on Date 1 for $90.
Within five years of A’s purchase, on Date 2, A con-
tributes the D stock to P in exchange for P stock
worth $90 and $10 cash in a transaction qualifying
under section 351. A recognizes a gain of $10 as a
result of the transfer. Under section 362(a), P’s basis
in D is $100. P is treated as having purchased 90
percent ($90 worth) of the D stock on Date 1 under
section 355(d)(5)(C) and paragraph (e)(2) of this
section and as having purchased 10 percent ($10
worth) of the D stock on Date 2 under paragraph
(d)(2)(i)(B)(2)(ii) of this section.
(ii) Acquisition of stock in a distribu-
tion to which section 305(a) applies. An
acquisition of stock in a distribution qual-
ifying under section 305(a) is not a pur-
chase to the extent section 307(a) applies
to determine the recipient’s basis.
However, to the extent the distribution is
of rights to acquire stock, see paragraph
(c)(3) of this section for rules regarding
options, warrants, convertible obligations,
and other similar interests.
(iii) Section 1036(a) exchange. An
exchange of stock qualifying under sec-
tion 1036(a) is not a purchase by either
party to the exchange to the extent the
2001–3 I.R.B.311January 16, 2001

basis of the property acquired equals that
of the property exchanged under section
1031(d).
(iv) Section 338 elections—(A) In gen-
eral. Stock acquired in a qualified stock
purchase with respect to which a section
338 election (or a section 338(h)(10) elec-
tion) is made is not treated as a purchase
for purposes of section 355(d)(5)(A).
However, any stock (or an interest in
another entity) held by old target that is
treated as purchased by new target is treat-
ed as acquired by purchase for purposes
of section 355(d)(5)(A) unless a section
338 election or section 338(h)(10) elec-
tion also is made for that stock. See
§1.338–2T(c) for the definitions of sec-
tion 338 election, section 338(h)(10) elec-
tion, old target, and new target.
(B) Example. The following example
illustrates this paragraph (d)(2)(iv):
Example. T owns all of the stock of S and no
other assets. X acquires all of the T stock from the
T shareholders for cash and makes an election under
section 338. Under section 338(a) and (b), T, as Old
T, is treated as having sold all of its assets at fair
market value and purchased the assets as a new cor-
poration, New T, as of the beginning of the day after
the acquisition date. Under paragraph (d)(2)(iv)(A)
of this section, X is not treated as having purchased
the T stock. Absent a section 338 election or a sec-
tion 338(h)(10) election with respect to S, New T is
treated as having purchased all of the S stock under
section 355(d)(5)(A).
(v) Partnership distributions—(A)
Section 732(b). An acquisition of stock
(or an interest in another entity) in a liqui-
dation of a partner’s interest in a partner-
ship in which basis is determined pursuant
to section 732(b) is a purchase at the time
of the liquidation.
(B) Section 734(b). If the adjusted
basis of stock (or an interest in another
entity) held by a partnership is increased
under section 734(b), a proportionate
amount of the stock (or other interest) will
be treated as purchased at the time of the
basis adjustment, determined by reference
to the amount of the basis adjustment (but
not in excess of the fair market value of
the stock (or other interest) at the time of
the adjustment) over the fair market value
of the stock (or other interest) at the time
of the adjustment.
(3) Certain section 351 exchanges
treated as purchases—(i) In general–(A)
Treatment of stock received by transferor.
Under section 355(d)(5)(B), a purchase
includes any acquisition of property in an
exchange to which section 351 applies to
the extent the property is acquired in
exchange for any cash or cash item, any
marketable stock, or any debt of the trans-
feror. The property treated as acquired by
purchase is the property received by the
transferor in the exchange.
(B) Multiple classes of stock. If the
transferor in a transaction described in
section 355(d)(5)(B) receives stock or
securities of more than one class, or
receives both stock and securities, then
the amount of stock or securities pur-
chased is determined in a manner that cor-
responds to the allocation of basis to the
stock or securities under section 358. See
§1.358–2(b).
(ii) Cash item, marketable stock. For
purposes of section 355(d)(5)(B) and this
paragraph (d)(3), either or both of the
terms cash item and marketable stock
include personal property within the
meaning of section 1092(d)(1) and
§1.1092(d)–1, without giving effect to
section 1092(d)(3).
(iii) Exception for certain
acquisitions—(A) In general. Except to
the extent provided in paragraph (e)(3) of
this section (interest received in exchange
for purchased interest in exchanged basis
transaction treated as purchased), an
acquisition of stock in a corporation in a
section 351 transaction by one or more
persons in exchange for an amount of
stock in another corporation (the trans-
ferred corporation) that meets the require-
ments of section 1504(a)(2) is not a pur-
chase by the transferor or transferors,
regardless of whether the stock of the
transferred corporation is marketable
stock under section 355(d)(5)(B)(ii) and
paragraph (d)(3)(ii) of this section.
(B) Example. The following example
illustrates this paragraph (d)(3)(iii):
Example. D’s two classes of stock, voting com-
mon and nonvoting preferred, are both widely held
and publicly traded. The nonvoting preferred stock
is stock described in section 1504(a)(4). Assume
that all of the D stock is marketable stock under sec-
tion 355(d)(5)(B)(ii) and paragraph (d)(3)(ii) of this
section. D’s board of directors proposes that, for
valid business purposes, D’s common stock should
be held by a holding company, HC, but its preferred
stock should not be transferred to HC. As proposed,
the D common shareholders exchange their D stock
solely for HC common stock in a section 351(a)
transaction. The D preferred shareholders retain
their stock. HC acquires an amount of D stock that
meets the requirements of section 1504(a)(2).
Although the D common stock was marketable stock
in the hands of the D shareholders immediately
before the transfer, and the D nonvoting preferred
stock is marketable stock after the transfer, the D
shareholders are not treated as having acquired the
HC stock by purchase (except to the extent the
exchanged basis rule of paragraph (e)(3) of this sec-
tion may apply to treat HC stock as purchased on the
date the exchanged D stock was purchased).
(iv) Exception for assets transferred as
part of an active trade or business—(A)
In general. Except to the extent provided
in paragraph (e)(3) of this section, an
acquisition not described in paragraph
(d)(3)(iii) of this section of stock in
exchange for any cash or cash item, any
marketable stock, or any debt of the trans-
feror in a section 351 transaction is not a
purchase if—
(1) The transferor is engaged in the active
conduct of a trade or business under para-
graph (d)(3)(iv)(B) of this section and the
transferred items (including debt incurred in
the ordinary course of the trade or business)
are used in the trade or business;
(2) The transferred items do not exceed
the reasonable needs of the trade or busi-
ness under paragraph (d)(3)(iv)(C) of this
section;
(3) The transferor transfers the items as
part of the trade or business; and
(4) The transferee continues the active
conduct of the trade or business.
(B) Active conduct of a trade or busi-
ness. For purposes of this paragraph
(d)(3)(iv), whether, with respect to the
trade or business at issue, the transferor
and transferee are engaged in the active
conduct of a trade or business is deter-
mined under §1.355–3(b)(2) and (3),
except that—
(1) Conduct is tested before the transfer
(with respect to the transferor) and after
the transfer (with respect to the transferee)
rather than immediately after a distribu-
tion; and
(2) The trade or business need not have
been conducted for five years before its
transfer, but it must have been conducted
for a sufficient period of time to establish
that it is a viable and ongoing trade or
business.
(C) Reasonable needs of the trade or
business. For purposes of this paragraph
(d)(3)(iv), the reasonable needs of the
trade or business include only the amount
of cash or cash items, marketable stock, or
debt of the transferor that a prudent busi-
ness person apprised of all relevant facts
would consider necessary for the present
and reasonably anticipated future needs of
the business. Transferred items may be
January 16, 20013122001–3 I.R.B.

considered necessary for reasonably
anticipated future needs only if the trans-
feror and transferee have specific, defi-
nite, and feasible plans for their use.
Those plans must require that items
intended for anticipated future needs
rather than present needs be used as expe-
ditiously as possible consistent with the
business purpose for retention of the
items. Future needs are not reasonably
anticipated if they are uncertain or vague
or where the execution of the plan for
their use is substantially postponed. The
reasonable needs of a trade or business are
generally its needs at the time of the trans-
fer of the business including the items.
However, for purposes of applying sec-
tion 355(d) to a distribution, events and
conditions after the transfer and through
the date immediately after the distribution
(including whether plans for the use of
transferred items have been consummated
or substantially postponed) may be con-
sidered to determine whether at the time
of the transfer the items were necessary
for the present and reasonably anticipated
future needs of the business.
(D) Consideration of all facts and cir-
cumstances. All facts and circumstances
are considered in determining whether
this paragraph (d)(3)(iv) applies.
(E) Successive transfers. A transfer of
assets does not fail to meet the require-
ments of paragraph (d)(3)(iv)(A)(4) of
this section solely because the transferee
transfers the assets directly (or indirectly
through other members) to another mem-
ber of the transferee’s affiliated group, as
defined in §1.355–3(b)(4)(iv) (the final
transferee), if the requirements of para-
graphs (d)(3)(iv)(A)(1), (2), (3) and (4) of
this section would be met if the transferor
had transferred the assets directly to the
final transferee.
(v) Exception for transfer between
members of the same affiliated group—
(A) In general. Except to the extent pro-
vided in paragraph (e)(3) of this section,
an acquisition of stock (whether actual or
constructive) not described in paragraphs
(d)(3)(iii) and (iv) of this section in
exchange for any cash or cash item, mar-
ketable stock, or debt of the transferor in a
section 351 transaction is not a purchase
if—
(1) The transferor corporation or corpo-
rations and the transferee corporation
(whether formed in the transaction or
already existing) are members of the same
affiliated group as defined in section
1504(a) before the section 351 transaction
(if the transferee corporation is in exis-
tence before the transaction);
(2) The cash or cash item, marketable
stock or debt of the transferor are not
included in assets that are acquired (or
treated as acquired) by the transferor (or
another member of the transferor’s affili-
ated group) from a nonmember in a relat-
ed transaction in which section 362(a) or
(b) applies to determine the basis in the
acquired assets; and
(3) The transferor corporation or corpo-
rations, the transferee corporation, and
any distributed controlled corporation of
the transferee corporation do not cease to
be members of such affiliated group in
any transaction pursuant to a plan that
includes the section 351 transaction
(including any distribution of a controlled
corporation by the transferee corpora-
tion). But see paragraph (b)(4) of this sec-
tion where the transfer is made for a prin-
cipal purpose to avoid the purposes of
section 355(d).
(B) Examples. The following examples
illustrate this paragraph (d)(3)(v):
Example 1. Publicly traded P has wholly owned
S since 1990. S is engaged in the telecommunica-
tions business and the business of computer software
development. S is developing new software for use
in the managed health care industry. Over a period
of four years beginning on January 31, 2000, P con-
tributes a substantial amount of cash to S solely for
the purpose of funding the software development.
On completion of the software in January of 2004,
60 percent of the value of the S stock is attributable
to the cash contributions made within the last four
years. The P group’s primary lender requires that S
separately incorporate the software and related
assets and distribute the new subsidiary to P as a
condition of providing required funding to market
the software. Accordingly, on February 1, 2004, S
forms N, contributes the software and related assets
to N, and distributes all of the N stock to P in a trans-
action intended to qualify under section 355(a). P, S,
and N will not leave the affiliated group in any trans-
action related to the cash contributions. Under para-
graph (d)(3)(v)(A) of this section, P’s cash contribu-
tions to S are not treated as purchases of additional S
stock, and the distribution of N from S to P is not a
disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
Example 2. On Date 1, P contributes cash to its
subsidiary S with a principal purpose to increase its
stock basis in S. Sixty percent of the value of P’s S
stock is attributable to the cash contribution. Under
paragraph (b)(4) of this section (anti-avoidance
rule), 60 percent of the S stock is treated as pur-
chased under section 355(d)(5)(B), notwithstanding
paragraph (d)(3)(v)(A) of this section. Accordingly,
any distribution of a subsidiary of S to P within the
five-year period after Date 1 will be a disqualified
distribution, regardless of whether P, S, and any dis-
tributed S subsidiary remain affiliated after the dis-
tribution and any transactions related to the cash
contribution.
(4) Triangular asset reorganizations—
(i) Definition. Atriangular asset reorga-
nizationis a reorganization that qualifies
under—
(A) Section 368(a)(1)(A) or (G) by rea-
son of section 368(a)(2)(D);
(B) Section 368(a)(1)(A) by reason of
section 368(a)(2)(E) (regardless of
whether section 368(a)(3)(E) applies),
unless the transaction also qualifies as
either a section 351 transfer or a reorgani-
zation under section 368(a)(1)(B); or
(C) Section 368(a)(1)(C), and stock of
the controlling corporation rather than the
acquiring corporation is exchanged for the
acquired corporation’s properties.
(ii) Treatment. Notwithstanding sec-
tion 355(d)(5)(A), for purposes of section
355(d), the controlling corporation in a
triangular asset reorganization is treated
as having—
(A) Acquired the assets of the acquired
corporation (and as having assumed any
liabilities assumed by the controlling cor-
poration’s subsidiary corporation or to
which the acquired corporation’s assets
were subject (the acquired liabilities)) in a
transaction in which the controlling cor-
poration’s basis in the acquired corpora-
tion’s assets was determined under section
362(b); and
(B) Transferred the acquired assets and
acquired liabilities to its subsidiary corpo-
ration in a section 351 transfer.
(iii) Example. The following example
illustrates this paragraph (d)(4):
Example. Forward triangular reorganization. P
forms S with $25 of cash and T merges into S in a
reorganization qualifying under section 368(a)(1)(A)
by reason of section 368(a)(2)(D) in which the T
shareholders receive $70 of P stock and $15 of cash
in exchange for their T stock. T is not a common
parent of a consolidated group of corporations. The
remaining $10 of cash with which P formed S will
not be used in the acquired business. T’s assets con-
sist only of assets part of and used in its business
with a value of $80, and $5 of cash that is not part of
or used in T’s business. T has no liabilities. S will
use T’s business assets in T’s business (which will
become S’s business), but will invest the $5 of cash
in an unrelated passive investment. Under para-
graph (d)(4)(ii) of this section, P is treated as acquir-
ing the T assets in a transaction in which P’s basis in
the T assets was determined under section 362(b)
and contributing them to S in a section 351 transfer.
Under paragraph (d)(3)(v) of this section, $10 (of the
total $25) of cash contributed by P to S upon S’s
formation is not treated as a purchase of S stock.
The $15 (of the total $25) of cash contributed by P
to S upon S’s formation that is paid to T’s share-
2001–3 I.R.B.313January 16, 2001

holders is not treated as a purchase of S stock. The
exception in paragraph (d)(3)(v) of this section does
not apply to the $5 of cash from T’s business because
P is treated as having acquired T’s assets in a related
transaction in which section 362(b) applies to deter-
mine P’s basis in such assets. Accordingly, P is treat-
ed under section 355(d)(5)(B) and paragraph
(d)(3)(iv) of this section as having purchased $5 of
the S stock, but is not deemed to have purchased the
remaining $80 of the S stock.
(5) Reverse triangular reorganizations
other than triangular asset reorganiza-
tions—(i) In general. Except as provided
in paragraph (d)(5)(ii) of this section, if a
transaction qualifies as a reorganization
under section 368(a)(1)(A) by reason of
section 368(a)(2)(E) and also as either a
reorganization under section 368(a)(1)(B)
or a section 351 transfer, then either sec-
tion 355(d)(5)(B) (and paragraphs
(d)(3)(i) through (iv) of this section) or
355(d)(5)(C) (and paragraph (e)(2) of this
section) applies. Regardless of which
method the controlling corporation
employs to determine its basis in the sur-
viving corporation stock under
§1.358–6(c)(2)(ii) or §1.1502–30(b), the
total amount of surviving corporation
stock treated as purchased by the control-
ling corporation will equal the higher of—
(A) The amount of surviving corpora-
tion stock that would be treated as pur-
chased (on the date of the deemed section
351 transfer) by the controlling corpora-
tion if the controlling corporation
acquired the surviving corporation’s
assets and assumed its liabilities in a
transaction in which the controlling cor-
poration’s basis in the surviving corpora-
tion assets was determined under section
362(b), and then transferred the acquired
assets and liabilities to the surviving cor-
poration in a section 351 transfer (see
§§1.358–6(c)(1) and (2)(ii)(A), and
1.1502–30(b)); or
(B) The amount of surviving corpora-
tion stock that would be treated as pur-
chased (on the date the surviving corpora-
tion shareholders purchased their
surviving corporation stock) if the con-
trolling corporation acquired the stock of
the surviving corporation in a transaction
in which the basis in the surviving corpo-
ration’s stock was determined under sec-
tion 362(b) (see §§1.358–6(c)(2)(ii)(B)
and 1.1502–30(b)).
(ii) Letter ruling and closing agree-
ment. If a controlling corporation obtains
a letter ruling and enters into a closing
agreement under section 7121 in which it
agrees to determine its basis in surviving
corporation stock under §1.358–6(c)-
(2)(ii)(A), or under §1.1502–30(b) by
applying §1.358–6(c)(2)(ii)(A) (deemed
asset acquisition and transfer by control-
ling corporation), then section
355(d)(5)(B) and paragraph (d)(3)(i)
through (iv) of this section apply, and sec-
tion 355(d)(5)(C) and paragraph (e)(2) of
this section do not apply. If a controlling
corporation obtains a letter ruling and
enters into a closing agreement under sec-
tion 7121 under which it agrees to deter-
mine its basis in surviving corporation
stock under §1.358–6(c)(2)(ii)(B), or
under §1.1502–30(b) by applying
§1.358–6(c)(2)(ii)(B) (deemed stock
acquisition), then section 355(d)(5)(C)
and paragraph (e)(2) of this section apply,
and section 355(d)(5)(B) and paragraphs
(d)(3)(i) through (iv) of this section do not
apply.
(iii) Example. The following example
illustrates this paragraph (d)(5):
Example. Reverse triangular reorganization;
purchase. (i) A purchases 60 percent of the stock of
D on Date 1. D owns no cash items, marketable
stock, or transferor debt, but holds cash that is not
part of or used in D’s trade or business under para-
graph (d)(3)(iv) of this section and that represents 20
percent of D’s value. On Date 2, P forms S, and S
merges into D in a reorganization qualifying under
section 368(a)(1)(B) and under section 368(a)(1)(A)
by reason of section 368(a)(2)(E). In the reorgani-
zation, P acquires all of the D stock in exchange
solely for P stock. After Date 2, and within five
years after Date 1, D distributes its wholly owned
subsidiary C to P. P does not obtain a letter ruling
and enter into a closing agreement under paragraph
(d)(5)(ii) of this section. P would acquire 20 percent
of the D stock by purchase on Date 2 under para-
graph (d)(5)(i)(A) of this section by operation of sec-
tion 355(d)(5)(B) and paragraph (d)(3)(iv) of this
section. The exception in paragraph (d)(3)(v) of this
section does not apply because D was not affiliated
with P before the transaction in which the section
351 transfer is deemed to occur and D’s assets are
treated as acquired by P in a related transaction in
which section 362(b) applies to determine P’s basis
in the D assets. P would acquire 60 percent of the D
stock by purchase on Date 1 under paragraph
(d)(5)(i)(B) of this section because, under the trans-
ferred basis rule of section 355(d)(5)(C) and para-
graph (e)(2) of this section, P is treated as though P
purchased the D stock on the date A purchased it.
Accordingly, under paragraph (d)(5)(i) of this sec-
tion, P is treated as acquiring the higher amount (60
percent) by purchase on Date 1. D’s distribution of
C to P is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section. In
addition, A is treated as acquiring the P stock by pur-
chase on Date 1 under paragraph (e)(3) of this sec-
tion because A’s basis in the P stock is determined by
reference to A’s basis in the D stock.
(ii) The facts are the same as in paragraph (i) of
this Example, except that P obtains a letter ruling and
enters into a closing agreement under which it agrees
to determine its basis in the D stock under
§1.358–6(c)(2)(ii)(A). Under paragraph (d)(5)(ii) of
this section, section 355(d)(5)(B) (and paragraphs
(d)(3)(i) through (iv) of this section) applies, and
section 355(d)(5)(C) (and paragraph (e)(2) of this
section) does not apply. Accordingly, P is treated as
acquiring only 20 percent of the D stock by purchase
on Date 2. D’s distribution of C to P is not a dis-
qualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
(6) Treatment of group structure
changes—(i) In general. Notwithstand-
ing section 355(d)(5)(A), for purposes of
section 355(d), if a corporation succeeds
another corporation as the common parent
of a consolidated group in a group struc-
ture change to which §1.1502–31 applies,
the new common parent is treated as hav-
ing acquired the assets and assumed the
liabilities of the former common parent in
a transaction in which the new common
parent’s basis in the former common par-
ent’s assets was determined under section
362(b), and then transferred the acquired
assets and liabilities to the former com-
mon parent (or, if the former common
parent does not survive, to the new com-
mon parent’s subsidiary) in a section 351
transfer, with the new common parent and
former common parent being treated as
not in the same affiliated group at the time
of the transfer for purposes of applying
paragraph (d)(3)(v) of this section
(notwithstanding §1.1502–31(c)(2)).
(ii) Adjustments to basis of higher-tier
members. A higher-tier member that indi-
rectly owns all or part of the former com-
mon parent’s stock after a group structure
change is treated as having purchased the
stock of an immediate subsidiary to the
extent that the higher-tier member’s basis
in the subsidiary is increased under
§1.1502–31(d)(4).
(iii) Example. The following example
illustrates this paragraph (d)(6):
Example. P is the common parent of a consoli-
dated group, and T is the common parent of another
group. P has owned S for more than five years, and
the fair market value of the S stock is $50. T’s assets
consist only of non-marketable stock of direct and
indirect wholly owned subsidiaries with a value of
$50, assets used in its business with a value of $50,
and $50 of marketable stock that is not part of or
used in T’s business. T has no liabilities. T merges
into S with the T shareholders receiving solely P
stock with a value of $150 in exchange for their T
stock in a section 368(a)(2)(D) reorganization. S
will use T’s business assets in T’s business (which
January 16, 20013142001–3 I.R.B.

will become S’s business), but will hold the $50 of
marketable stock for investment purposes. Assume
that the transaction is a reverse acquisition under
§1.1502–75(d)(3) because the T shareholders, as a
result of owning T stock, own more than 50 percent
of the value of P’s stock immediately after the trans-
action. Thus, the transaction is a group structure
change under §1.1502–33(f)(1). Under paragraph
(d)(6) of this section, P is treated as having acquired
the assets of T in a transaction in which P’s basis in
the T assets was determined under section 362(b),
and then transferred the acquired assets to S in a sec-
tion 351 transfer, with P and T being treated as not in
the same affiliated group at the time of the transfer
solely for purposes of paragraph (d)(3)(v) of this
section. The exception in paragraph (d)(3)(v) of this
section (transfers within an affiliated group) does not
apply. Accordingly, P is treated under section
355(d)(5)(B) and paragraph (d)(3)(iv) of this section
as having purchased $50 of the S stock (attributable
to the marketable stock), but is not deemed to have
purchased the remaining $150 of the S stock.
(7) Special rules for triangular asset
reorganizations, other reverse triangular
reorganizations, and group structure
changes. The amount of acquiring sub-
sidiary, surviving corporation, or former
common parent stock that is treated as
purchased under paragraph (c)(4),
(5)(i)(A), or (6) of this section (by opera-
tion of section 355(d)(5)(B) and para-
graphs (d)(3)(i) through (iv) of this sec-
tion) is adjusted to reflect any basis
adjustment under—
(i) Section 1.358–6(c)(2)(i)(B) and (C)
(reduction of basis adjustment in reverse
triangular reorganization where control-
ling corporation acquires less than all of
the surviving corporation stock),
§1.1502–30(b) (applying §1.358–6(c)-
(2)(i)(B) and (C) to a consolidated group),
and §1.1502–31(d)(2)(ii) (reduction of
basis adjustment in group structure
change where new common parent
acquires less than all of the former com-
mon parent stock); or
(ii) Section 1.358–6(d) (reduction of
basis adjustment in any triangular reor-
ganization to the extent controlling cor-
poration does not provide considera-
tion), §1.1502–30(b) (applying
§1.358–6(d) (except §1.358–6(d)(2)) to
a consolidated group), and
§1.1502–31(d)(1) (reduction of basis
adjustment in group structure change to
the extent new common parent does not
provide consideration).
(e) Deemed purchase and timing
rules—(1) Attribution and aggregation—
(i) In general. Under section 355(d)-
(8)(B), if any person acquires by purchase
an interest in any entity, and the person is
treated under section 355(d)(8)(A) as
holding any stock by reason of holding
the interest, the stock shall be treated as
acquired by purchase on the later of the
date of the purchase of the interest in the
entity or the date the stock is acquired by
purchase by such entity.
(ii) Purchase of additional interest. If a
person and an entity are treated as a single
person under section 355(d)(7), and the
person later purchases an additional inter-
est in the entity, the person is treated as
purchasing on the date of the later pur-
chase the amount of stock attributed from
the entity to the person under section
355(d)(8)(A) as a result of the additional
interest.
(iii) Purchase between persons treated
as one person. If two persons are treated
as one person under section 355(d)(7),
and one later purchases stock from the
other, the date of the later purchase is used
for purposes of determining when the
five-year period commences.
(iv) Purchase by a person already
treated as holding stock under section
355(d)(8)(A). If a person who is already
treated as holding stock under section
355(d)(8)(A) later directly purchases such
stock, the date of the later direct purchase
is used for purposes of determining when
the five-year period commences.
(v) Examples. The following examples
illustrate this paragraph (e)(1):
Example 1. On Date 1, A purchases 10 percent of
the stock of P, which has held 100 percent of the
stock of T for more than five years at the time of A’s
purchase. A is deemed to have purchased 10 percent
of P’s T stock on Date 1. If A later purchases an
additional 41 percent of the stock of P on Date 2, A
is deemed to have purchased an additional 41 per-
cent of P’s T stock on Date 2. Because A and P are
now related persons under section 267(b), they are
treated as one person under section 355(d)(7)(A),
and A is treated as owning all of P’s T stock. A is
treated as acquiring 51 percent of the T stock by pur-
chase at the times of A’s respective purchases of P
stock on Date 1 and Date 2. The remaining 49 per-
cent of T stock is treated as acquired when P
acquired the T stock, more than five years before
Date 1. If P distributes T after Date 2 and within five
years after Date 1, the distribution will be a disqual-
ified distribution under section 355(d)(2) and para-
graph (b)(1) of this section.
Example 2. A has owned 60 percent of the stock
of P for more than five years, and P has owned 40
percent of the stock of T for more than five years. A
and P are treated as one person, and A is treated as
owning 40 percent of the stock of T for more than
five years. If P later purchases an additional 20 per-
cent of the stock of T on Date 1, A is treated as
acquiring by purchase the additional 20 percent of T
stock on Date 1. If A then purchases an additional 10
percent of the stock of P on Date 2, under paragraph
(e)(1)(i) of this section, A is deemed to have pur-
chased on Date 2 an additional four percent of the T
stock (10 percent of the 40 percent that P originally
owned). In addition, even though A and P were
already treated as one person under section
355(d)(7)(A), A also is deemed to have purchased
two percent of the T stock on Date 2 (10 percent of
the 20 percent of the T stock that it was treated as
purchasing on Date 1). A is still treated as owning
all 60 percent of the T stock owned by P. However,
of the 60 percent, A is treated as having purchased 18
percent of the T stock on Date 1 and 6 percent of the
T stock on Date 2, for a total of 24 percent purchased
stock.
Example 3. A purchases a 20 percent interest in
partnership M on Date 1. M has owned 30 percent
of the stock and 25 percent of the securities of P
for more than five years. P has owned 40 percent
of the stock and 100 percent of the securities of T
for more than five years. Under section
318(a)(2)(C) as modified by section 355(d)(8)(A),
M is deemed to own 12 percent of the stock (30
percent of the 40 percent P owns) and 30 percent
of the securities (30 percent of the 100 percent P
owns) of T. Under sections 318(a)(2)(A) and
355(d)(8)(B), A is deemed to have purchased 2.4
percent of the stock (20 percent of the 12 percent
M is deemed to own) and 6 percent of the securi-
ties (20 percent of the 30 percent M is deemed to
own) of T on Date 1. Similarly, A is deemed to
have purchased 6 percent of the stock (20 percent
of the 30 percent M owns) and five percent of the
securities (20 percent of the 25 percent M owns) of
P on Date 1. If M later purchases an additional 10
percent of P stock on Date 2, M is deemed to have
purchased four percent of the stock (10 percent of
the 40 percent P owns) and 10 percent of the secu-
rities (10 percent of the 100 percent P owns) of T
on Date 2. A is deemed to have purchased two per-
cent of the stock of P on Date 2 (20 percent of the
10 percent M purchased). A is also deemed to have
purchased 0.8 percent of the stock (20 percent of
the four percent M is deemed to have purchased)
and two percent of the securities (20 percent of the
10 percent M is deemed to have purchased) of T on
Date 2.
Example 4. A and B are brother and sister. For
more than five years, A has owned 75 percent of the
stock of P, and B has owned 25 percent of the stock
of P. A and B are treated as one person under section
267(b), and the stock of each is treated as purchased
on the date it was purchased by A and B, respective-
ly. If B later purchases 50 percent of the P stock
from A on Date 1, A and B are still treated as one
person. However, under paragraph (e)(3)(iii) of this
section, the 50 percent of P stock that B purchased
from A is treated as purchased on Date 1.
(2) Transferred basis rule. If any per-
son acquires property from another person
who acquired the property by purchase
(determined with regard to section
355(d)(5) and paragraphs (d) and (e)(2),
(3) and (4) of this section, but without
regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the adjusted
basis of the property in the hands of the
acquirer is determined in whole or in part
2001–3 I.R.B.315January 16, 2001

by reference to the adjusted basis of the
property in the hands of the other person,
the acquirer is treated as having acquired
the property by purchase on the date it
was so acquired by the other person. The
rule in this paragraph (e)(2) applies, for
example, where stock of a corporation
acquired by purchase is subsequently
acquired in a section 351 transfer or a
reorganization qualifying under section
368(a)(1)(B), but does not apply if the
stock of a former common parent is
acquired in a group structure change to
which §1.1502–31 applies. But see para-
graph (d)(2)(i)(B)(2) of this section for
situations where the stock is treated as
purchased on the date of a transfer.
(3) Exchanged basis rule—(i) In gener-
al. If any person acquires an interest in an
entity (the first interest) by purchase
(determined with regard to section
355(d)(5) and paragraphs (d) and (e)(2),
(3) and (4) of this section, but without
regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the first interest
is exchanged for an interest in the same or
another entity (the second interest) where
the adjusted basis of the second interest is
determined in whole or in part by refer-
ence to the adjusted basis of the first inter-
est, then the second interest is treated as
having been purchased on the date the
first interest was purchased. The rule in
this paragraph (e)(3) applies only to
exchanges that are not treated otherwise
treated as purchases under section
355(d)(5) and paragraph (d) of this sec-
tion. The rule in this paragraph (e)(3)
applies, for example, where stock of a
corporation acquired by purchase is sub-
sequently exchanged for other stock in a
section 351, 354, or 1036(a) exchange.
But see paragraph (d)(2)(i)(A)(2) of this
section for situations where the stock is
treated as purchased on the date of an
exchange or distribution.
(ii) Example. The following example
illustrates this paragraph (e)(3):
Example. A purchases 50 percent of the stock of
T on Date 1. On Date 2, T merges into D in a sec-
tion 368(a)(1)(A) reorganization, with A exchanging
all of the T stock solely for stock of D. Under sec-
tion 358(a), A’s basis in the D stock is determined by
reference to the basis of the T stock it purchased.
Accordingly, A is treated as having purchased the D
stock on Date 1, and has a purchased basis in the D
stock under paragraph (b)(3)(iii) of this section.
(4) Certain section 355 or section 305
distributions—(i) Section 355. If a dis-
tributing corporation distributes any stock
of a controlled corporation with respect to
recently purchased distributing stock in a
distribution that qualifies under section
355 (or so much of section 356 as relates
to section 355), such controlled corpora-
tion stock is deemed to be acquired by
purchase by the distributee on the date the
distributee acquired the recently pur-
chased distributing stock. Recently pur-
chased distributing stock is stock in the
distributing corporation acquired by pur-
chase (determined with regard to section
355(d)(5) and paragraphs (d) and (e)(2),
(3), and (4) of this section, but without
regard to section 355(d)(8) and paragraph
(e)(1) of this section) by the distributee
during the five-year period with respect to
that distribution.
(ii) Section 305. If a corporation dis-
tributes its stock in a distribution that
qualifies under section 305(a), the stock
received in the distribution (to the extent
section 307(a) applies to determine the
recipient’s basis) is deemed to be acquired
by purchase by the recipient on the date
(if any) that the recipient acquired by pur-
chase (determined with regard to section
355(d)(5) and paragraphs (d) and (e)(2),
(3), and (4) of this section), the stock with
respect to which the distribution is made.
(5) Substantial diminution of risk—(i) In
general. If section 355(d)(6) applies to any
stock for any period, the running of any
five-year period set forth in section
355(d)(3) is suspended during such period.
(ii) Property to which suspension
applies. Section 355(d)(6) applies to any
stock for any period during which the
holder’s risk of loss with respect to such
stock, or with respect to any portion of the
activities of the corporation, is (directly or
indirectly) substantially diminished by an
option, a short sale, any special class of
stock, or any other device or transaction.
(iii) Risk of loss substantially dimin-
ished. Whether a holder’s risk of loss is
substantially diminished under section
355(d)(6) and paragraph (e)(5)(ii) of this
section will be determined based on all
facts and circumstances relating to the
stock, the corporate activities, and
arrangements for holding the stock.
(iv) Special class of stock. For purpos-
es of section 355(d)(6) and paragraph
(e)(5)(ii) of this section, the term special
class of stock includes a class of stock that
grants particular rights to, or bears partic-
ular risks for, the holder or the issuer with
respect to the earnings, assets, or attribut-
es of less than all the assets or activities of
a corporation or any of its subsidiaries.
The term includes, for example, tracking
stock and stock (or any related instru-
ments or arrangements) the terms of
which provide for the distribution
(whether or not at the option of any party
or in the event of any contingency) of any
controlled corporation or other specified
assets to the holder or to one or more per-
sons other than the holder.
(f) Duty to determine stockholders—(1)
In general. In determining whether sec-
tion 355(d) applies to a distribution of
controlled corporation stock, a distribut-
ing corporation must determine whether a
disqualified person holds its stock or the
stock of any distributed controlled corpo-
ration. This paragraph (f) provides rules
regarding this determination and the
extent to which a distributing corporation
must investigate whether a disqualified
person holds stock.
(2) Deemed knowledge of contents of
securities filings. A distributing corpora-
tion is deemed to have knowledge of the
existence and contents of all schedules,
forms, and other documents filed with or
under the rules of the Securities and
Exchange Commission, including without
limitation any Schedule 13D or 13G (or
any similar schedules) and amendments,
with respect to any relevant corporation.
(3) Presumption as to securities filings.
Absent actual knowledge to the contrary, in
determining whether section 355(d)
applies to a distribution, a distributing cor-
poration may presume, with respect to
stock that is reporting stock (while such
stock is reporting stock), that every share-
holder or other person required to file a
schedule, form, or other document with or
under the rules of the Securities and
Exchange Commission as of a given date
has filed the schedule, form, or other docu-
ment as of that date and that the contents of
filed schedules, forms, or other documents
are accurate and complete. Reporting
stock is stock that is described in Rule
13d–1(i) of Regulation 13D (17 CFR
240.13d–1(i)) (or any rule or regulation to
generally the same effect) promulgated by
the Securities and Exchange Commission
under the Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.).
(4) Presumption as to less-than-five-
percent shareholders. Absent actual
knowledge (or deemed knowledge under
paragraph (f)(2) of this section) immedi-
January 16, 20013162001–3 I.R.B.

ately after the distribution to the contrary
with regard to a particular shareholder, a
distributing corporation may presume that
no less-than-five-percent shareholder of a
corporation acquired stock or securities
by purchase under section 355(d)(5) or (8)
and paragraphs (d) and (e) of this section
during the five-year period. For purpos-
es of this paragraph (f), a less-than-five-
percent shareholder is a person that, at no
time during the five-year period, holds
directly (or by application of paragraph
(c)(3)(ii) of this section, but not by appli-
cation of section 355(d)(7) or (8)) stock
possessing five percent or more of the
total combined voting power of all classes
of stock entitled to vote or the total value
of shares of all classes of stock of a cor-
poration. However, this presumption does
not apply to any less-than-five-percent
shareholder that, at any time during the
five-year period—
(i) Is related under section 355(d)(7)(A)
to a shareholder in the corporation that is,
at any time during the five-year period,
not a less-than-five-percent shareholder;
(ii) Acted pursuant to a plan or arrange-
ment, with respect to acquisitions of the
corporation’s stock or securities under
section 355(d)(7)(B) and paragraph (c)(4)
of this section, with a shareholder in the
corporation that is, at any time during the
five-year period, not a less-than-five-per-
cent shareholder; or
(iii) Holds stock or securities that is
attributed under section 355(d)(8)(A) to a
shareholder in the corporation that is, at
any time during the five-year period, not a
less-than-five-percent shareholder.
(5) Examples. The following examples
illustrate this paragraph (f):
Example 1. Publicly traded corporation; no
schedules filed. D is a widely held and publicly trad-
ed corporation with a single class of reporting stock
and no other class of stock. Assume that applicable
federal law requires any person that directly holds
five percent or more of the D stock to file a schedule
with the Securities and Exchange Commission with-
in 10 days after an acquisition. D distributes its
wholly owned subsidiary C pro rata. D determines
that no schedule, form, or other document has been
filed with respect to its stock or the stock of any
other relevant corporation during the five-year peri-
od or within 10 days after the distribution.
Immediately after the distribution, D has no knowl-
edge that any of its shareholders are (or were at any
time during the five-year period) not less-than-five-
percent shareholders, or that any particular share-
holder acquired D stock by purchase under section
355(d)(5) or (8) and paragraphs (d) and (e) of this
section during the five-year period. Under para-
graph (f)(3) of this section, D may presume it has no
shareholder that is or was not a less-than-five-per-
cent shareholder during the five-year period due to
the absence of any filed schedules, forms, or other
documents. Under paragraph (f)(4) of this section,
D may presume that none of its less-than-five-per-
cent shareholders acquired D’s stock by purchase
during the five-year period. Accordingly, D may
presume that section 355(d) does not apply to the
distribution of C.
Example 2. Publicly traded corporation; sched-
ule filed. The facts are the same as those in Example
1, except that D determines that, as of 10 days after
the distribution, only one schedule has been filed
with respect to its stock. That schedule discloses
that X acquired 15 percent of the D stock one year
before the distribution. Absent contrary knowledge,
D may rely on the presumptions in paragraph (f)(3)
of this section and so may presume that X is its only
shareholder that is or was not a less-than-five-per-
cent shareholder during the five-year period. D may
not rely on the presumption in paragraph (f)(4) of
this section with respect to X. In addition, D may
not rely on the presumption in paragraph (f)(4) of
this section with respect to any less-than-five-per-
cent shareholder that, at any time during the five-
year period, is related to X under section
355(d)(7)(A), acted pursuant to a plan or arrange-
ment with X under section 355(d)(7)(B) and para-
graph (c)(4) of this section with respect to acquisi-
tions of D stock, or holds stock that is attributed to X
under section 355(d)(8)(A). Accordingly, under
paragraph (f)(1) of this section, to determine
whether section 355(d) applies, D must determine:
whether X acquired its directly held D stock by pur-
chase under section 355(d)(5) and paragraphs (d)
and (e)(2) and (3) of this section during the five-year
period; whether X is treated as having purchased any
additional D stock under section 355(d)(8) and para-
graph (e)(1) of this section during the five-year peri-
od; and whether X is related to, or acquired its D
stock pursuant to a plan or arrangement with, one or
more of D’s other shareholders during the five-year
period under section 355(d)(7)(A) or (B) and para-
graph (c)(4) of this section, and if so, whether those
shareholders acquired their D stock by purchase
under section 355(d)(5) or (8) and paragraphs (d)
and (e) of this section during the five-year period.
Example 3. Acquisition of publicly traded corpo-
ration. The facts are the same as those in Example
1, except that P acquires all of the D stock in a sec-
tion 368(a)(1)(B) reorganization that is not also a
reorganization under section 368(a)(1)(A) by reason
of section 368(a)(2)(E), and D distributes C to P one
year later. Because D was widely held, P applies sta-
tistical sampling procedures that involve less than
50% of D’s outstanding shares, to estimate the basis
of all shares acquired, instead of surveying each
shareholder. Under the deemed purchase rule of sec-
tion 355(d)(5)(C) and paragraph (e)(2) of this sec-
tion, P is treated as having acquired the D stock by
purchase on the date the D shareholders acquired the
D stock by purchase. Even though D has no less-
than-five-percent shareholder immediately after the
distribution, D may rely on the presumptions in para-
graphs (f)(3) and (4) of this section to determine
whether and to what extent the D stock is treated as
purchased during the five-year period in P’s hands
under the deemed purchase rule of section
355(d)(5)(C) and paragraph (e)(2) of this section.
Accordingly, D may presume that section 355(d)
does not apply to the distribution of C to P. This
result would not change even if the statistical sam-
pling that involves less than 50 percent of D’s out-
standing shares indicated that more than 50% of D’s
shares were acquired by purchase during the five-
year period.
Example 4. Non-publicly traded corporation. D
is owned by 20 shareholders and has a single class of
stock that is not reporting stock. D knows that A
owns 40 percent of the D stock, and D does not
know that any other shareholder has owned as much
as five percent of the D stock at any time during the
five-year period. D may not rely on the presumption
in paragraph (f)(3) of this section because its stock is
not reporting stock. D may not rely on the presump-
tion in paragraph (f)(4) of this section with respect to
A. In addition, D may not rely on the presumption
in paragraph (f)(4) of this section for any less-than-
five-percent shareholder that, at any time during the
five-year period, is related to A under section
355(d)(7)(A), acted pursuant to a plan or arrange-
ment with A under section 355(d)(7)(B) and para-
graph (c)(4) of this section with respect to acquisi-
tions of D stock, or holds stock that is attributed to A
under section 355(d)(8)(A). D may rely on the pre-
sumption in paragraph (f)(4) of this section for less-
than-five-percent shareholders that during the five-
year period are not related to A, did not act pursuant
to a plan or arrangement with A, and do not hold
stock attributed to A. Accordingly, under paragraph
(f)(1) of this section, to determine whether section
355(d) applies, D must determine: that A is its only
shareholder that is (or was at any time during the
five-year period) not a less-than-five-percent share-
holder; whether A acquired its directly held D stock
by purchase under section 355(d)(5) and paragraphs
(d) and (e)(2) and (3) of this section during the five-
year period; whether A is treated as having pur-
chased any additional D stock under section
355(d)(8) and paragraph (e)(1) of this section during
the five-year period; and whether A is related to, or
acquired its D stock pursuant to a plan or arrange-
ment with, one or more of D’s other shareholders
during the five-year period under section
355(d)(7)(A) or (B) and paragraph (c)(4) of this sec-
tion, and if so, whether those shareholders acquired
their D stock by purchase under section 355(d)(5) or
(8) and paragraphs (d) and (e) of this section during
the five-year period.
(g) Effective date. This section applies
to distributions occurring after December
20, 2000, except that they do not apply to
any distributions occurring pursuant to a
written agreement which is (subject to
customary conditions) binding on
December 20, 2000, and at all times there-
after.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 11, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
2001–3 I.R.B.317January 16, 2001

January 16, 20013182001–3 I.R.B.
(Filed by the Office of the Federal Register on De-
cember 19, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 20, 2000,
65 F.R. 79719)
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of January 2001. See Rev.
Rul. 2001–3, page 319.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3, page 319.
Section 467.—Certain Payments
for the Use of Property or
Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3, page 319.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3, page 319.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 2001. See
Rev. Rul. 2001–3, page 319.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of January 2001. See Rev. Rul. 2001–3,
page 319.
Section 512.—Unrelated
Business Taxable Income
The Service provides an inflation adjustment to
the maximum amount of annual dues that can be
paid to certain agricultural or horticultural organiza-
tions without any portion being treated as unrelated
trade or business income by reason of any benefits
or privileges available to members for taxable years
beginning in 2001. See Rev. Proc. 2001–13, page
337.
Section 513.—Unrelated Trade
or Business
The Service provides inflation adjustments to the
maximum amount of a “low cost article” for taxable
years beginning in 2001. Funds raised through a
charity’s distribution of “low cost articles” will not
be treated as unrelated business income to the char-
ity. See Rev. Proc. 2001–13, page 337.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 2001. See
Rev. Rul. 2001–3, page 319.
Section 685.—Treatment of
Funeral Trusts
The Service provides an inflation adjustment to
the maximum amount of contributions that may be
made to a qualified funeral trust for contracts en-
tered in calendar year 2001. See Rev. Proc.
2001–13, page 337.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3, page 319.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 2001. See Rev. Rul. 2001–3,
page 319.
Section 860E.—Treatment of
Income in Excess of Daily
Accruals on Residual Interests
26 CFR 1.860E–1: Treatment of taxable income of a
residual interest holder in excess of daily accruals.
This procedure details safe harbor conditions
under which the transfer of a REMIC noneconomic
residual interest or FASIT ownership interest is pre-
sumed to be accomplished without an intention to
impede the assessment or collection of tax. Taxpay-
ers may rely on the safe harbors from February 4,
2000 (the date proposed regulations were filed with
the Federal Register) until the date specified in fu-
ture published guidance. See Rev. Proc. 2001–12,
page 335.
Section 860H.—Taxation of a
FASIT; Other General Rules
This procedure details safe harbor conditions
under which the transfer of a REMIC noneconomic
residual interest or FASIT ownership interest is pre-
sumed to be accomplished without an intention to
impede the assessment or collection of tax. Taxpay-
ers may rely on the safe harbors from February 4,
2000 (the date proposed regulations were filed with
the Federal Register) until the date specified in fu-
ture published guidance. See Rev. Proc. 2001–12,
page 335.
Section 877.—Expatriation to
Avoid Tax
The Service provides inflation adjustments to
amounts used to determine whether an individual’s
loss of United States citizenship had the avoidance
of the United States tax as one of its principal pur-
poses for calendar year 2001. See Rev. Proc.
2001–13, page 337.
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate. For pur-

2001–3 I.R.B.319January 16, 2001
poses of sections 1274, 1288, 382, and
other sections of the Code, tables set forth
the rates for January 2001.
Rev. Rul. 2001–3
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2001 (the current)
month). Table 1 contains the short-term,
mid-term, and long-term applicable feder-
al rates (AFR) for the current month for
purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the
appropriate percentages for determining
the low-income housing credit described
in section 42(b)(2) for buildings placed in
service during the current month. Table 5
contains the federal rate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remain-
der or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the deemed rate of return for transfers
made during calendar year 2001 to pooled
income funds described in § 642(c)(5)
that have been in existence for less than 3
taxable years immediately preceding the
taxable year in which the transfer is made.
REV. RUL. 2001–3 TABLE 1
Applicable Federal Rates (AFR) for January 2001
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR5.90%5.82%5.78%5.75%
110% AFR6.50%6.40%6.35%6.32%
120% AFR7.10%6.98%6.92%6.88%
130% AFR7.71%7.57%7.50%7.45%
Mid-Term
AFR5.61%5.53%5.49%5.47%
110% AFR6.17%6.08%6.03%6.00%
120% AFR6.75%6.64%6.59%6.55%
130% AFR7.32%7.19%7.13%7.08%
150% AFR8.47%8.30%8.22%8.16%
175% AFR9.91%9.68%9.57%9.49%
Long-Term
AFR5.78%5.70%5.66%5.63%
110% AFR6.37%6.27%6.22%6.19%
120% AFR6.96%6.84%6.78%6.74%
130%AFR7.55%7.41%7.34%7.30%
REV. RUL. 2001–3 TABLE 2
Applicable Federal Rates (AFR) for January 2001
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
adjusted AFR4.18%4.14%4.12%4.10%
Mid-Term
adjusted AFR4.52%4.47%4.45%4.43%
Long-Term
adjusted AFR5.24%5.17%5.14%5.12%

REV. RUL. 2001-3 TABLE 3
Rates Under Section 382 for January 2001
Adjusted federal long-term rate for the current month5.24%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)5.39%
January 16, 20013202001–3 I.R.B.
REV. RUL. 2001-3 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 2001
Appropriate percentage for the 70% present value low-income housing credit8.33%
Appropriate percentage for the 30% present value low-income housing credit3.57%
REV. RUL. 2001-3 TABLE 5
Rate Under Section 7520 for January 2001
Applicable federal rate for determining the present value of an annuity, an interest for life
or a term of years, or a remainder or reversionary interest6.8%
REV. RUL. 2001-3 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2001
Deemed rate of return for transfers during 2001 to pooled income funds that have been
in existence for less than 3 taxable years6.6%
Section 1288.—Treatment of
Original Issue Discounts on Tax-
Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3 page 319.
Section 2032A.—Valuation of
Certain Farm, Etc., Real
Property
The Service provides an inflation adjustment to the
maximum amount by which the value of certain farm
and other qualified real property included in a decen-
dent’s gross estate may be decreased for purposes of
valuing the estate of a decedent dying in calendar year
2001. See Rev. Proc. 2001–13, page 337.
Section 2503.—Taxable Gifts
The Service provides an inflation adjustment to the
amount of gifts that may be made to a person in a cal-
endar year without including the amount in taxable
gifts for calendar year 2001. See Rev. Proc. 2001–13,
page 337.
Section 2523.—Gift to Spouse
The Service provides an inflation adjustment to
the amount of gifts that may be made in a calendar
year to a spouse who is not a citizen of the United
States without including the amount in taxable gifts
for calendar year 2001. See Rev. Proc. 2001–13,
page 337.
Section 2631.—GST Exemption
The Service provides an inflation adjustment to
the amount of the generation-skipping transfer tax
exemption for calendar year 2001. See Rev. Proc.
2001–13, page 337.
Section 4001.—Passenger
Vehicles
The Service provides inflation adjustments to
the price above which a passenger vehicle becomes
subject to an excise tax for transactions occurring
in calendar year 2001. See Rev. Proc. 2001–13,
page 337.
Section 4003.—Special Rules
The Service provides inflation adjustments to the
price above which a passenger vehicle becomes sub-
ject to an excise tax for transactions occurring in cal-
endar year 2001. (Price includes the price of instal-
lation of parts or accessories on a passenger vehicle
within six months of the date after the vehicle was

first placed in service.) See Rev. Proc. 2001–13,
page 337.
Section 4261.—Imposition of
Tax; In General.
This notice provides rules relating to the air
transportation tax imposed by § 4261(a) of the In-
ternal Revenue Code on amounts paid for the right
to provide mileage awards. The notice reflects
changes made by § 1031(c)(2) of the Taxpayer Re-
lief Act of 1997, 1997–4 (Vol. 1) C.B. 2, 144, which
added § 4261(e)(3) to the Code. See Notice 2001–6,
page 327.
Section 4261(c).—Use of
International Travel Facilities
The Service provides an inflation adjustment to
the amount of the excise tax on passenger air trans-
portation beginning or ending in the United States
for calendar year 2001. See Rev. Proc. 2001–13,
page 337.
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 31.6011(a)–3: Returns under Federal
Unemployment Tax Act.
What are the requirements of the Form 940 e-file
Program, which allows taxpayers, reporting agents,
transmitters, and software developers to electroni-
cally file a Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return?See Rev. Proc.
2001–9, page 328.
26 CFR 31.6011(a)–7: Execution of returns.
What are the requirements of the Form 940 e-file
Program, which allows taxpayers, reporting agents,
transmitters, and software developers to electroni-
cally file a Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return? See Rev. Proc.
2001–9, page 328.
Section 6033.—Returns by
Exempt Organizations
The Service provides an inflation adjustment to
the amount of dues certain exempt organizations
with nondeductible lobbying expenditures can
charge and still be excepted from reporting require-
ments for taxable years beginning in 2001. See Rev.
Proc. 2001–13, page 337.
Section 6039F.—Notice of Large
Gifts Received From Foreign
Persons
The Service provides an inflation adjustment to
the amount of gifts in a taxable year from foreign
person(s) that triggers a reporting requirement for a
United States person for taxable years beginning in
2001. See Rev. Proc. 2001–13, page 337.
Section 6061.—Signing of
Returns and Other Documents
26 CFR 301.6061–1: Signing of returns and other
documents.
What are the requirements of the Form 940 e-file
Program, which allows taxpayers, reporting agents,
transmitters, and software developers to electroni-
cally file a Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return?See Rev. Proc.
2001–9, page 328.
Section 6071.—Time for Filing
Returns and Other Documents
26 CFR 31.6071(a)–1: Time for filing returns and
other documents.
What are the requirements of the Form 940 e-file
Program, which allows taxpayers, reporting agents,
transmitters, and software developers to electroni-
cally file a Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return?See Rev. Proc.
2001–9, page 328.
Section 6323.—Validity and
Priority Against Certain Persons
The Service provides inflation adjustments for
calendar year 2001 to (1) the maximum amount of a
casual sale of personal property below which a fed-
eral tax lien will not be valid against a purchaser of
the property, and (2) the maximum amount of a con-
tract for the repair or improvement of certain resi-
dential property at or below which a federal tax lien
will not be valid against a mechanic’s lienor. See
Rev. Proc. 2001–13, page 337.
Section 6334.—Property
Exempt From Levy
The Service provides inflation adjustments to the
value of certain property exempt from levy (fuel,
provisions, furniture, household personal effects,
arms for personal use, livestock, poultry, and books
and tools of a trade, business, or profession) for cal-
endar year 2001. See Rev. Proc. 2001–13, page 337.
Section 6601.—Interest on
Underpayment, Nonpayment, or
Extension of Time for Payment,
of Tax
The Service provides an inflation adjustment to
the amount used to determine the amount of interest
charged on a certain portion of the estate tax payable
in installments for the estate of a decedent dying in
calendar year 2001. See Rev. Proc. 2001–13, page
337.
Section 6651.—Failure to File
Tax Return or to Pay Tax
26 CFR 301.6651–1: Failure to file tax return or to
pay tax.
What are the requirements of the Form 940 e-file
Program, which allows taxpayers, reporting agents,
transmitters, and software developers to electroni-
cally file a Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return?See Rev. Proc.
2001–9, page 328.
Section 7430.—Awarding of
Costs and Certain Fees
The Service provides an inflation adjustment to
the hourly limit on attorney fees that may be
awarded in a judgement or settlement of an adminis-
trative or judicial proceeding concerning the deter-
mination, collection, or refund of tax, interest, or
penalty for calendar year 2001. See Rev. Proc.
2001–13, page 337.
Section 7508.—Time for
Performing Certain Acts
Postponed by Reason of Service
in Combat Zone
26 CFR 301.7508–1: Time for performing certain
acts postponed by reason of service in a combat
zone.
26 CFR 301.7508A–1: Postponement of certain tax-
related deadlines by reason of Presidentially
declared disaster.
T.D. 8911
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Relief for Service in Combat
Zone and for Presidentially
Declared Disaster
2001–3 I.R.B.321January 16, 2001

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the post-
ponement of certain tax-related dead-
lines due either to service in a combat
zone or a Presidentially declared disas-
ter. The regulations reflect changes to
the law made by the Taxpayer Relief Act
of 1997. The regulations affect taxpay-
ers serving in a combat zone and taxpay-
ers affected by a Presidentially declared
disaster.
DATES: Effective Date: These regula-
tions are effective December 30, 1999.
Applicability Date: For dates of applica-
bility, see §§301.7508–1(b) and
301.7508A–1(h).
FOR FURTHER INFORMATION CON-
TACT: Bridget E. Finkenaur, (202) 622-
4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Regulations on Procedure and
Administration (26 CFR part 301)
under section 7508 of the Internal Rev-
enue Code (Code), relating to postpone-
ment of certain acts by reason of service
in a combat zone, and section 7508A,
relating to postponement of certain tax-
related deadlines by reason of a Presi-
dentially declared disaster. Section
7508A was added to the Code by sec-
tion 911 of the Taxpayer Relief Act of
1997, Public Law 105–34 (111 Stat.
788), effective for any period for per-
forming an act that has not expired be-
fore August 5, 1997.
A notice of proposed rulemaking
(REG–101492–98, 2000–3 I.R.B. 326)
was published in the Federal Register
(64 F.R. 73444) on December 30, 1999.
No public hearing was requested or
held. One comment letter was received.
After consideration of the comments,
the proposed regulations are adopted as
modified by this Treasury decision. The
comments are discussed below.
Summary of Comments
1. IRA and Pension Contribution
Deadlines
Section 301.7508A–1(c)(1) of the pro-
posed regulations lists various tax-related
deadlines that may be postponed. The
commentator recommends that deadlines
for contributions to an individual retire-
ment account (IRA) or a pension plan be
added to the list. The final regulations
adopt this recommendation and also add
the deadline for rollover contributions.
2. Notification of IRS When Taxpayer
Moves Out of Disaster Area
The commentator suggests that the IRS
develop a simple procedure for taxpayers
to notify the IRS when they move out of a
Presidentially declared disaster area. The
commentator believes that the notification
would ensure that relief under section
7508A will automatically apply to a tax-
payer who has moved out of a
Presidentially declared disaster area.
Such taxpayers could also be advised of
any further relevant filing guidance
regarding the disaster.
The final regulations do not adopt this
suggestion because it is not necessary for
taxpayers moving out of a disaster area to
notify the IRS to obtain relief under sec-
tion 7508A. When a Presidentially
declared disaster occurs, the IRS makes a
decision whether to grant relief to taxpay-
ers affected by the disaster. If a decision
is made to grant relief, the IRS identifies
most affected taxpayers located in the dis-
aster area and places a marker on the
affected tax accounts. A subsequent
change of address will not remove the
marker from the tax account. Thus, an
affected taxpayer who relocates outside a
disaster area will still automatically
receive disaster relief.
Because the IRS may not be able to iden-
tify all taxpayers potentially affected by a
Presidentially declared disaster, some tax-
payers may have to identify themselves to
the IRS to receive relief. To ensure that
they receive the relief for which they are
eligible, the IRS typically issues public
guidance, such as a news release, that
describes how to claim relief. The guidance
instructs taxpayers how to note on their tax
return that they are affected taxpayers, and
what, if any, additional information should
be attached. When the IRS processes these
tax returns, it manually places the disaster
relief marker on the tax account.
Subsequent changes of address will not
affect the grant of relief.
3. Definition of Affected Taxpayer
The regulations list seven types of
affected taxpayers, including “any busi-
ness whose principal place of business is
located in a covered disaster area.” The
commentator recommends that this defin-
ition be expanded to include all owners of
a business.
The final regulations do not adopt this
recommendation. The IRS and Treasury
Department believe that the definition of
affected taxpayerin the proposed regula-
tions is sufficiently broad to cover all tax-
payers within the intended scope of sec-
tion 7508A. Although the final regulations
do not provide a specific rule for business
owners (other than sole proprietors), the
IRS may nonetheless make a determina-
tion based on the facts and circumstances
in a particular case that a business owner
is an affected taxpayer under either
§301.7508A–1(d)(1)(iv), which applies to
an individual whose principal residence is
not located in a disaster area, but whose
records necessary to meet the deadline for
a specified act are maintained in a covered
disaster area, or under §301.7508A
–1(d)(1)(vii), which applies to any other
person determined by the IRS to be affect-
ed by a Presidentially declared disaster.
For example, in the case of a partnership,
it is expected that partners whose ability
to meet a deadline is significantly affected
by a Presidentially declared disaster will
be granted relief.
4. Deadline for Tax Deposits
The commentator also recommends
that the deadline for tax deposits under
section 6302 be added to the list. The
commentator states that no distinction
should be drawn between tax payments
and tax deposits and that allowing a post-
ponement of deposits would be less cum-
bersome than waiving the section 6656
deposit penalties for reasonable cause. To
the contrary, due to the frequency with
which tax deposits are due, the IRS
believes it would be more administrative-
ly cumbersome to defer those deadlines.
However, in cases where taxpayers are
unable to make timely tax deposits under
section 6302 because of a Presidentially
declared disaster, the IRS will consider a
reasonable cause waiver of the section
6656 failure to deposit penalty on a case
by case basis. The IRS believes such a
January 16, 20013222001–3 I.R.B.

system is more administrable. Thus, this
comment has not been adopted by the
final regulations.
Explanation of Other Revisions
Section 301.7508A–1(c)(1) of the final
regulations expands the acts for which
disaster relief is available to include: the
filing of generation-skipping transfer tax
returns; the payment of generation-skip-
ping transfer tax; and the filing of any
petition with the Tax Court.
Sections 301.7508A–1(d)(1)(ii) and
(iv) of the final regulations have been
revised to clarify that affected taxpayer
includes any business entity or sole pro-
prietor whose principal place of business
is located in a covered disaster area.
Example 5of the final regulations clar-
ifies the application of section 7508A to
the lookback period in section
6511(b)(2)(A). This period limits the
amount that may be refunded to the tax-
payer when a timely claim is filed under
section 6511(a). In Example 5, H and W
timely file their 2001 income tax return on
April 15, 2002. Example 5states that an
amended return for 2001 will be timely if
it is filed on or before July 14, 2005. As
clarified by the final regulations, Example
5further states that the section
6511(b)(2)(A) lookback period runs from
July 14, 2005, back to April 15, 2002.
Thus, the taxpayers are allowed a refund
of estimated tax and tax withheld from
wages for 2001, deemed paid on April 15,
2002, under section 6513(b).
The final regulations also clarify
Examples 6and 7. Under §301.7508A–1(f)
of the final regulations, if there is an exten-
sion of time to file income tax returns under
section 6081 and to pay income tax with
respect to such returns under section 6161,
and a postponement of tax-related dead-
lines under section 7508A, interest on an
underpayment that arises during such peri-
od is abated under section 6404(h) for the
period of time disregarded under section
7508A. This is illustrated by Example 8.
By contrast, in Examples 6and 7, exten-
sions were not granted under sections 6081
and 6161 and interest was not abated under
section 6404(h). Therefore, in Examples 6
and 7, no interest abatement would be per-
mitted regardless of whether the underpay-
ment arose before or during the extension
period. Therefore, Examples 6 and 7are
amended by removing the statement that
interest is not abated “because the under-
payment arose prior to the extension peri-
od” and clarifying that because no exten-
sions under sections 6081 and 6161 were
granted, interest was not abated under sec-
tion 6404(h).
Special Analyses
It has been determined that these final
regulations are not a significant regulato-
ry action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these final regulations was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these regula-
tions is Bridget E. Finkenaur, Office of
Associate Chief Counsel, Procedure and
Administration (Administrative Pro-
visions and Judicial Practice Division).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7508–1 also issued under
26 U.S.C. 7508(a)(1)(K);
Section 301.7508A–1 also issued under
26 U.S.C. 7508(a)(1)(K) and 7508A(a); *
* *
Par. 2. Section 301.7508–1 is added to
read as follows:
§ 301.7508–1 Time for performing
certain acts postponed by reason of
service in a combat zone.
(a) General rule. The period of time
that may be disregarded for performing
certain acts under section 7508 applies to
acts described in section 7508(a)(1) and to
other acts specified in a revenue ruling,
revenue procedure, notice, or other guid-
ance published in the Internal Revenue
Bulletin (see §601.601(d)(2) of this chap-
ter).
(b) Effective date. This section applies
to any period for performing an act that
has not expired before December 30,
1999.
Par. 3. Section 301.7508A–1 is added
to read as follows:
§301.7508A–1 Postponement of certain
tax-related deadlines by reason of
Presidentially declared disaster.
(a) Scope. This section provides rules
by which the Internal Revenue Service
(IRS) may postpone deadlines for per-
forming certain acts with respect to taxes
other than taxes not administered by the
IRS such as firearms tax (chapter 32, sec-
tion 4181); harbor maintenance tax (chap-
ter 36, section 4461); and alcohol and
tobacco taxes (subtitle E).
(b) Postponed deadlines. For any tax,
penalty, additional amount, or addition to
the tax of an affected taxpayer (as defined
in paragraph (d)(1) of this section), the
IRS may disregard a period of up to 90
days in determining, under the internal
revenue laws—
(1) Whether any or all of the acts
described in paragraph (c) of this section
were performed within the time pre-
scribed; and
(2) The amount of any credit or refund.
(c) Acts for which a period may be dis-
regarded—(1) Acts performed by taxpay-
ers. Paragraph (b) of this section applies
to the following acts performed by affect-
ed taxpayers (as defined in paragraph
(d)(1) of this section)—
(i) Filing any return of income tax,
estate tax, gift tax, generation-skipping
transfer tax, excise tax (other than
firearms tax (chapter 32, section 4181);
harbor maintenance tax (chapter 36, sec-
tion 4461); and alcohol and tobacco taxes
(subtitle E)), or employment tax (includ-
2001–3 I.R.B.323January 16, 2001

ing income tax withheld at source and
income tax imposed by subtitle C or any
law superseded thereby);
(ii) Paying any income tax, estate tax,
gift tax, generation-skipping transfer tax,
excise tax (other than firearms tax (chap-
ter 32, section 4181); harbor maintenance
tax (chapter 36, section 4461); and alco-
hol and tobacco taxes (subtitle E)),
employment tax (including income tax
withheld at source and income tax
imposed by subtitle C or any law super-
seded thereby), any installment of those
taxes (including payment under section
6159 relating to installment agreements),
or of any other liability to the United
States in respect thereof, but not including
deposits of taxes pursuant to section 6302
and the regulations under section 6302;
(iii) Making contributions to a qualified
retirement plan (within the meaning of
section 4974(c)) under section 219(f)(3),
404(a)(6), 404(h)(1)(B), or 404(m)(2);
making distributions under section
408(d)(4); recharacterizing contributions
under section 408A(d)(6); or making a
rollover under section 402(c), 403(a)(4),
403(b)(8), or 408(d)(3);
(iv) Filing a petition with the Tax
Court, or for review of a decision ren-
dered by the Tax Court;
(v) Filing a claim for credit or refund of
any tax;
(vi) Bringing suit upon a claim for
credit or refund of any tax; and
(vii) Any other act specified in a rev-
enue ruling, revenue procedure, notice,
announcement, news release, or other
guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of
this chapter).
(2) Acts performed by the government.
Paragraph (b) of this section applies to the
following acts performed by the govern-
ment—
(i) Assessing any tax;
(ii) Giving or making any notice or
demand for the payment of any tax, or
with respect to any liability to the United
States in respect of any tax;
(iii) Collecting by the Secretary, by
levy or otherwise, of the amount of any
liability in respect of any tax;
(iv) Bringing suit by the United States,
or any officer on its behalf, in respect of
any liability in respect of any tax;
(v) Allowing a credit or refund of any
tax;
and
(vi) Any other act specified in a rev-
enue ruling, revenue procedure, notice, or
other guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of
this chapter).
(d) Definitions—(1) Affected taxpayer
means–-
(i) Any individual whose principal resi-
dence (for purposes of section 1033(h)(4))
is located in a covered disaster area;
(ii) Any business entity or sole propri-
etor whose principal place of business is
located in a covered disaster area;
(iii) Any individual who is a relief
worker affiliated with a recognized gov-
ernment or philanthropic organization and
who is assisting in a covered disaster area;
(iv) Any individual whose principal
residence (for purposes of section
1033(h)(4)), or any business entity or sole
proprietor whose principal place of busi-
ness is not located in a covered disaster
area, but whose records necessary to meet
a deadline for an act specified in para-
graph (c) of this section are maintained in
a covered disaster area;
(v) Any estate or trust that has tax
records necessary to meet a deadline for
an act specified in paragraph (c) of this
section and that are maintained in a cov-
ered disaster area;
(vi) The spouse of an affected taxpayer,
solely with regard to a joint return of the
husband and wife; or
(vii) Any other person determined by
the IRS to be affected by a Presidentially
declared disaster (within the meaning of
section 1033(h)(3)).
(2) Covered disaster areameans an
area of a Presidentially declared disaster
(within the meaning of section
1033(h)(3)) to which the IRS has deter-
mined paragraph (b) of this section
applies.
(e) Notice of postponement of certain
acts. If any tax-related deadline is post-
poned under section 7508A and this sec-
tion, the IRS will publish a revenue rul-
ing, revenue procedure, notice,
announcement, news release, or other
guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of
this chapter) describing the acts post-
poned, the number of days disregarded
with respect to each act, the time period to
which the postponement applies, and the
location of the covered disaster area.
Guidance under this paragraph (e) will be
published as soon as practicable after the
declaration of a Presidentially declared
disaster.
(f) Abatement of interest under section
6404(h). In the case of a Presidentially
declared disaster, if there is an extension
of time to file income tax returns under
section 6081 and to pay income tax with
respect to such returns under section
6161, and, in addition, a postponement of
tax-related deadlines under section
7508A, interest on an underpayment of
income tax that arises during such period
will be abated under section 6404(h) for
the period of time disregarded under sec-
tion 7508A in addition to the period of
time covered by the extension of time to
file and the extension of time to pay.
(g) Examples. The rules of this section
are illustrated by the following examples:
Example 1. (i) Corporation M, a calendar year
taxpayer, has its principal place of business in
County A in State X. Pursuant to a timely filed
request for extension of time to file, Corporation M’s
1999 Form 1120, “U.S. Corporation Income Tax
Return,” is due on September 15, 2000. Also due on
September 15, 2000, is Corporation M’s third quar-
ter estimated tax payment for 2000. Corporation
M’s 2000 third quarter Form 720, “Quarterly Federal
Excise Tax Return,” and third quarter Form 941,
“Employer’s Quarterly Federal Tax Return,” are due
on October 31, 2000. In addition, Corporation M
has an employment tax deposit due on September
15, 2000.
(ii) On September 1, 2000, a hurricane strikes
County A. On September 6, 2000, the President
declares a disaster within the meaning of section
1033(h)(3). The IRS determines that County A in
State X is a covered disaster area and publishes guid-
ance informing taxpayers that for acts described in
paragraph (c) of this section that are required to be
performed within the period beginning on
September 1, 2000, and ending on November 6,
2000, 90 days will be disregarded in determining
whether the acts are performed timely.
(iii) Because Corporation M’s principal place of
business is in County A, Corporation M is an affect-
ed taxpayer. Accordingly, Corporation M’s 1999
Form 1120 will be filed timely if filed on or before
December 14, 2000. Corporation M’s 2000 third
quarter estimated tax payment will be made timely if
paid on or before December 14, 2000. In addition,
because excise and employment tax returns are
described in paragraph (c) of this section,
Corporation M’s 2000 third quarter Form 720 and
third quarter Form 941 will be filed timely if filed on
or before January 29, 2001. However, because
deposits of taxes are excluded from the scope of para-
graph (c) of this section, Corporation M’s employ-
ment tax deposit is due on September 15, 2000. In
addition, Corporation M’s deposits relating to the
third quarter Form 720 are due without extension.
Example 2. The facts are the same as in Example
1, except that during 2000, Corporation M’s 1996
January 16, 20013242001–3 I.R.B.

Form 1120 is being examined by the IRS. Pursuant
to a timely filed request for extension of time to file,
Corporation M timely filed its 1996 Form 1120 on
September 15, 1997. Without application of this
section, the statute of limitations on assessment for
1996 income tax will expire on September 15, 2000.
However, pursuant to paragraph (c) of this section,
assessment of tax is one of the government acts for
which up to 90 days may be disregarded. The IRS
determines that an extension of the statute of limita-
tions is necessary and appropriate under these cir-
cumstances. Because the September 15, 2000, expi-
ration date of the statute of limitations on assessment
falls within the period of the disaster as described in
the IRS’s published guidance, the 90 day period dis-
regarded under paragraph (b) of this section begins
on September 16, 2000, and ends on December 14,
2000. Accordingly, the statute of limitations on
assessment for Corporation M’s 1996 income tax
will expire on December 14, 2000.
Example 3. The facts are the same as in Example
2, except that the examination of the 1996 taxable
year was completed earlier in 2000, and on July 28,
2000, the IRS mailed a statutory notice of deficien-
cy to Corporation M. Without application of this
section, Corporation M has 90 days (or until October
26, 2000) to file a petition with the Tax Court.
However, pursuant to paragraph (c) of this section,
filing a petition with the Tax Court is one of the tax-
payer acts for which up to 90 days may be disre-
garded. Because Corporation M is an affected tax-
payer, Corporation M’s petition to the Tax Court will
be filed timely if filed on or before January 24, 2001.
Example 4. (i) H and W, individual calendar year
taxpayers, intend to file a joint Form 1040, “U.S.
Individual Income Tax Return,” for the 2001 taxable
year and are required to file a Schedule H,
“Household Employment Taxes.” The joint return is
due on April 15, 2002. H and W fully and timely
paid all taxes for the 2001 taxable year, including
domestic service employment taxes, through with-
holding and estimated tax payments. H and W’s
principal residence is in County B in State Y.
(ii) On April 2, 2002, a severe ice storm strikes
County B. On April 5, 2002, the President declares
a disaster within the meaning of section 1033(h)(3).
The IRS determines that County B in State Y is a
covered disaster area and publishes guidance
informing taxpayers that for acts described in para-
graph (c) of this section that are required to be per-
formed within the period beginning on April 2, 2002,
and ending on April 19, 2002, 90 days will be disre-
garded in determining whether the acts are per-
formed timely.
(iii) Because H and W’s principal residence is in
County B, H and W are affected taxpayers. Because
April 15, 2002, the due date of H and W’s 2001
Form 1040 and Schedule H, falls within the period
of the disaster as described in the IRS published
guidance, the 90 day period disregarded under para-
graph (b) of this section begins on April 16, 2002,
and ends on July 14, 2002, a Sunday. Pursuant to
section 7503, if the last day for performing an act
falls on Saturday, Sunday, or a legal holiday, the per-
formance of the act shall be considered timely if it is
performed on the next succeeding day that is not a
Saturday, Sunday, or legal holiday. Accordingly, H
and W’s 2001 Form 1040 and Schedule H will be
filed timely if filed on or before July 15, 2002.
Example 5. (i) H and W, residents of County C in
State Z, want to file an amended return to request a
refund of 2001 taxes. H and W timely filed their
2001 income tax return on April 15, 2002. Without
application of section 7508A, under section 6511(a),
H and W’s amended 2001 tax return must be filed on
or before April 15, 2005.
(ii) On April 1, 2005, an earthquake strikes
County C. On April 5, 2005, the President declares
a disaster within the meaning of section 1033(h)(3).
The IRS determines that County C in State Z is a
covered disaster area and publishes guidance
informing taxpayers that for acts described in para-
graph (c) of this section that are required to be per-
formed within the period beginning on April 1, 2005,
and ending on April 19, 2005, 90 days will be disre-
garded in determining whether the acts are per-
formed timely.
(iii) Under paragraph (c) of this section, filing a
claim for refund of tax is one of the taxpayer acts for
which up to 90 days may be disregarded. Ninety
days are disregarded under paragraph (b)(1) of this
section beginning on April 16, 2005, and ending on
July 14, 2005. Accordingly, H’s and W’s claim for
refund for 2001 taxes will be timely if filed on or
before July 14, 2005. Moreover, in applying the
lookback period in section 6511(b)(2)(A), which
limits the amount of the allowable refund, the period
from July 14, 2005, back to April 16, 2005, is disre-
garded under paragraph (b)(2) of this section. Thus,
if the claim is filed on or before July 14, 2005,
amounts deemed paid on April 15, 2002, under sec-
tion 6513(b), such as estimated tax and tax withheld
from wages, will have been paid within the lookback
period of section 6511(b)(2)(A).
Example 6. (i) L is an unmarried, calendar year
taxpayer whose principal residence is located in
County R in State T. L does not timely file a 2001
Form 1040, “U.S. Individual Income Tax Return,”
which is due on April 15, 2002, and does not timely
pay tax owed on that return. Absent reasonable
cause, L is subject to the failure to file and failure to
pay penalties under section 6651 beginning on April
16, 2002.
(ii) On May 10, 2002, a tornado strikes County R.
On May 14, 2002, the President declares a disaster
within the meaning of section 1033(h)(3). The IRS
determines that County R in State T is a covered dis-
aster area and publishes guidance informing taxpay-
ers that for acts described in paragraph (c) of this
section that are required to be performed within the
period beginning on May 10, 2002, and ending on
June 27, 2002, 90 days will be disregarded in deter-
mining whether the acts are timely.
(iii) On May 31, 2002, L files a 2001 Form 1040,
“U.S. Individual Income Tax Return,” and pays the
tax owed for 2001.
(iv) Because L’s principal residence is in County
R, L is an affected taxpayer. For purposes of penal-
ties under section 6651, 90 days are disregarded
under paragraph (b) of this section beginning on
May 10, 2002. Because L files the return on May
31, 2002, the penalties under section 6651 will run
from April 16, 2002, until May 10, 2002. Because
there is no extension of time to file returns under
section 6081 and no extension of time to pay under
section 6161, interest is not abated under section
6404(h), and L is liable for the underpayment inter-
est for the entire period of April 16, 2002, through
May 31, 2002.
Example 7. The facts are the same as in Example
6, except L does not file the 2001 Form 1040 until
November 25, 2002. Ninety days are disregarded
under paragraph (b) of this section beginning on May
10, 2002, and ending on August 8, 2002. Therefore,
the section 6651 penalties will run from April 16,
2002, until May 10, 2002, and from August 9, 2002,
until November 25, 2002. Because there is no exten-
sion of time to file returns under section 6081 and no
extension of time to pay under section 6161, interest is
not abated under section 6404(h), and L will remain
liable for underpayment interest for the entire period of
April 16, 2002, through November 25, 2002.
Example 8. (i) H and W, individual calendar year
taxpayers, intend to file a joint Form 1040, “U.S.
Individual Income Tax Return,” for the 2001 taxable
year. The joint return is due on April 15, 2002. After
credits for withholding under section 31 and estimated
tax payments, H and W owe tax for the 2001 taxable
year. H and W’s principal residence is in County D in
State Q.
(ii) On March 1, 2002, severe flooding strikes
County D. On March 5, 2002, the President declares
a disaster within the meaning of section 1033(h)(3).
The IRS determines that County D in State Q is a cov-
ered disaster area and publishes guidance informing
taxpayers that for acts described in paragraph (c) of
this section that are required to be performed within
the period beginning on March 1, 2002, and ending on
April 25, 2002, 90 days will be disregarded in deter-
mining whether the acts are performed timely. The
guidance also grants affected taxpayers an additional
6-month extension of time to file returns under section
6081 and an additional 6-month extension of time to
pay under section 6161.
(iii) Because H and W’s principal residence is in
County D, H and W are affected taxpayers. Pursuant to
the published guidance, H and W have until January
13, 2003, to file their return and pay the tax. This date
is computed as follows: Under sections 6081 and
6161, H and W will have an additional 6 months, until
October 15, 2002, to file and pay the tax. Further,
under paragraph (f) of this section, 90 days are disre-
garded in determining the period of the extension.
Therefore, H and W’s return and payment of tax will be
timely if filed and paid on or before January 13, 2003.
In addition, under section 6404(h), underpayment inter-
est under section 6601 is abated for the entire period,
from April 16, 2002, until January 13, 2003.
(h) Effective date. This section applies
to disasters declared after December 30,
1999.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved November 30, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 14, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 15, 2000,
65 F.R. 78409)
2001–3 I.R.B.325January 16, 2001

Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3 page 319.
Section 7702B.—Treatment of
Qualified Long-Term Care
Insurance
The Service provides an inflation adjustment to
the stated dollar amount of the per diemlimitation
regarding periodic payments received under a quali-
fied long-term care insurance contract or periodic
payments received under a life insurance contract
that are treated as paid by reason of the death of a
chronically ill individual for calendar year 2001. See
Rev. Proc. 2001–13, page 337.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2001. See Rev. Rul. 2001–3 page 319.
January 16, 20013262001–3 I.R.B.

Partnership Termination - Final
Short-Year Tax Return
Notice 2001–5
This notice provides guidance to part-
nerships regarding the need to file a final
short-year partnership tax return follow-
ing a partnership termination under
§708(b)(1)(B) of the Internal Revenue
Code. Questions have arisen regarding
whether a terminated partnership files a
final short-year tax return given that the
new partnership resulting from the termi-
nation will continue to use the employer
identification number of the terminated
partnership.
A partnership terminates for tax pur-
poses under § 708(b)(1)(B) as a result of
the sale or exchange of 50 percent or more
of the total interest in partnership capital
and profits within a 12-month period. The
regulations under § 708(b) were modified
in 1997 to provide that following the ter-
mination of a partnership, the terminated
partnership is deemed to contribute all its
assets and liabilities to a new partnership
in exchange for an interest in the new
partnership; and, immediately thereafter,
the terminated partnership distributes
interests in the new partnership to the pur-
chasing partner and the other remaining
partners in proportion to their respective
interests in the terminated partnership in
liquidation of the terminated partnership.
Section 301.6109–1(d)(2)(iii) of the
Procedure and Administration Regulations
provides that the new partnership that is
formed as a result of the termination of a
partnership under § 708(b)(1)(B) will retain
the employer identification number of the
terminated partnership.
Section 1.706–1(c)(1) of the Income
Tax Regulations provides that in the case
of a termination, the partnership taxable
year closes for all partners as of the date
of termination. Thus, the taxable year of
the partnership terminates with the termi-
nation of the partnership under
§ 708(b)(1)(B). Under § 6031(a) every
partnership that is required to file a return
must file a return of partnership income
for each taxable year of the partnership.
Under § 443(a)(2), a return is required
to be made for a period of less than 12
months if the taxpayer is in existence for
only part of what would otherwise be its
taxable year.
Accordingly, a partnership that termi-
nates under § 708(b)(1)(B) is required to
file a short-year final return for the taxable
year ending with the date of its termina-
tion. The new partnership is required to
file a return for its taxable year beginning
after the date of termination of the termi-
nated partnership.
The principal author of this notice is
Stephen J. Coleman of the Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this notice contact Mr.
Coleman at (202) 622-3060 (not a toll
free call).
Air Transportation Excise Tax;
Amount Paid for the Right to
Award Miles
Notice 2001–6
This notice provides rules relating to
the air transportation tax imposed by
§ 4261(a) of the Internal Revenue Code
on amounts paid for the right to provide
mileage awards. The notice reflects
changes made by § 1031(c)(2) of the
Taxpayer Relief Act of 1997, 1997–4
(Vol. 1) C.B. 2, 144, which added
§ 4261(e)(3) to the Code. Section
4261(e)(3) provides that the tax imposed
by § 4261(a) applies to any amount paid
(and the value of any other benefit provid-
ed) for the right to provide mileage
awards for, or other reductions in the cost
of, any transportation of persons by air.
The Treasury Department and the Internal
Revenue Service expect to issue the sub-
stance of this notice as a regulation at a
later date. Until that regulation is pub-
lished, persons responsible for collecting
the tax and persons responsible for paying
the tax may rely on the guidance provided
in this notice.
Section 4261(a) imposes a 7.5 percent
excise tax on amounts paid for taxable
transportation. Taxable transportation
includes most domestic air transportation
(that is, transportation between points in
the United States) and certain air trans-
portation beginning or ending in southern
Canada or northern Mexico. With the
exception of these Canadian and Mexican
flights, the tax does not apply to air trans-
portation between the United States and a
foreign country, which is subject to the
international arrival and departure tax
imposed by § 4261(c), or to entirely for-
eign air transportation, which is not taxed.
Section 4261(e)(3) was enacted for the
purpose of “clarifying that the air trans-
portation excise tax applies to payments
to air carriers (and related parties) for the
right to award air travel benefits.” H.R.
Conf. Rep. No. 105–220, at 555 (1997),
1997–4 (Vol. 2) C.B. 2025. Thus, because
the Treasury Department and the IRS
have concluded that this clarification was
intended as a backstop to the 7.5 percent
tax imposed by § 4261(a), the new
mileage award rules should not apply with
respect to mileage awards for air trans-
portation that would not, under any cir-
cumstances, be subject to the tax imposed
by § 4261(a) or with respect to mileage
awards that will otherwise be fully subject
to that tax.
Regulations under § 4261(e)(3) will
provide the following rules concerning
mileage awards:
(1) Amounts paid for mileage awards
that cannot be redeemed for taxable trans-
portation (for example, awards usable
only on a foreign air carrier) are not sub-
ject to tax.
(2) Amounts paid by an air carrier to
another air carrier, whether foreign or
domestic, for mileage awards that can be
redeemed for taxable transportation are
not subject to tax to the extent those miles
will be awarded in connection with the
purchase of air transportation subject to
the tax imposed by § 4261(a).
(3) Amounts paid by an air carrier to
another air carrier, whether foreign or
domestic, for mileage awards that can be
redeemed for taxable transportation are
subject to tax to the extent those miles will
be awarded other than in connection with
the purchase of air transportation subject
to the tax imposed by § 4261(a).
Air carriers may use any reasonable
method to allocate amounts paid (and the
value of any other benefits provided)
between purchased mileage that cannot be
redeemed for taxable transportation or
that will be awarded in connection with
the purchase of air transportation that is
2001–3 I.R.B.327January 16, 2001
Part III. Administrative, Procedural, and Miscellaneous

subject to the tax imposed by § 4261(a)
and purchased mileage that does not meet
either of these conditions.
These rules apply to amounts paid after
September 30, 1997. However, any
amount paid after June 11, 1997, by one
member of a controlled group for a
mileage award that is furnished by anoth-
er member of the controlled group after
September 30, 1997, is treated as paid
after September 30, 1997.
The principal author of this notice is
Patrick S. Kirwan of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this notice contact Mr.
Kirwan at (202) 622-3130 (not a toll-free
call).
Inflation-Adjusted Amounts for
2001
Notice 2001–12
PURPOSE
This notice clarifies Rev. Proc.
2001–13, 2001–3 I.R.B. (Jan. 16, 2001),
to provide that the inflation-adjustment
amounts set forth in Part I of section 3 of
that revenue procedure are the applicable
amounts for 2001 in light of recently
enacted legislation.
BACKGROUND
Section 3 of Rev. Proc. 2001–13,
released on December 15, 2000, set forth
two alternative sets of inflation adjust-
ment figures for 2001 for certain items.
Part I of section 3 provided the figures for
these items that would apply if certain
legislation, pending on the date of
release, were to be enacted. Part II of sec-
tion 3 provided alternative figures for
these items that would apply if the pend-
ing legislation were not enacted. Section
2.02 of Rev. Proc. 2001–13 stated that the
Service would issue subsequent notifica-
tion clarifying whether the amounts set
forth in Part I or Part II of section 3 are in
fact the appropriate figures for 2001.
The then-pending legislation was sub-
sequently enacted as section 308 of H.R.
5662, the Community Renewal Tax Relief
Act of 2000 (the “Act”), the text of which
was incorporated by reference in section
1(a)(7) of the Consolidated Appropria-
tions Act of 2001, Public Law 106–554,
106th Cong., 2nd Sess. (Dec. 21, 2000).
APPLICATION
As a result of section 308 of the Act,
the tax tables and other items adjusted
for inflation for 2001 in Rev. Proc.
2001–13 are required to reflect the
unpublished corrections made by the
Bureau of Labor Statistics in the
Consumer Price Index for All Urban
Consumers for September 1999 through
December 1999. Thus, the applicable
inflation-adjusted amounts for 2001 are
those set forth in Part I of section 3 of
Rev. Proc. 2001–13. Part II of section 3
should be disregarded. The specific
items that are affected are:
(1) the tax rate tables (set forth in sec-
tion 3.01);
(2) certain figures relating to the
earned income tax credit (section 3.03);
(3) the aggregate amount of gifts
received from foreign persons for purpos-
es of information reporting under § 6039F
(section 3.22); and
(4) the amount used to determine the
validity of certain tax liens under
§ 6323(b)(7) (section 3.23).
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2001–13 is clarified.
DRAFTING INFORMATION
The principal author of this notice is Paul
E. Tellier of the Office of Associate Chief
Counsel (Income Tax & Accounting). For
further information regarding this notice
contact Mr. Tellier at (202) 622-4930 (not
a toll-free call).
26 CFR. 601.602: Tax forms and instructions. (Also
Part I, secs. 6011, 6061, 6071, 6651; 31.6011(a)–3,
31.6011(a)–7, 31.6061–1, 301.6061–1,
31.6071(a)–1, 301.6651–1)
Rev. Proc. 2001–9
Table of Contents
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
SECTION 3. SCOPE
SECTION 4. DEFINITIONS
SECTION 5. APPLICATION FOR THE
FORM 940 e-file PROGRAM
SECTION 6. ACCEPTANCE IN THE
FORM 940 e-file PROGRAM
SECTION 7. ELECTRONIC FILING OF
FORM 940
SECTION 8. RESPONSIBILITIES OF
PARTICIPANTS IN FORM 940 e-file
PROGRAM
SECTION 9. ALTERNATIVE FILING
PROCEDURES
SECTION 10. REVISION OF COM-
PUTER SPECIFICATIONS BY THE
SERVICE
SECTION 11. ADVERTISING STAN-
DARDS
SECTION 12. REASONS FOR SUS-
PENSION
SECTION 13. ADMINISTRATIVE RE-
VIEW PROCESS FOR PROPOSED
SUSPENSION
SECTION 14. EFFECT OF SUSPENSION
SECTION 15. APPEAL OF SUSPEN-
SION
SECTION 16. PENALTY FOR FAIL-
URE TO TIMELY FILE A RETURN
SECTION 17. INTERNAL REVENUE
SERVICE CONTACT
SECTION 18. EFFECT ON OTHER
DOCUMENTS
SECTION 19. EFFECTIVE DATE
SECTION 20. PAPERWORK REDUC-
TION ACT
SECTION 1. PURPOSE
This revenue procedure provides the
requirements for electronically filing the
Form 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return in the
“Form 940 e-fileProgram.” Under “IRS
e-filefor Business,” there are two options
for electronically filing Form 940: 940 e-
fileOption and 940 On-Line Option, both
similar to the 941 e-fileand 941 On-Line
options. There is no 940 TeleFile option at
this time. The technical specifications for
filing Form 940 electronically are pub-
lished separately in Publication 3715,
Technical Specifications Guide for the
Electronic Filing of Form 940, Employer’s
Annual Federal Unemployment (FUTA)
Tax Return.This revenue procedure does
not address the requirements of the Form
941 e-fileProgram, which can be found in
Rev. Proc. 99–39, 1999–2 C.B. 532.
SECTION 2. BACKGROUND
.01 Section 6011(a) of the Internal
Revenue Code provides that any person
January 16, 20013282001–3 I.R.B.

liable for any tax imposed by this title, or
for the collection thereof, must make a
return or statement according to the forms
and regulations prescribed by the
Secretary. Every person required to make
a return or statement must include therein
the information required by such forms or
regulations.
.02 Section 31.6011(a)–3 of the
Regulations on Employment Taxes and
Collection of Income Tax at Source pro-
vides in general that every person must
make a return of tax under the Federal
Unemployment Tax Act for each calendar
year in which the person is an employer as
defined in section 31.3306(a)–1. Except
as otherwise provided, Form 940 is the
form prescribed for making the return.
.03 Section 31.6011(a)–7 provides that
each return, together with any prescribed
copies or supporting data, must be filled
in and disposed of in accordance with the
forms, instructions, and regulations
applicable thereto. The return may be
made by an agent in the name of the per-
son required to make the return if an
acceptable power of attorney is filed with
the Internal Revenue Service office with
which such person is required to file
returns and if such a return includes all
taxes required to be reported by such per-
son on such return. Form 8655, Reporting
Agent Authorization for Magnetic
Tape/Electronic Filers, is an acceptable
power of attorney, if prepared in accor-
dance with the requirements set forth in
Rev. Proc. 96–17, 1996–1 C.B. 633, as
modified by section 18 of this revenue
procedure.
.04 Section 31.6061–1 provides that the
return may be signed for the taxpayer by
an agent that is fully authorized in accor-
dance with section 31.6011(a)–7 to make
such return. An agent may sign the Form
940 on behalf of a taxpayer that has a
valid form on file with the Service.
.05 Section 301.6061–1 of the Regula-
tions on Procedure and Administration
provides that the Secretary may prescribe
in forms, instructions, or other appropriate
guidance the method for signing any
return, statement, or other document
required to be made under any provision
of the internal revenue laws or regula-
tions. The Service has prescribed in
Publication 3715 that an electronically-
filed Form 940 is signed by the entry of
the Authorized Signatory’s Personal
Identification Number (“PIN”).
.06 Section 31.6071(a)–1(c) generally
provides that each return of the tax
imposed by the Federal Unemployment
Tax Act required to be made under section
31.6011(a)–3 must be filed on or before
the last day of the first calendar month
following the period for which it is made.
However, that regulation also provides
that a return may be filed on or before the
10th day of the second calendar month
following the tax period if timely deposits
under section 6302(c) of the Code and the
regulations thereunder have been made in
full payment of such tax due for the peri-
od.
.07 Procedures for the magnetic filing
of Form 940 are in Rev. Proc. 96–18,
1996–1 C.B. 637, and the specifications
are in Publication 1314. For further infor-
mation, see Publication 1314, Form
940—Employer’s Federal Unemployment
Tax Return (FUTA): File Specifications,
Processing Criteria, and Record Layouts
for Magnetic Tape Filing.
SECTION 3. SCOPE
.01 The Form 940 e-fileProgram
applies to electronically-filed Forms 940
for the year ending December 31, 2000,
and thereafter that are timely filed. Late
and/or amended Forms 940 must not be
filed electronically. A violation of these
restrictions may cause a Processing
Interruption (as defined in section 4.10 of
this revenue procedure). Late and/or
amended Forms 940 must be filed by
paper only.
.02 The Form 940 e-fileProgram
applies only to the Form 940. The Form
940 e-fileProgram does notapply to the
Form 940 (PR), Employer’s Annual
Federal Unemployment (FUTA) Tax
Return (Puerto Rican Version)or the
Form 940 EZ, Employer’s Annual Federal
Unemployment (FUTA) Tax Return. Do
not file the listed forms electronically.
Taxpayers who currently file a paper
Form 940 EZ, however, may wish to elec-
tronically file a Form 940.
SECTION 4. DEFINITIONS
.01Form 940 e-file Program. The pro-
gram within “IRS e-filefor Business” that
provides two options for electronically fil-
ing Forms 940, Employer’s Annual
Federal Unemployment (FUTA) Tax
Return:940 e-fileOption and 940 On-
Line Option.
.02 940 e-file Option.The option for
electronically filing a Form 940 in the
Form 940 e-fileProgram that allows tax-
payers to use a Reporting Agent to pre-
pare, sign and electronically file Form 940
for the taxpayer.
.03 940 On-Line Option.The option
for electronically filing a Form 940 in the
Form 940 e-fileProgram that allows tax-
payers to use the World Wide Web, via a
Transmitter, to electronically file Form
940.
.04 Authorized Signatory. An
Authorized Signatory is a person who is
authorized to use a PIN to sign returns
filed by or through an Electronic Filer
under the Form 940 e-fileProgram or dur-
ing software development testing.
.05 Electronic Filer.An Electronic
Filer may be a:
(1) Reporting Agent.A Reporting
Agent (“Agent”), commonly called a
“payroll service,” is an accounting ser-
vice, franchiser, bank, or other person that
complies with Rev. Proc. 96–17, as modi-
fied by section 18 of this revenue proce-
dure, and is authorized to prepare, sign,
and electronically file a Form 940 for a
taxpayer by using the 940 e-fileOption of
the Form 940 e-fileProgram;
(2) Software Developer.A Software
Developer develops software for the pur-
poses of (a) formatting returns according
to the Service’s electronic return specifi-
cations in Publication 3715; and/or (b)
transmitting electronic returns directly to
the Service. A Software Developer may
also sell its software. A Software
Developer may develop software for the
940 e-fileOption and/or the 940 On-Line
Option of the Form 940 e-fileProgram; or
(3) Transmitter.A Transmitter is a
firm, organization, or individual that
receives returns and Letters of
Application electronically from its clients,
reformats the data (if necessary), batches
the data with returns or electronic Letters
of Application from other clients, and then
transmits the data to the Service. A
Transmitter does not have signature
authority for the taxpayers that it services.
A Transmitter receives the data from its
clients via the World Wide Web and trans-
mits the data to the Service by using the
On-Line Option of the Form 940 e-file
Program.
2001–3 I.R.B.329January 16, 2001

.06 On-Line Filer.An On-Line Filer is
a taxpayer that electronically files a Form
940 through a Transmitter using a person-
al computer, modem, and commercial tax
preparation software.
.07 Electronic Filing Help DesksThe
Electronic Filing Help Desks (“e-file”Help
Desks) in Austin, Texas, and in Memphis,
Tennessee, are responsible for the adminis-
tration of the Form 940 e-fileProgram. See
section 17 of this revenue procedure for a
description of their respective responsibili-
ties, and the address and telephone number
of each e-fileHelp Desk.
.08 Letter of Application.A Letter of
Application (“LOA”) is a paper or elec-
tronic request that is submitted to the
Service by a prospective Electronic Filer
or On-Line Filer to participate in the Form
940 e-fileProgram and, if submitted by an
Authorized Signatory, to receive a
Personal Identification Number. A sam-
ple LOA is printed in Publication 3715.
.09 Personal Identification Number.A
Personal Identification Number (“PIN”) is
a number assigned by the Service to the
Authorized Signatory for purposes of
signing an electronically-filed Form 940.
.10 Processing Interruption.A
Processing Interruption is an abnormal
termination of a program run caused by
the electronic data submitted by an
Electronic Filer.
.11 Reporting Agent Authorization.A
Reporting Agent Authorization
(“Authorization”) allows a taxpayer to
designate an Agent. The Authorization
may be submitted on Form 8655, or any
other instrument that complies with Rev.
Proc. 96–17, as modified by section 18 of
this revenue procedure. An Authorization
must be submitted for each taxpayer on
the Reporting Agent’s List.
.12 Reporting Agent’s List.For purpos-
es of the Form 940 e-fileProgram, a
Reporting Agent’s List (“Agent’s List”)
identifies all taxpayers for whom an
Agent will file Forms 940 electronically.
A separate Authorization must be submit-
ted for each taxpayer on the Agent’s List.
The Agent’s List must contain each tax-
payer’s employer identification number
(“EIN”).
.13User identification/password.The
user identification/password (“userid/pass-
word”) consists of an identification number
(userid) issued by the Service and a confi-
dential set of characters (password) that,
when used in conjunction with each other,
permit an Electronic Filer access to the
Form 940 e-fileProgram.
.14 Validated Reporting Agent’s List.A
Validated Reporting Agent’s List
(“Validated Agent’s List”) is a list of tax-
payers and their EINs prepared by an
Agent that is confirmed and assigned
name controls by the Service. A Validated
Agent’s List is to be used as a source for
the identification of each taxpayer by an
Electronic Filer that is an Agent. Once the
Service returns a Validated Agent’s List,
the Agent must use it to fill in certain
required fields (for example, the name
control field) of the electronic transmis-
sion. See Publication 3715.
SECTION 5. APPLICATION FOR THE
FORM 940 e-file PROGRAM
.01 A prospective Electronic Filer must
first submit an LOA to the Service to par-
ticipate in the Form 940 e-fileProgram.
The LOA of a prospective Electronic Filer
may be submitted electronically or by
paper. See Publication 3715 for a sample
LOA for an Agent, a Software Developer,
and a Transmitter, and the application pro-
cedures.
.02 A prospective On-Line Filer must
submit an electronic LOA through a
Transmitter to participate in the Form 940
e-fileProgram. A prospective On-Line
Filer must use the electronic LOA provid-
ed in the commercial tax preparation soft-
ware used by the taxpayer in order to par-
ticipate in the Form 940 e-fileProgram.
The Transmitter is required to batch and
bundle the electronic LOA files, and then
transmit those files to the Service. The
Transmitter is required to send an
acknowledgment to the On-Line Filer to
verify that the electronic LOA was trans-
mitted successfully to the Service.
.03 In addition to the LOA, an Agent
must also include an Agent’s List, provid-
ing the names of all taxpayers for which it
will file returns. Each name on the
Agent’s List must be accompanied by an
Authorization made on Form 8655, or
acceptable substitute, except as provided
in section 5.04 of this revenue procedure.
See Rev. Proc. 96–17, as modified by sec-
tion 18 of this revenue procedure, for gen-
eral instructions on preparing Form 8655.
See section 6.10 of this revenue procedure
for instructions on adding names to, or
deleting names from, the Agent’s List.
.04 A revised Authorization is not
required to replace an Authorization made
on Form 8655 with a revision date before
October 1995 (or its equivalent) that was
previously submitted to the Service by an
Agent, if the Authorization places no
restriction on the medium for filing Form
940, and the Agent:
(1) advises its client that its Forms
940 may be filed electronically, and pro-
vides the client with the option of reject-
ing electronic filing as the medium for fil-
ing its Forms 940. An Agent may use the
most efficient and timely method of clear-
ly providing this notification to a client. A
client’s rejection of electronic filing for its
Forms 940 must be submitted in writing
to the Agent; and
(2) immediately removes from its
electronic filing client base any client that
rejects having its Forms 940 filed elec-
tronically.
SECTION 6. ACCEPTANCE IN THE
FORM 940 e-filePROGRAM
.01 A prospective Electronic Filer or
On-Line Filer will receive an acceptance
or rejection regarding its LOA for the
Form 940 e-fileProgram within 45 days
of the Service’s receipt of their completed
LOA.
.02 An Electronic Filer that is accepted
in the Form 940 e-fileProgram will be
required to submit a successful test trans-
mission before being granted approval to
file tax returns. Details regarding test
requirements may be found in Publication
3715.
.03 After evaluating the test file, the
Service will notify an Electronic Filer in
writing of approval or denial of electronic
filing privileges. An approval remains in
effect unless the Electronic Filer:
(1) that is an Agent fails to comply
with the Authorization requirements of
sections 5.03 and 5.04 of this revenue
procedure;
(2) that is a Software Developer fails
to comply with the requirements of sec-
tion 8.04 of this revenue procedure;
(3) that is a Transmitter fails to com-
ply with the requirements of section 8.03
of this revenue procedure; or
(4) is suspended from the Form 940
e-fileProgram. See section 14 of this rev-
January 16, 20013302001–3 I.R.B.

enue procedure for the effect of a suspen-
sion.
.04 The acceptance by the Service of a
Software Developer as an Electronic
Filer:
(1) establishes only that the test elec-
tronic transmission(s) are formatted prop-
erly and may be processed by the Service;
(2) is not an endorsement by the
Service of the software or the quality of
services provided by the Software
Developer; and
(3) does not entitle the Software
Developer to electronically file Forms
940 unless the Software Developer is also
accepted in the Form 940 e-fileProgram
as an Agent or Transmitter.
.05 If an LOA is approved, the Service
will send the following:
(1) for an Electronic Filer, a notifica-
tion of approval that will contain the
userid/password, and information and
procedures regarding signing onto the
system for electronically filing Forms
940; and
(2) for an Authorized Signatory, a
PIN that may be used only by the
Authorized Signatory named in the LOA.
.06 Upon receipt of the document(s)
referenced in section 6.05 of this revenue
procedure, the Electronic Filer must
return the following documents to the
Service:
(1) an acknowledgment signed by
each employee recipient of the userid/pass-
word indicating possession of, and respon-
sibility for, the userid/password; and
(2) where applicable, an acknowl-
edgment signed by the Authorized
Signatory indicating possession of, and
responsibility for, the proper use of the
PIN for signing tax returns (pursuant to
§ 301.6061–1) filed in the Form 940 e-file
Program.
See Publication 3715 for a sample
userid/password and PIN receipt.
.07 Upon receipt of the PIN referenced
in section 6.05(2) of this revenue proce-
dure, the On-Line Filer must return an
acknowledgment signed by the
Authorized Signatory indicating posses-
sion of, and responsibility for, the proper
use of the PIN for signing tax returns
(pursuant to § 301.6061–1) filed in the
Form 940 e-fileProgram.
.08 The Service will activate the
userid/password and the PIN upon receiv-
ing the Electronic Filer’s or On-Line
Filer’s acknowledgments referenced in
sections 6.06 and 6.07 of this revenue pro-
cedure.
.09 If a prospective Electronic Filer that
is an Agent is denied, or does not receive,
approval to participate in the Form 940
e-fileProgram before the end of the year
for which the Forms 940 will be filed, the
Agent may file the Forms 940 on magnet-
ic tape (if the Agent meets the require-
ments of Rev. Proc. 96–18) or prepare
paper Forms 940. See section 9.02 of this
revenue procedure for the circumstances
that must exist for an Electronic Filer who
is an Agent to use a Form 8655 as author-
ity to sign and file a paper Form 940.
.10 After a Reporting Agent is notified
that the application for electronically fil-
ing Forms 940 has been approved, the
Agent may need to add and delete taxpay-
ers’ names from the Agent’s List.
(1) To add taxpayers, the Agent must
submit an Add Llist with names to be
added, their respective employer identifi-
cation numbers, and Authorization for
each taxpayer added to the Agent’s List.
The Service will validate and mail the val-
idated Add List to the Agent within 10
business days of receiving the Add List.
(2) To delete taxpayers, the Agent
must submit a Delete List with the names
to be deleted, and if known, a short state-
ment indicating which taxpayers will not
remain in business.
SECTION 7. ELECTRONIC FILING OF
FORM 940
.01 An Electronic Filer that is an Agent
must ensure that a current electronic Form
940 is filed on or before the due date of
the return. The due dates prescribed for
filing paper Forms 940 with the Service
also apply to returns filed under the Form
940 e-fileProgram. Forms 940 are due on
or before the last day of the first calendar
month following the calendar year for
which the return is made. However, a
return for which all tax deposits were
made when due may be filed by the 10th
day of the second calendar month follow-
ing the end of the calendar year.
.02 An Electronic Filer that is a
Transmitter must ensure that an electronic
Form 940 is transmitted to the Service on
or before the due date of the return, as
described in sec. 7.01, without regard to
extensions.
.03 An electronically-filed Form 940 is
not considered filed until it has been
acknowledged as accepted for processing
by the Service. If an electronically-filed
Form 940 is transmitted to the Service on
or before the return due date, and
acknowledged as accepted for processing,
the return will be deemed timely filed. If
an electronically-filed Form 940 is initial-
ly transmitted to the Service on or before
the return due date and is ultimately
rejected, but the Electronic Filer complies
with section 7.04 or 7.05 of this revenue
procedure, as appropriate, and the On-
Line Filer also complies with section 7.06
of this revenue procedure, the return will
be deemed timely filed.
.04 An electronic transmission that
causes a Processing Interruption will not
be accepted for processing by the Service.
An Electronic Filer that is an Agent will
be asked to resubmit the return(s). If the
electronic transmission is acknowledged
as rejected by the Service, the Agent
should correct the error(s) and retransmit
the return(s) on the same calendar day. If
the Agent chooses not to have the previ-
ously-rejected return retransmitted, or if
the return still cannot be accepted for pro-
cessing, a paper Form 940 (or a Form 940
on magnetic tape if the Electronic Filer
meets the requirements of Rev. Proc.
96–18) must be filed by the later of: (1)
the due date of the return; or (2) within
five calendar days of the rejection or
notice that the return cannot be retrans-
mitted, with an explanation of why the
return is being filed after the due date.
For the penalty for failure to file a timely
return, see section 16 of this revenue pro-
cedure.
.05 If a Processing Interruption occurs
with an Electronic Filer that is a
Transmitter, and the Transmitter cannot
promptly correct any transmission error
that causes an electronic transmission to
be rejected, then the Transmitter, within
24 hours of receiving the rejection
acknowledgment, must take reasonable
steps to inform the On-Line Filer that the
return has not been filed. When the
Transmitter advises the On-Line Filer that
the return has not been filed, the
Transmitter must provide the On-Line
Filer with the reject code(s), an explana-
tion of the reject code(s), and the
2001–3 I.R.B.331January 16, 2001

sequence number of each reject code(s).
See Publication 3715 for an explanation
of the reject codes.
.06 If the On-Line Filer chooses not to
have the electronic portion of the return
corrected and transmitted to the Service,
or if the electronic portion of the return
cannot be accepted for processing by the
Service, the On-Line Filer must file a
paper Form 940 by the later of: (1) the due
date of the return; or (2) within five cal-
endar days of the rejection acknowledg-
ment described in section 7.05, with an
explanation of why the return is being
filed after the due date. For the penalty
for failure to file a timely return, see sec-
tion 16 of this revenue procedure.
SECTION 8. RESPONSIBILITIES OF
PARTICIPANTS IN FORM 940 e-file
PROGRAM
.01 To ensure that complete returns are
accurately and efficiently filed, Electronic
Filers must comply with the technical
specifications detailed in Publication
3715.
.02 An Electronic Filer or On-Line Filer
must comply with the following applica-
ble userid/password and PIN require-
ments:
(1) if an Electronic Filer suspects
that the confidentiality of the userid/pass-
word has been compromised, the
Electronic Filer must contact the Austin,
Texas, e-fileHelp Desk within 24 hours
for instructions on how to proceed. See
section 17 of this revenue procedure for
Service contact information;
(2) the Electronic Filer or On-Line
Filer is responsible for ensuring that the
PIN remains the confidential information
of the Authorized Signatory. If the
Electronic Filer or On-Line Filer suspects
that the confidentiality of the PIN has
been compromised, the Electronic Filer or
On-Line Filer must contact the Austin,
Texas, e-fileHelp Desk within 24 hours
for instructions on how to proceed. See
section 17 of this revenue procedure for
Service contact information;
(3) if the Authorized Signatory
changes, the Electronic Filer or On-Line
Filer must notify the Service of the name
and title of the new Authorized Signatory
for the electronically-filed Form 940 and
apply for a new PIN no later than 15 days
before the filing of another return. After
this notification, the Service will deacti-
vate the current PIN and issue a new PIN
to the new Authorized Signatory. The
new Authorized Signatory must submit a
PIN receipt as specified in section 6.06 or
6.07 of this revenue procedure in order to
activate the new PIN; and
(4) the Authorized Signatory must
manually enter the PIN signature for each
transmission of electronically-filed Forms
940.
.03 An Electronic Filer that is a
Transmitter must:
(1) retrieve the acknowledgment file
(in which the Service states whether it
accepts or rejects the electronic portion of
a taxpayer’s return for processing) within
two work days of transmission;
(2) match the acknowledgment file
to the original transmission file and send
to the On-Line Filer either:
(a) an acceptance notice within
two days of retrieving the acknowledg-
ment file; or
(b) a rejection notice within 24
hours of retrieving the acknowledgment
file;
(3) immediately contact the appro-
priate service center for further instruc-
tions if an acknowledgment of acceptance
for processing has not been received by
the Transmitter within two work days of
transmission or if a Transmitter receives
an acknowledgment for a return that was
not transmitted on the designated trans-
mission;
(4) promptly correct any transmis-
sion error that causes an electronic trans-
mission to be rejected; and
(5) ensure the security of all trans-
mitted data.
.04 An Electronic Filer that is a
Software Developer must:
(1) promptly correct any software
error that may cause, or causes, an elec-
tronic return to be rejected;
(2) promptly distribute any such soft-
ware correction;
(3) ensure that any software package
that will be used to transmit returns from
multiple Electronic Filers that are Agents has
the capability of combining these returns
into one Service transmission file; and
(4) not incorporate into its software a
Service-assigned PIN.
.05 An Agent must retain the following
material for four years after the due date
of the return, unless otherwise notified by
the Service:
(1) a complete copy of the electroni-
cally-filed Form 940;
(2) a copy of the Service’s acknowl-
edgement of receipt of the return; and
(3) a copy of each Authorization.
.06 An Electronic Filer that is an Agent
or a Transmitter must:
(1) provide the taxpayer with a copy
of the taxpayer’s electronically-filed
Form 940. This information may be pro-
vided on a replica or an official form or in
any other format that provides all of the
return information and references the line
numbers of the official form);
(2) advise the taxpayer to retain a
copy of the return and any supporting
material; and
(3) provide the taxpayer, upon
request, with the date the return was trans-
mitted to the Service and the date the
Service acknowledged receipt of the tax-
payer’s return.
SECTION 9. ALTERNATIVE FILING
PROCEDURES
.01 Procedures for the filing of Form
940 on magnetic tape are in Rev. Proc.
96–18 and the specifications are in
Publication 1314.
.02 An Electronic Filer that is an Agent
may use an Authorization to sign and file
a paper Form 940 under the following cir-
cumstances:
(1) the late receipt of payroll infor-
mation from a taxpayer would jeopardize
the timely submission of the taxpayer’s
return;
(2) the amendment of returns filed
under the Form 940 e-fileProgram;
(3) the rejection of an electronic
transmission that would jeopardize the
timely submission of the taxpayer’s
return;
(4) an authorization by the Service
for an Agent to file paper Forms 940
instead of electronically-filed Forms 940;
(5) the suspension of an Agent from
the Form 940 e-file Program as provided
in section 14.02(3) of this revenue proce-
dure; or
(6) a prospective Electronic Filer that
is an Agent is denied, or does not receive,
approval to participate in the Form 940
e-file Program before the end of the year
for which the Forms 940 will be filed.
.03 An Agent may prepare a paper
Form 940 for the taxpayer’s signature. A
taxpayer’s authorized representative that
January 16, 20013322001–3 I.R.B.

is not an Agent participating in the Form
940 e-fileProgram (including a suspended
Agent) must have a valid power of attor-
ney (usually a Form 2848, Power of
Attorney and Declaration of
Representative) that authorizes the repre-
sentative to sign and file a paper Form 940
on behalf of a taxpayer.
.04 Each paper Form 940 must be
signed by the taxpayer, the taxpayer’s
authorized representative, or a participat-
ing Agent to the extent permitted under
section 9.02 of this revenue procedure.
SECTION 10. REVISION OF
COMPUTER SPECIFICATIONS BY
THE SERVICE
.01 If Publication 3715 is revised, the
Service, if necessary, will advise all cur-
rent Electronic Filers to submit test files
prior to filing under the new specifica-
tions. Failure to submit a test file may
later result in a Processing Interruption,
which may result in a notice of suspen-
sion. See section 12 of this revenue pro-
cedure concerning the reasons for suspen-
sion of electronic filing privileges.
.02 If an Electronic Filer is unable to
comply with the changes in specifications,
the Electronic Filer must contact the
appropriate e-fileHelp Desk for further
instructions. See section 17 of this rev-
enue procedure for Service contact infor-
mation.
SECTION 11. ADVERTISING
STANDARDS
.01 An Electronic Filer must:
(1) comply with the advertising and
solicitation provisions of 31 CFR Part 10
(Treasury Department Circular No. 230).
This circular prohibits the use or partici-
pation in the use of any form of public
communication containing a false, fraud-
ulent, misleading, deceptive, unduly
influencing, coercive, or unfair statement
or claim. In addition, advertising must
not imply a special relationship with the
Service, Financial Management Service
(“FMS”), or the Treasury Department;
(2) adhere to all relevant federal,
state, and local consumer protection laws;
(3) not use the Service’s name,
“Internal Revenue Service” or “IRS”,
within a firm’s name;
(4) not use improper or misleading
advertising in relation to the Form 940
e-fileProgram;
(5) not carry the Service, FMS, or
other Treasury Seals on its advertising
material;
(6) clearly state the names of all
cooperating parties if advertising for a
cooperative electronic return filing project
(public/private sector);
(7) pre-record any radio or television
advertisement and keep a copy of this
advertisement for a period of at least 36
months from the date of the last transmis-
sion or use; and
(8) retain a copy of any actual direct
mailing or fax communications, along
with a list or other description of persons
to whom the communication was mailed,
faxed, or otherwise distributed for a peri-
od of at least 36 months from the date of
the last mailing, fax, or distribution.
.02 Acceptance to participate in the
Form 940 e-fileProgram does not imply
endorsement by the Service, FMS, or the
Treasury Department of the software or
quality of services provided.
SECTION 12. REASONS FOR
SUSPENSION
.01 The Service reserves the right to
suspend an Electronic Filer from the Form
940 e-fileProgram for the following rea-
sons (this list is not all-inclusive):
(1) submitting tax returns for which
the Service did not receive Authoriza-
tions;
(2) repeatedly submitting tax returns
that cause a Processing Interruption;
(3) submitting tax returns that cause
a Processing Interruption after failing to
submit the test file required by section
6.02 of this revenue procedure;
(4) failing to comply with the
responsibilities of an Electronic Filer set
forth in section 8 of this revenue proce-
dure;
(5) failing to abide by the advertising
standards in section 11 of this revenue
procedure; or
(6) significant complaints about an
Electronic Filer’s performance in the
Form 940 e-fileProgram.
.02 If the Electronic Filing Coordinator
informs an Electronic Filer that a certain
action is a reason for suspension and the
action continues, the service center direc-
tor may send the Electronic Filer a notice
proposing suspension of the Electronic
Filer. However, a notice proposing sus-
pension may be sent without a warning if
the Electronic Filer’s action indicates an
intentional disregard of rules. A notice
proposing suspension will describe the
reason(s) for the proposed suspension,
and indicate the length of the suspension
and the conditions that need to be met
before the suspension will terminate.
.03 An Electronic Filer that is an Agent
or Transmitter has an obligation to notify
its Form 940 e-fileProgram clients when
that Agent or Transmitter is suspended
from filing under the Form 940 e-file
Program as provided in sections 14.02(4)
and 14.03 of this revenue procedure. The
Service reserves the right to extend the
period of suspension of any Agent or
Transmitter that fails to comply with this
requirement.
SECTION 13. ADMINISTRATIVE
REVIEW PROCESS FOR PROPOSED
SUSPENSION
.01 An Electronic Filer that receives a
notice proposing suspension may request
an administrative review prior to the pro-
posed suspension taking effect.
.02 The request for an administrative
review must be in writing and contain
detailed reasons, with supporting docu-
mentation, for withdrawal of the proposed
suspension.
.03 The written request for an adminis-
trative review and a copy of the notice
proposing suspension must be delivered
to the Electronic Filing Coordinator with-
in 30 calendar days of the date on the
notice proposing suspension. The
Electronic Filing Coordinator will for-
ward the written request to the National
Program Analyst for Electronic Filing of
Business Returns (“National Coor-
dinator”) if the service center director
continues to believe that suspension is
warranted.
.04 After consideration of the written
request for an administrative review, the
National Coordinator will either issue a
suspension letter or notify the Electronic
Filer in writing that the proposed suspen-
sion is withdrawn.
.05 If an Electronic Filer receives a sus-
pension letter, the Electronic Filing
Coordinator’s subsequent determination
of whether a reason for suspension has
been corrected is not subject to review or
appeal.
.06 If an Electronic Filer does not time-
ly submit a written request for an admin-
2001–3 I.R.B.333January 16, 2001

istrative review, the service center director
will issue a suspension letter.
.07 Failure to submit a written request for
an administrative review within the 30-day
period described in section 13.03 of this
revenue procedure irrevocably terminates
the Electronic Filer’s right to an administra-
tive review of the proposed suspension.
SECTION 14. EFFECT OF
SUSPENSION
.01 An Electronic Filer’s suspension
will continue for the length of time speci-
fied in the suspension letter, or until the
conditions for terminating the suspension
have been met, whichever is later.
.02 In the case of an Electronic Filer
that is an Agent, the following additional
rules apply:
(1) if a Form 940 is due (without
regard to extensions) within 60 days from
the date on the suspension letter, the
Agent may file the Form 940 under the
Form 940 e-fileProgram;
(2) if a Form 940 is due (without
regard to extensions) more than 60 days
from the date on the suspension letter, the
Agent may not file the Form 940 under
the Form 940 e-fileProgram;
(3) if a suspended Agent has a power
of attorney from a taxpayer that autho-
rizes the Agent to sign and file Form 940,
the suspended Agent will be able to sign
and file a paper Form 940 for the taxpay-
er. See section 9.03 of this revenue pro-
cedure. Form 8655 does not authorize the
filing of paper Forms 940 outside of the
Form 940 e-fileProgram; and
(4) an Agent must provide written
notification of a suspension to a taxpayer
at least 45 days before the due date of the
taxpayer’s first return affected by the sus-
pension. This notification must be provid-
ed even though the Agent may believe
that the Agent will be able to meet the
conditions for terminating the suspension
before the due date.
.03 A Transmitter that receives a sus-
pension letter described in section 13.04
from the Service may not accept any fur-
ther LOAs from prospective On-Line
Filers that want to participate in the Form
940 e-fileProgram and must immediately
inform current On-Line Filers of its
inability to transmit Forms 940 during its
suspension
.04 An Electronic Filer will be able to
participate in the Form 940 e-fileProgram
from which the Electronic Filer was sus-
pended, without reapplying to the Form
940 e-fileProgram, after:
(1) the stated suspension period
expires; and
(2) the reason(s) for suspension is
corrected.
SECTION 15. APPEAL OF
SUSPENSION
.01 If an Electronic Filer receives a sus-
pension letter from the National
Coordinator, the Electronic Filer is enti-
tled to appeal, by written protest, to the
National Director of Appeals. The written
protest must be sent to the National
Coordinator, who will forward it to the
National Director of Appeals. During the
appeals process, the suspension remains
in effect.
.02 The written protest must be
received by the National Coordinator
within 30 calendar days of the date of the
suspension letter. The written protest
must contain detailed reasons, with sup-
porting documentation, for termination of
the suspension.
.03 Within 15 calendar days of receipt of
a written protest, the National Coordinator
will forward the file on the Electronic Filer
and the material described in section 15.02
of this revenue procedure to the National
Director of Appeals.
.04 Failure to appeal within the 30-day
period described in section 15.02 of this
revenue procedure irrevocably terminates
the Electronic Filer’s right to appeal the
suspension.
SECTION 16. PENALTY FOR
FAILURE TO TIMELY FILE A
RETURN
Section 6651(a)(1) provides that for
each month (or part thereof) a return is not
filed when required (determined with
regard to any extensions of time for fil-
ing), there is a penalty of 5 percent of the
unpaid tax not to exceed 25 percent,
absent reasonable cause. A taxpayer does
not establish reasonable cause simply by
engaging a competent Electronic Filer to
file the taxpayer’s return. However, if the
Electronic Filer has reasonable cause
under § 6651(a) for failing to timely file
the taxpayer’s return, the taxpayer will
also have reasonable cause for that failure,
and the failure-to-file penalty will be abat-
ed.
SECTION 17. INTERNAL REVENUE
SERVICE CONTACT
.01 The responsibility for the Form 940
e-fileProgram is divided between the
Electronic Filing Help Desk of the Austin
Service Center and the Memphis
Electronic Filing Desk. Questions should
be directed to the appropriate Electronic
Filing Help Desk as follows:
(1) All questions regarding applica-
tion to the Form 940 e-fileProgram,
acceptance into the Form 940 e-file
Program, userid/passwords, and PINs
should be directed to the Austin Service
Centere-fileHelp Desk at the following
address or telephone number:
Address
Internal Revenue Service
Austin Service Center
Electronic Filing Help Desk
P.O. Box 1231
Stop 6380 AUSC
Austin, TX 78767
Attention: Electronic Filing
Telephone Number:
(512) 460-8900 (not a toll-free number)
(2) All questions regarding the 940
On-Line Option (that allows taxpayers to
use the World Wide Web, via a Transmitter,
to file Form 940 electronically) should be
directed to the Austin Service Centere-file
Help Desk at the address or telephone num-
ber identified in section 17.01(1) of this
revenue procedure.
(3) All questions concerning the 940
e-fileOption (that allows taxpayers to use
a Reporting Agent to prepare, sign and
electronically file Form 940 for the tax-
payer), except those matters identified in
section 17.01(1) of this revenue proce-
dure, should be directed to the Memphis
Electronic Help Desk at the following
address or telephone number:
Address
Memphis Electronic Filing Desk
P.O. Box 30309 AMF
Memphis, TN 38130
ATTN: ELF Unit Stop 26
Telephone Number
(901) 546-2690 Ext. 7519
.02 General information about electron-
ic filing of tax forms can be found at the
following web site:
Web site for electronic services:
www.irs.gov/prod/elec_svs
January 16, 20013342001–3 I.R.B.

.03 All questions regarding publica-
tions may be directed to the following
web site:
Web site for publications:
www.irs.gov/forms_pubs
SECTION 18 EFFECT ON OTHER
DOCUMENTS
Section 6.05 of Rev. Proc. 96–17,
1996–1 C.B. 633, is modified to provide
the same relief as set forth in section 5.04
of this revenue procedure (regarding an
Agent not having to replace a previously
submitted Authorization under certain cir-
cumstances).
SECTION 19. EFFECTIVE DATE
This revenue procedure is effective for
taxable years commencing after
December 31, 1999.
SECTION 20. PAPERWORK
REDUCTION ACT
The collections of information contained
in this revenue procedure have been
reviewed and approved by the Office of
Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1710.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless the collec-
tion of information displays a valid control
number.
The collections of information in this
revenue procedure are in sections 5, 6, 7,
8, 10, and 11. This information is required
by the Service to implement the Form 940
e-fileProgram and to enable taxpayers to
file their Forms 940 electronically. The
information will be used to ensure that
taxpayers receive accurate and essential
information regarding the filing of their
electronic returns and to identify persons
involved in the filing of electronic returns.
The collections of information are
required to retain the benefit of participat-
ing in the Form 940 e-fileProgram. The
likely respondents are business or other
for-profit institutions; federal, state or
local governments; nonprofit institutions;
and small businesses or organizations.
The estimated total annual reporting
and recordkeeping burden is 207,127
hours. The estimated annual burden per
respondent/recordkeeper varies from 10
minutes to 5 hours, depending on individ-
ual circumstances, with an estimated
average of 32 minutes. The estimated
number of respondents and recordkeepers
is 390,685. The estimated annual fre-
quency of responses is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability. (Also Part I,
§§ 860E, 860H; 1.860E–1.)
Rev. Proc. 2001–12
SECTION 1. PURPOSE
This revenue procedure sets forth a safe
harbor for establishing the lack of
improper knowledge under § 1.860E–1(c)
of the Income Tax Regulations for trans-
fers of noneconomic residual interests in
real estate mortgage investment conduits
(REMICs) and ownership interests in
Financial Asset Securitization Investment
Trusts (FASITs).
SECTION 2. BACKGROUND
The current regulations governing
REMICs contain rules governing the trans-
fer of noneconomic residual interests in
REMICs. In general, a transfer of a noneco-
nomic residual interest is disregarded for all
tax purposes if a significant purpose of the
transfer is to enable the transferor to impede
the assessment or collection of tax. This pur-
pose exists if the transferor, at the time of the
transfer, either knew or should have known
that the transferee would be unwilling or
unable to pay taxes due on its share of the
REMIC’s taxable income.
The current regulations also contain a safe
harbor for establishing the lack of a purpose
to impede the assessment or collection of
tax. Under the safe harbor, a transferor of a
noneconomic residual interest in a REMIC
is presumed to lack this purpose if two
requirements are satisfied. First, the transfer-
or must conduct a reasonable investigation
of the transferee’s financial condition.
Second, the transferor must secure a repre-
sentation from the transferee stating that the
transferee understands the tax obligations
associated with holding a residual interest
and intends to pay those taxes.
The Internal Revenue Service and
Treasury have been concerned that some
transferors of residual interests have claimed
they satisfy the safe harbor even though the
economics of a transfer clearly indicate the
transferees are unwilling or unable to pay the
tax associated with holding the interest. For
this reason, on February 7, 2000, the Service
published in the Federal Register a notice of
proposed rulemaking (65 Fed. Reg. 5807)
designed to clarify the safe harbor. The pro-
posed regulation explains that the safe har-
bor is unavailable unless the present value of
the anticipated tax liabilities associated with
holding the residual interest does not exceed
the sum of: (1) the present value of any con-
sideration given to the transferee to acquire
the interest; (2) the present value of the
expected future distributions on the interest;
and (3) the present value of the anticipated
tax savings associated with holding the inter-
est as the REMIC generates losses. This
clarification is proposed to be effective on
February 4, 2000. The notice of proposed
rulemaking published on February 7, 2000
also contained proposed rules for FASITs.
Proposed § 1.860H–6(g) provides require-
ments for transfers of FASIT ownership
interests and adopts a safe harbor for estab-
lishing lack of improper knowledge by ref-
erence to the safe harbor provisions of the
REMIC regulations.
Some commentators have stated that,
although current regulations are inadequate,
the proposed regulations are inappropriately
restrictive. This revenue procedure sets forth
an alternate safe harbor that may be used
while the Service and Treasury consider the
comments on the proposed regulations.
SECTION 3. SCOPE
This revenue procedure applies to all
transfers of noneconomic residual inter-
ests in REMICs. The principles set forth
in this revenue procedure, appropriately
adjusted with respect to terminology and
other technical differences between the
REMIC and FASIT provisions, also apply
to transfers of ownership interests in
FASITs. See section 8 for applicability.
SECTION 4. PROCEDURE
A transferor of a residual interest in a
REMIC is presumed not to have improp-
er knowledge under § 1.860E–1(c) of the
regulations if–
2001–3 I.R.B.335January 16, 2001

.01 The transferor conducted, at the
time of the transfer, a reasonable investi-
gation of the financial condition of the
transferee and, as a result of the investiga-
tion, the transferor found that the transfer-
ee had historically paid its debts as they
came due and found no significant evi-
dence to indicate that the transferee will
not continue to pay its debts as they come
due in the future;
.02 The transferee represents to the
transferor that it understands that, as the
holder of the residual interest, the trans-
feree may incur tax liabilities in excess of
any cash flows generated by the interest
and that the transferee intends to pay
taxes associated with holding the residual
interest as they become due; and
.03 Either section 5 or section 6 is sat-
isfied.
SECTION 5. FORMULA TEST
.01 The present value of the anticipated
tax liabilities associated with holding the
residual interest does not exceed the sum of–
(1) The present value of any consid-
eration given to the transferee to acquire
the interest;
(2) The present value of the expect-
ed future distributions on the interest; and
(3) The present value of the antici-
pated tax savings associated with holding
the interest as the REMIC generates loss-
es.
.02 For purposes of section 5.01 of this
revenue procedure, both of the following
rules apply:
(1) The transferee is assumed to pay
tax at a rate equal to the highest rate of tax
specified in § 11(b)(1) of the Internal
Revenue Code; and
(2) Present values are computed
using a discount rate equal to the applica-
ble Federal rate prescribed by § 1274(d)
compounded semiannually. (A lower dis-
count rate may be used if the transferee
can demonstrate that it regularly borrows,
in the course of its trade or business, sub-
stantial funds at such lower rate from
unrelated third parties.)
SECTION 6. ASSET TEST
.01 The following three requirements
must be satisfied–
(1) At the time of the transfer, and at
the close of each of the transferee’s two
fiscal years preceding the year of transfer,
the transferee’s gross assets for financial
reporting purposes exceed $100 million
and its net assets for financial reporting
purposes exceed $10 million;
(2) The transferee is an eligible cor-
poration (as defined in § 860L(a)(2)) that
makes a written agreement that any sub-
sequent transfer of the interest will be to
another eligible corporation in a transac-
tion that satisfies section 4; and
(3) The facts and circumstances
known to the transferor on or before the
date of the transfer must not reasonably
indicate that the taxes associated with the
residual interest will not be paid. The
consideration given to the transferee to
acquire the noneconomic residual interest
in the REMIC is only one factor to be
considered. However, if the amount of
consideration is so low that under any set
of reasonable assumptions a reasonable
person would conclude that the taxes
associated with holding the residual inter-
est will not be paid, then the transferor is
deemed to know that the transferee cannot
or will not pay. In determining whether
the amount is too low, the specific terms
of the formula test in section 5 of this rev-
enue procedure need not be used.
.02 For purposes of section 6.01 of this
revenue procedure, all of the following
rules apply:
(1) The gross assets and net assets of
a transferee do not include any obligation
of any person related to the transferee (as
defined in § 860L(g)) or any other asset if
a principal purpose for holding or acquir-
ing that asset is to permit the transferee to
satisfy section 6 of this revenue proce-
dure;
(2) A transfer fails to meet the
requirements of section 6 of this revenue
procedure if the transferor knows, or has
reason to know, that the transferee will
not honor the restrictions on subsequent
transfers of the residual interest; and
(3) Section 6.01(2) fails to be satisfied
in the case of any transfer or assignment of
the interest to a foreign branch of an eligi-
ble corporation or any other arrangement
by which the interest is at any time subject
to net tax by a foreign country or posses-
sion of the United States.
SECTION 7. EXAMPLES
.01 Example 1. Transfer to partnership.
Xtransfers a noneconomic residual inter-
est in a REMIC to Partnership P. Yand Z
are the partners of P. The transfer does
not satisfy the formula test of section 5.
Even if Yand Zare eligible corporations
that satisfy section 6.01(1) and that make
the written agreement in section 6.01(2),
the transfer fails to qualify under section 4
because Pis a partnership rather than an
eligible corporation.
.02 Example 2. Transfer to corporation
without capacity to carry additional resid-
ual interests. During the first ten months of
a year, Bank transfers five residual interests
to Corporation Uunder circumstances
meeting the requirements of section 6.
Bank is the major creditor of Uand for that
reason has access to U’s financial records.
During the last month of the year, Bank
transfers three additional residual interests
to U. At the time of transfer, U’s financial
records indicate it has retained the previ-
ously transferred residual interests. Bank
has knowledge of U’s financial circum-
stances, including the aggregate tax liabili-
ties it has assumed with respect to REMIC
residual interests, that would reasonably
cause Bank to conclude that Uwill be
unable to meet its tax liabilities when due.
The transfers in the last month of the year
fail to satisfy section 4 and 6.01(3) because
Bank has reason to know that Uwill not be
able to pay the tax due on those interests.
SECTION 8. EFFECTIVE DATE
This revenue procedure applies to all
transfers of noneconomic residual inter-
ests in REMICs and all transfers of FASIT
ownership interests occurring on or after
February 4, 2000, until the date specified
in future published guidance.
DRAFTING INFORMATION
A principal author of this revenue pro-
cedure is Courtney Shepardson of the
Office of Associate Chief Counsel
(Financial Institutions and Products). For
further information regarding this revenue
procedure contact Courtney Shepardson
at (202) 622-3940 (not a toll-free call).
January 16, 20013362001–3 I.R.B.

26 CFR 601.602: Tax forms and instructions.
(Also Part I, §§ 1, 32, 59, 63, 68, 132, 135, 151, 170, 213, 220, 512, 513, 685, 877, 2032A, 2503, 2523, 2631, 4001, 4003, 4261, 6033, 6039F, 6323, 6334, 6601,
7430, 7702B)
Rev. Proc. 2001–13
Table of Contents
SECTION 1. PURPOSE
SECTION 2. CHANGES
SECTION 3. 2001 ADJUSTED ITEMS
Part I – Inflation-adjusted Items Applicable if Pending Legislation is Enacted
Code Section
.01 Tax Rate Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1(a)-(e)
.02 Unearned Income of Minor Children Taxed as if Parent’s Income (“Kiddie Tax”) . . . . . . . . . . . . . . . . . . . . . . . . .1(g)
.03 Earned Income Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
.04 Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax” . . . . . . . . . . . . . . . . . . . . . . . . . . .59(j)
.05 Standard Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
.06 Overall Limitation on Itemized Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
.07 Qualified Transportation Fringe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132(f)
.08 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher
Education Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135
.09 Personal Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151
.10 Eligible Long-Term Care Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213(d)(10)
.11 Medical Savings Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220
.12 Treatment of Dues Paid to Agricultural or Horticultural Organizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .512(d)
.13 Insubstantial Benefit Limitations for
Contributions Associated with Charitable Fund-Raising Campaigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .513(h)
.14 Funeral Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .685
.15 Expatriation to Avoid Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .877
.16 Valuation of Qualified Real Property in Decedent’s Gross Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2032A
.17 Annual Exclusion for Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2503 & 2523
.18 Generation-Skipping Transfer Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2631
.19 Luxury Automobile Excise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4001 & 4003
.20 Passenger Air Transportation Excise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4261
.21 Reporting Exception for Certain Exempt Organizations with Nondeductible
Lobbying Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6033(e)(3)
.22 Notice of Large Gifts Received from Foreign Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6039F
.23 Persons against Which a Federal Tax Lien is Not Valid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6323
.24 Property Exempt from Levy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6334
.25 Interest on a Certain Portion of the Estate Tax Payable in Installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6601(j)
.26 Attorney Fee Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7430
.27 Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under
Certain Life Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7702B(d)
Part II – Inflation-adjusted Items Applicable if Pending Legislation is not Enacted
Code Section
.01 Tax Rate Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1(a)-(e)
.03 Earned Income Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
.22 Notice of Large Gifts Received from Foreign Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6039F
.23 Persons against Which a Federal Tax Lien is Not Valid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6323
2001–3 I.R.B.337January 16, 2001
SECTION 4. EFFECTIVE DATE
SECTION 5. DRAFTING
INFORMATION
SECTION 1. PURPOSE
This revenue procedure sets forth infla-
tion adjusted items for 2001.
SECTION 2. CHANGES
.01 This revenue procedure reflects the
unpublished corrections made by the Bu-
reau of Labor Statistics (BLS) in the Con-
sumer Price Index for All Urban Con-
sumers (CPI-U) for September 1999
through December 1999 that will be re-
quired if the Taxpayer Relief Act of 2000
is enacted. The 2000 Act passed the
House as H.R. 2614 on October 26, 2000.
A provision having the same effect is con-
tained in the Community Renewal Tax
Relief Act of 2000 pending in the Con-
gress as of the date of publication of this
revenue procedure. Specific items that

would be affected by the legislation are:
(1) the tax rate tables (set forth in
section 3.01 of this revenue procedure);
(2) certain figures relating to the
earned income tax credit (section 3.03);
(3) the aggregate amount of gifts
received from foreign persons for purpos-
es of information reporting § 6039F (sec-
tion 3.22); and
(4) the amount used to determine the
validity of certain tax liens under
§ 6323(b)(7) (section 3.23).
.02 Part I of section 3 of this revenue
procedure reflects the figures that will
apply if the legislation is enacted. Part II
of section 3 provides the alternative fig-
ures for items affected by the legislation
that will apply in the event that the 2000
Act is not enacted. The Service will
issue subsequent notification clarifying
whether the amounts set forth in Part I or
Part II are applicable for 2001.
.03 There are no changes from the pre-
ceding year in the list of items adjusted.
SECTION 3. 2001 ADJUSTED ITEMS
Part I – Inflation-adjusted Items
Applicable if Pending Legislation is
Enacted
.01 Tax Rate Tables. For tax years
beginning in 2001, the tax rate tables
under § 1 are as follows:
January 16, 20013382001–3 I.R.B.
TABLE 1 - Section 1(a). — MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES
If Taxable Income Is: The Tax Is:
Not Over $45,20015% of the taxable income
Over $45,200$6,780.00 plus 28% of
but not over $109,250the excess over $45,200
Over $109,250$24,714.00 plus 31% of
but not over $166,500 the excess over $109,250
Over $166,500$42,461.50 plus 36% of
but not over $297,350 the excess over $166,500
Over $297,350 $89,567.50 plus 39.6% of
the excess over $297,350
TABLE 2 - Section 1(b). — HEADS OF HOUSEHOLDS
If Taxable Income Is:The Tax Is:
Not Over $36,25015% of the taxable income
Over $36,250 $5,437.50 plus 28% of
but not over $93,650 the excess over $36,250
Over $93,650 $21,509.50 plus 31% of
but not over $151,650 the excess over $93,650
Over $151,650 $39,489.50 plus 36% of
but not over $297,350 the excess over $151,650
Over $297,350 $91,941.50 plus 39.6% of
the excess over $297,350
TABLE 3 - Section 1(c). — UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES
AND HEADS OF HOUSEHOLDS)
If Taxable Income Is:The Tax Is:
Not Over $27,050 15% of the taxable income
Over $27,050 $4,057.50 plus 28% of
but not over $65,550 the excess over $27,050
Over $65,550 $14,837.50 plus 31% of
but not over $136,750the excess over $65,550
Over $136,750 $36,909.50 plus 36% of
but not over $297,350 the excess over $136,750
Over $297,350 $94,725.50 plus 39.6% of
the excess over $297,350

2001–3 I.R.B.339January 16, 2001
TABLE 4 - Section 1(d). — MARRIED INDIVIDUALS FILING SEPARATE RETURNS
If Taxable Income Is:The Tax Is:
Not Over $22,600 15% of the taxable income
Over $22,600 $3,390.00 plus 28% of
but not over $54,625the excess over $22,600
Over $54,625$12,357.00 plus 31% of
but not over $83,250the excess over $54,625
Over $83,250 $21,230.75 plus 36% of
but not over $148,675 the excess over $83,250
Over $148,675 $44,783.75 plus 39.6% of
the excess over $148,675
TABLE 5 - Section 1(e). — ESTATES AND TRUSTS
If Taxable Income Is:The Tax Is:
Not Over $1,80015% of the taxable income
Over $1,800$270.00 plus 28% of
but not over $4,250the excess over $1,800
Over $4,250 $956.00 plus 31% of
but not over $6,500the excess over $4,250
Over $6,500$1,653.50 plus 36% of
but not over $8,900the excess over $6,500
Over $8,900$2,517.50 plus 39.6% of
the excess over $8,900
.02 Unearned Income of Minor
Children Taxed as if Parent’s Income (the
“Kiddie Tax”). For tax years beginning in
2001, the amount in § 1(g)(4)(A)(ii)(I),
which is used to reduce the net unearned
income reported on the child’s return that
is subject to the “kiddie tax,” is $750.
(This amount is the same as the $750
standard deduction amount provided in
section 3.05(2) of this revenue proce-
dure.) The same $750 amount is used for
purposes of § 1(g)(7) (that is, determining
whether a parent may elect to include a
child’s gross income in the parent’s gross
income and for calculating the “kiddie
tax”).
.03 Earned Income Tax Credit.
(1) In general. For tax years begin-
ning in 2001, the following amounts are
used to determine the earned income tax
credit under § 32(b). The “earned income
amount” is the amount of earned income
at or above which the maximum amount
of the earned income tax credit is allowed.
The “threshold phaseout amount” is the
amount of modified adjusted gross
income (or, if greater, earned income)
above which the maximum amount of the
credit begins to phase out. The “complet-
ed phaseout amount” is the amount of
modified adjusted gross income (or if
greater, earned income) at or above which
no credit is allowed.
MaximumThresholdCompleted
NumberAmount ofEarned Income PhaseoutPhaseout
of Childrenthe CreditAmountAmount Amount
1$2,428$ 7,140$13,090$28,281
2 or more$4,008 $10,020$13,090$32,121
None$ 364$ 4,760$ 5,950$10,710
The Internal Revenue Service, in the
instructions for the Form 1040 series, pro-
vides tables showing the amount of the
earned income tax credit for each type of
taxpayer.
(2) Excessive investment income.
For tax years beginning in 2001, the
earned income tax credit is denied under
§ 32(i) if the aggregate amount of certain
investment income exceeds $2,450.
.04 Alternative Minimum Tax
Exemption for a Child Subject to the
“Kiddie Tax.” For tax years beginning in
2001, in the case of a child to whom the
§ 1(g) “kiddie tax” applies, the exemption
amount under § 55 and § 59(j) for purpos-
es of the alternative minimum tax under
§ 55 may not exceed the sum of (A) such
child’s earned income for the taxable year,
plus (B) $5,350.
.05 Standard Deduction.
(1) In general. For tax years begin-
ning in 2001, the standard deduction
amounts under § 63(c)(2) are as follows:

Filing StatusStandard Deduction
MARRIED INDIVIDUALS FILING JOINT RETURNS$7,600
AND SURVIVING SPOUSES (§ 1(a))
HEADS OF HOUSEHOLDS (§ 1(b)) $6,650
UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING $4,550
SPOUSES AND HEADS OF HOUSEHOLDS) (§ 1(c))
MARRIED INDIVIDUALS FILING SEPARATE$3,800
RETURNS (§ 1(d))
January 16, 20013402001–3 I.R.B.
(2) Dependent. For tax years begin-
ning in 2001, the standard deduction
amount under § 63(c)(5) for an individual
who may be claimed as a dependent by
another taxpayer may not exceed the
greater of $750, or the sum of $250 and
the individual’s earned income.
(3) Aged and blind. For tax years
beginning in 2001, the additional standard
deduction amounts under § 63(f) for the
aged and for the blind are $900 for each.
These amounts are increased to $1,100 if
the individual is also unmarried and not a
surviving spouse.
.06 Overall Limitation on Itemized
Deductions. For tax years beginning in
2001, the “applicable amount” of adjusted
gross income under § 68(b), above which
the amount of otherwise allowable item-
ized deductions is reduced under § 68, is
$132,950 (or $66,475 for a separate return
filed by a married individual).
.07 Qualified Transportation Fringe.
For tax years beginning in 2001, the
monthly limitation under § 132(f)(2)(A),
regarding the aggregate fringe benefit
exclusion amount for transportation in a
commuter highway vehicle and any transit
pass, is $65. The monthly limitation
under § 132(f)(2)(B) regarding the fringe
benefit exclusion amount for qualified
parking is $180.
.08 Income from United States Savings
Bonds for Taxpayers Who Pay Qualified
Higher Education Expenses. For tax
years beginning in 2001, the exclusion
under § 135, regarding income from
United States savings bonds for taxpayers
who pay qualified higher education
expenses, begins to phase out for modi-
fied adjusted gross income above $83,650
for joint returns and $55,750 for other
returns. This exclusion completely phas-
es out for modified adjusted gross income
of $113,650 or more for joint returns and
$70,750 or more for other returns.
.09 Personal Exemption.
(1) Exemption amount. For tax years
beginning in 2001, the personal exemp-
tion amount under § 151(d) is $2,900.
(2) Phaseout. For tax years begin-
ning in 2001, the personal exemption
amount begins to phase out at, and is com-
pletely phased out after, the following
adjusted gross income amounts:
ThresholdCompleted
Filing StatusPhaseout AmountPhaseout Amount After
Code § 1(a)$199,450 $321,950
Code § 1(b)$166,200 $288,700
Code § 1(c)$132,950 $255,450
Code § 1(d)$ 99,725 $160,975
.10 Eligible Long-Term Care Premiums. For tax years beginning in 2001, the limitations under § 213(d), regarding eligible long-
term care premiums includible in the term “medical care,” are as follows:
Attained age before the close of the taxable year:
40 or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230
More than 40 but not more than 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 430
More than 50 but not more than 60. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 860
More than 60 but not more than 70. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,290
More than 70.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,860
.11 Medical Savings Accounts.
(1) Self-only coverage. For tax years
beginning in 2001, the term “high
deductible health plan” as defined in
§ 220(c)(2)(A) means, in the case of self-
only coverage, a health plan which has an
annual deductible that is not less than
$1,600 and not more than $2,400, and
under which the annual out-of-pocket
expenses required to be paid (other than
for premiums) for covered benefits does
not exceed $3,200.
(2) Family coverage. For tax years
beginning in 2001, the term “high
deductible health plan” means, in the case
of family coverage, a health plan which
has an annual deductible that is not less
than $3,200 and not more than $4,800,

and under which the annual out-of-pocket
expenses required to be paid (other than
for premiums) for covered benefits does
not exceed $5,850.
.12 Treatment of Dues Paid to
Agricultural or Horticultural Organizations.
For tax years beginning in 2001, the limita-
tion under § 512(d)(1), regarding the exemp-
tion of annual dues required to be paid by a
member to an agricultural or horticultural
organization, is $116.
.13 Insubstantial Benefit Limitations
for Contributions Associated with
Charitable Fund-Raising Campaigns.
(1) Low cost article. For tax years
beginning in 2001, the unrelated business
income of certain exempt organizations
under § 513(h)(2) does not include a “low
cost article” of $7.60 or less.
(2) Other insubstantial benefits. For
tax years beginning in 2001, the $5, $25,
and $50 guidelines in section 3 of Rev.
Proc. 90–12, 1990–1 C.B. 471 (as ampli-
fied and modified), for disregarding the
value of insubstantial benefits received by
a donor in return for a fully deductible
charitable contribution under § 170, are
$7.60, $38, and $76, respectively.
.14 Funeral Trusts. For a contract
entered into during calendar year 2001 for
a “qualified funeral trust,” as defined in
§ 685, the trust may not accept aggregate
contributions by or for the benefit of an
individual in excess of $7,500.
.15 Expatriation to Avoid Tax. For cal-
endar year 2001, the thresholds used
under § 877(a)(2), regarding whether an
individual’s loss of United States citizen-
ship had the avoidance of United States
taxes as one of its principal purposes, are
more than $115,000 for “average annual
net income tax” and $579,000 or more for
“net worth.”
.16 Valuation of Qualified Real
Property in Decedent’s Gross Estate. For
an estate of a decedent dying in calendar
year 2001, if the executor elects to use the
special use valuation method under
§ 2032A for qualified real property, the
aggregate decrease in the value of quali-
fied real property resulting from electing
to use § 2032A that is taken into account
for purposes of the estate tax may not
exceed $800,000.
.17 Annual Exclusion for Gifts.
(1) For calendar year 2001, the first
$10,000 of gifts to any person (other than
gifts of future interests in property) are
not included in the total amount of tax-
able gifts under § 2503 made during that
year.
(2) For calendar year 2001, the first
$106,000 of gifts to a spouse who is not
a citizen of the United States (other than
gifts of future interests in property) are
not included in the total amount of tax-
able gifts under §§ 2503 and 2523(i)(2)
made during that year.
.18 Generation-Skipping Transfer Tax
Exemption. For calendar year 2001, the
generation-skipping transfer tax exemp-
tion under § 2631, which is allowed in
determining the “inclusion ratio” defined
in § 2642, is $1,060,000.
.19 Luxury Automobile Excise Tax. For
calendar year 2001, the excise tax under
§§ 4001 and 4003 is imposed on the first
retail sale of a passenger vehicle (includ-
ing certain parts or accessories installed
within six months of the date after the
vehicle was first placed in service), to the
extent the price exceeds $38,000.
.20 Passenger Air Transportation
Excise Tax. For calendar year 2001, the
tax under § 4261(c) on any amount paid
(whether within or without the United
States) for any transportation of any per-
son by air, if such transportation begins or
ends in the United States, generally is
$12.80. However, in the case of a domes-
tic segment beginning or ending in Alaska
or Hawaii as described in § 4261(c)(3),
the tax only applies to departures and is at
the rate of $6.40.
.21 Reporting Exception for Certain
Exempt Organizations with Nondeductible
Lobbying Expenditures. For tax years begin-
ning in 2001, the annual per person, family,
or entity dues limitation to qualify for the
reporting exception under § 6033(e)(3) (and
section 5.05 of Rev. Proc. 98–19, 1998–7
I.R.B. 30), regarding certain exempt organi-
zations with nondeductible lobbying expen-
ditures, is $81 or less.
.22 Notice of Large Gifts Received from
Foreign Persons. For tax years beginning
in 2001, recipients of gifts from certain
foreign persons may have to report these
gifts under § 6039F if the aggregate value
of gifts received in a taxable year exceeds
$11,273.
.23 Persons against Which a Federal
Tax Lien is Not Valid. For calendar year
2001, a federal tax lien is not valid against
(1) certain purchasers under § 6323(b)(4)
that purchased personal property in a
casual sale for less than $1,100, or (2) a
mechanic’s lienor under § 6323(b)(7) that
repaired or improved certain residential
property if the contract price with the
owner is not more than $5,490.
.24 Property Exempt from Levy. For
calendar year 2001, the value of property
exempt from levy under § 6334(a)(2)
(fuel, provisions, furniture, and other
household personal effects, as well as
arms for personal use, livestock, and poul-
try) may not exceed $6,560. The value of
property exempt from levy under
§ 6334(a)(3) (books and tools necessary
for the trade, business, or profession of
the taxpayer) may not exceed $3,280.
.25 Interest on a Certain Portion of the
Estate Tax Payable in Installments. For
an estate of a decedent dying in calendar
year 2001, the dollar amount used to
determine the “2-percent portion” (for
purposes of calculating interest under
§ 6601(j)) of the estate tax payable in
installments under § 6166 is $1,060,000.
.26 Attorney Fee Awards. For fees
incurred in calendar year 2001, the attor-
ney fee award limitation under
§ 7430(c)(1)(B)(iii) is $140 per hour.
.27 Periodic Payments Received under
Qualified Long-Term Care Insurance
Contracts or under Certain Life
Insurance Contracts. For calendar year
2001, the stated dollar amount of the per
diem limitation under § 7702B(d)(4),
regarding periodic payments received
under a qualified long-term care insurance
contract or periodic payments received
under a life insurance contract that are
treated as paid by reason of the death of a
chronically ill individual, is $200.
Part II – Inflation-adjusted Items
Applicable if Pending Legislation is not
Enacted
.01 Tax Rate Tables. For tax years
beginning in 2001, the tax rate tables
under § 1 are as follows:
2001–3 I.R.B.341January 16, 2001

TABLE 1 - Section 1(a). — MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES
If Taxable Income Is: The Tax Is:
Not Over $45,200 15% of the taxable income
Over $45,200$6,780.00 plus 28% of
but not over $109,250 the excess over $45,200
Over $109,250 $24,714.00 plus 31% of
but not over $166,450the excess over $109,250
Over $166,450$42,446.00 plus 36% of
but not over $297,300the excess over $166,450
Over $297,300 $89,552.00 plus 39.6% of
the excess over $297,300
January 16, 20013422001–3 I.R.B.
TABLE 2 - Section 1(b). — HEADS OF HOUSEHOLDS
If Taxable Income Is:The Tax Is:
Not Over $36,250 15% of the taxable income
Over $36,250 $5,437.50 plus 28% of
but not over $93,600 the excess over $36,250
Over $93,600 $21,495.50 plus 31% of
but not over $151,600 the excess over $93,600
Over $151,600 $39,475.50 plus 36% of
but not over $297,300 the excess over $151,600
Over $297,300 $91,927.50 plus 39.6% of
the excess over $297,300
TABLE 3 - Section 1(c). — UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES
AND HEADS OF HOUSEHOLDS)
If Taxable Income Is:The Tax Is:
Not Over $27,050 15% of the taxable income
Over $27,050 $4,057.50 plus 28% of
but not over $65,550the excess over $27,050
Over $65,550 $14,837.50 plus 31% of
but not over $136,750the excess over $65,550
Over $136,750$36,909.50 plus 36% of
but not over $297,300the excess over $136,750
Over $297,300$94,707.50 plus 39.6% of
the excess over $297,300
TABLE 4 - Section 1(d). — MARRIED INDIVIDUALS FILING SEPARATE RETURNS
If Taxable Income Is:The Tax Is:
Not Over $22,600 15% of the taxable income
Over $22,600 $3,390.00 plus 28% of
but not over $54,625 the excess over $22,600
Over $54,625$12,357.00 plus 31% of
but not over $83,225 the excess over $54,625
Over $83,225 $21,223.00 plus 36% of
but not over $148,650 the excess over $83,225
Over $148,650 $44,776.00 plus 39.6% of
the excess over $148,650

TABLE 5 - Section 1(e). — ESTATES AND TRUSTS
If Taxable Income Is:The Tax Is:
Not Over $1,800 15% of the taxable income
Over $1,800 $270.00 plus 28% of
but not over $4,250 the excess over $1,800
Over $4,250 $956.00 plus 31% of
but not over $6,500 the excess over $4,250
Over $6,500 $1,653.50 plus 36% of
but not over $8,900 the excess over $6,500
Over $8,900 $2,517.50 plus 39.6% of
the excess over $8,900
2001–3 I.R.B.343January 16, 2001
.03 Earned Income Tax Credit.
(1) In general. For tax years begin-
ning in 2001, the following amounts are
used to determine the earned income tax
credit under § 32(b). The “earned income
amount” is the amount of earned income
at or above which the maximum amount
of the earned income tax credit is allowed.
The “threshold phaseout amount” is the
amount of modified adjusted gross
income (or, if greater, earned income)
above which the maximum amount of the
credit begins to phase out. The “complet-
ed phaseout amount” is the amount of
modified adjusted gross income (or if
greater, earned income) at or above which
no credit is allowed.
MaximumThresholdCompleted
NumberAmount ofEarned Income PhaseoutPhaseout
of Childrenthe CreditAmountAmount Amount
1$2,424$ 7,130$13,090$28,260
2 or more$4,008 $10,020$13,090$32,121
None$ 364$ 4,760$ 5,950$10,710
.22 Notice of Large Gifts Received from
Foreign Persons. For tax years beginning in
2001, recipients of gifts from certain foreign
persons may have to report these gifts under
§ 6039F if the aggregate value of gifts
received in a taxable year exceeds $11,271.
.23 Persons against Which a Federal
Tax Lien is Not Valid. For calendar year
2001, a federal tax lien is not valid against
(1) certain purchasers under § 6323(b)(4)
that purchased personal property in a
casual sale for less than $1,100, or (2) a
mechanic’s lienor under § 6323(b)(7) that
repaired or improved certain residential
property if the contract price with the
owner is not more than $5,480.
SECTION 4. EFFECTIVE DATE
.01 General Rule. Except as provided
in section 4.02, this revenue procedure
applies to tax years beginning in 2001.
.02 Calendar Year Rule. This revenue
procedure applies to transactions or
events occurring in calendar year 2001 for
purposes of section 3.14 (funeral trusts),
section 3.15 (expatriation to avoid tax),
section 3.16 (valuation of qualified real
property in decedent’s gross estate), sec-
tion 3.17 (annual exclusion for gifts), sec-
tion 3.18 (generation-skipping transfer tax
exemption), section 3.19 (luxury automo-
bile excise tax), section 3.20 (passenger
air transportation excise tax), section 3.23
(persons against which a federal tax lien is
not valid), section 3.24 (property exempt
from levy), section 3.25 (interest on a cer-
tain portion of the estate tax payable in
installments), section 3.26 (attorney fee
awards), and section 3.27 (periodic pay-
ments received under qualified long-term
care insurance contracts or under certain
life insurance contracts).
SECTION 5. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Paul Tellier of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Mr. Tellier at (202) 622-4930 (not a toll-
free call).
26 CFR 601.601: Rules and regulations.
(Also Part I, § 1397E)
Rev. Proc. 2001–14
SECTION 1. PURPOSE
This revenue procedure sets forth the
maximum face amount of Qualified Zone
Academy Bonds (“Bond” or “Bonds”)
that may be issued for each State during
2001. For this purpose “State” includes
the District of Columbia and the posses-
sions of the United States.
SECTION 2. BACKGROUND
.01 Section 226 of the Taxpayer Relief
Act of 1997, Pub. L. 105–34, 111 Stat.
821 (1997), added § 1397E to the Internal
Revenue Code to provide a credit to hold-
er of Bonds under certain circumstances
so that the Bonds generally can be issued
without discount or interest. Ninety-five
percent of Bond proceeds are to be used
for qualified purposes, as defined by
§ 1397E(d)(5), with respect to a qualified

zone academy, as defined by § 1397E-
(d)(4).
.02 Section 1397E(e)(1), as amended
by § 509 of the Tax Relief Extension Act
of 1999, Pub. L. 106–170, 113 Stat. 1860
(1999) provides that the aggregate
amount of Bonds that may be issued for
the States is limited to $400 million for
each of the years, 1998, 1999, 2000, and
2001 (the “national limitation”). This
amount is to be allocated among the
States by the Secretary on the basis of
their respective populations below the
poverty level (as defined by the Office of
Management and Budget) and is to be
further allocated by each State to quali-
fied zone academies within the State or
possession.
.03 Section 1397E(e)(4), as amended,
by § 509 of the Tax Relief Extension Act
of 1999, Pub. L. 106–170, 113 Stat. 1860
(1999) provides that any carryforward of
a limitation amount may be carried only
to the first 2 years (3 years for carryfor-
wards from 1998 or 1999) following the
unused limitation year. For this purpose
a limitation amount shall be treated as
used on a first–in first–out basis.
.04 Rev. Proc. 98–9, 1998–1 C.B. 341,
Rev. Proc. 98–57, 1998–2 C.B. 682, and
Rev. Proc. 2000–10, 2000–2 I.R.B. 287,
respectively, allocated the national limita-
tion for 1998, 1999, and 2000 among the
States and possessions.
SECTION 3. SCOPE
This revenue procedure applies to
Bonds issued under § 1397E during
2001.
SECTION 4. NATIONAL QUALIFIED
ZONE ACADEMY BOND
LIMITATION FOR 2001
The total face amount of bonds that
may be issued in 2001 is $400 million.
This amount is allocated among the States
as follows:
January 16, 20013442001–3 I.R.B.
STATEMAXIMUM FACE AMOUNT OF
BONDS THAT MAY BE
ISSUED DURING 2001
(thousands of dollars)
ALABAMA$ 7,641
ALASKA545
ARIZONA6,640
ARKANSAS4,343
CALIFORNIA52,969
COLORADO3,899
CONNECTICUT2,699
DELAWARE908
DISTRICT OF COLUMBIA896
FLORIDA21,699
GEORGIA11,635
HAWAII1,496
IDAHO2,015
ILLINOIS13,905
INDIANA4,611
IOWA2,492
KANSAS3,750
KENTUCKY5,550
LOUISIANA9,721
MAINE1,538
MARYLAND4,372
MASSACHUSETTS8,367
MICHIGAN11,080
MINNESOTA3,982
MISSISSIPPI5,162
MISSOURI7,346
MONTANA1,595
NEBRASKA2,103
NEVADA2,368
NEW HAMPSHIRE1,071
NEW JERSEY7,356
NEW MEXICO4,171
NEW YORK29,712
NORTH CAROLINA11,961
NORTH DAKOTA954
OHIO15,643
OKLAHOMA4,939

STATEMAXIMUM FACE AMOUNT OF
BONDS THAT MAY BE
ISSUED DURING 2001
(thousands of dollars)
OREGON$ 4,839
PENNSYLVANIA13,056
RHODE ISLAND1,136
SOUTH CAROLINA5,265
SOUTH DAKOTA654
TENNESSEE7,557
TEXAS34,818
UTAH1,406
VERMONT667
VIRGINIA6,288
WASHINGTON6,333
WEST VIRGINIA3,285
WISCONSIN5,229
WYOMING644
AMERICAN SAMOA350
GUAM251
NORTHERN MARIANAS408
PUERTO RICO26,308
VIRGIN ISLANDS372
2001–3 I.R.B.345January 16, 2001
SECTION 6. EFFECTIVE DATE
This revenue procedure applies to
Bonds issued after December 31, 2000.
DRAFTING INFORMATION
The principal author of this revenue pro-
cedure is David White of the Office of As-
sistant Chief Counsel (Tax Exempt/Employ-
ment Tax/Government Entities). For further
information regarding this revenue proce-
dure contact Mr. White at (202) 622-3980
(not a /toll free call).

Notice of Proposed Rulemaking
and Notice of Public Hearing
Guidance Under Section 355(e);
Recognition of Gain on Certain
Distributions of Stock or
Securities In Connection With an
Acquisition.
REG–107566–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to recognition of
gain on certain distributions of stock or secu-
rities of a controlled corporation in connec-
tion with an acquisition. Changes to the ap-
plicable law were made by the Taxpayer
Relief Act of 1997. These proposed regula-
tions affect corporations and are necessary to
provide them with guidance needed to com-
ply with these changes. This document also
provides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
must be received by April 24, 2001. Out-
lines of topics to be discussed at the public
hearing scheduled for May 15, 2001, at 10
a.m. must be received by April 24, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–107566–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday be-
tween the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–107566–00),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers
may submit comments electronically
via the Internet by selecting the “Tax
Regs” option on the IRS Home Page, or
by submitting comments directly to the
IRS Internet site at http://www.irs.us
treas.gov/tax_regs/regslist.html. The
public hearing will be held in Room 4718,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Brendan P. O’Hara, (202) 622-
7530; concerning submissions of com-
ments, delivering comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, Guy R. Traynor,
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
A. State of the Law Before Section
355(e)
Section 355 generally provides that, if a
corporation distributes to its shareholders
stock of a corporation that it controls
immediately before the distribution and
certain other conditions are met, neither
the distributing corporation (hereinafter
referred to as Distributing) nor its share-
holders recognize gain or loss. A number
of the conditions for tax free treatment
(for example, the continuity of interest
requirement of §1.355–2(c), the “no
device” requirement of section
355(a)(1)(B), the 5-year active business
requirement of section 355(b), and the
limitation on disqualified stock under sec-
tion 355(d)) operate to limit the circum-
stances in which Distributing or the con-
trolled corporation (hereinafter referred to
as Controlled) can undergo changes of
control in conjunction with a distribution
that qualifies for corporate and sharehold-
er-level nonrecognition under section 355.
Nevertheless, prior to the enactment of
section 355(e), it was possible for such
changes to occur, for example, in the con-
text of tax free reorganizations, while
qualifying for tax free treatment under
section 355. See, e.g., Commissioner v.
Mary Archer W. Morris Trust, 367 F.2d
794 (4
th
Cir. 1966).
B. Enactment of Section 355(e)
Section 355(e), which was enacted in
1997, provides that the stock of a con-
trolled corporation generally will not be
qualified property under section 355(c)(2)
or section 361(c)(2) if the stock is distrib-
uted as “part of a plan (or series of related
transactions) pursuant to which 1 or more
persons acquire directly or indirectly
stock representing a 50-percent or greater
interest in the distributing corporation or
any controlled corporation.” Thus, if sec-
tion 355(e) applies to a distribution,
Distributing is taxed on the amount by
which the distributed stock’s fair market
value exceeds its basis. Distributee share-
holders receive Controlled stock tax free,
but do not increase their bases to reflect
the corporate level gain recognized by
Distributing on the distribution.
Section 355(e)(2)(B) provides that,
unless the taxpayer establishes otherwise, a
plan (or series of related transactions) (here-
inafter referred to as a plan) exists if “1 or
more persons acquire directly or indirectly
stock representing a 50-percent or greater
interest in the distributing corporation or
any controlled corporation during the 4-
year period beginning on the date which is
2 years before the date of the distribution.”
The committee reports state that section
355 was intended to permit the tax free
division of existing business arrange-
ments among existing shareholders. The
reports state that “[i]n cases in which it is
intended that new shareholders will
acquire ownership of a business in con-
nection with a spin off, the transaction
more closely resembles a corporate level
disposition of the portion of the business
that is acquired” and provide that gain is
recognized “if, pursuant to a plan or
arrangement in existence on the date of
distribution, either the controlled or dis-
tributing corporation is acquired . . ..”
H.R. Rep. No. 105–148, at 462 (1997);
see also S. Rep. No. 105–33, at 139–40
(1997) (slight variation in language). The
Conference Report adds, “[a]s under the
House bill and Senate amendment, a pub-
lic offering of sufficient size can result in
an acquisition that causes gain recognition
under the provision.” H.R. Conf. Rep.
No. 105–220, at 533 (1997).
C. Previous Proposal of Regulations
On August 24, 1999, the IRS and the
Department of the Treasury published
proposed regulations under section 355(e)
(REG–116733–98, 1999–2 C.B. 392) in
the Federal Register(64 F.R. 46155)
(hereinafter referred to as the 1999 pro-
posed regulations). The 1999 proposed
regulations provided the exclusive means
by which a taxpayer could establish that a
distribution and an acquisition were not
January 16, 20013462001–3 I.R.B.
Part IV. Items of General Interest

part of a plan, and required that the tax-
payer must establish the absence of a plan
with clear and convincing evidence.
A public hearing regarding the 1999
proposed regulations was held on March
2, 2000. In addition, written comments
were received. Commentators asserted
that the approach of the 1999 proposed
regulations, providing exclusive rebuttals
for establishing that transactions are not
part of a plan, was inappropriate because
it unfairly limited the evidence taxpayers
could produce that may be relevant to
whether transactions are part of a plan. In
addition, commentators argued that sec-
tion 355(e) does not require the IRS and
the Department of the Treasury to adopt a
clear and convincing evidence standard
for establishing whether transactions are
part of a plan. Further, commentators
were concerned that the exclusive rebut-
tals contained in the 1999 proposed regu-
lations may not be available in cases in
which there was an intent to facilitate any
acquisition, regardless of its type or size,
even if the acquisition being tested was
not the intended acquisition. Finally, one
of the rebuttals in the 1999 proposed reg-
ulations was only available if the taxpay-
er proves, among other things, that “[a]t
the time of the distribution, neither the
distributing corporation, the controlled
corporation, nor their controlling share-
holders reasonably would have anticipat-
ed that it was more likely than not that one
or more persons would acquire a 50-per-
cent or greater interest in the distributing
corporation or the controlled corporation
within 2 years after the distribution . . .
who would not have acquired such inter-
ests if the distribution had not occurred.”
1999 Prop. Reg. §1.355–7(a)(2)(iii)(B).
Many commentators indicated that deter-
mining whether it was reasonably antici-
pated that an event was more likely than
not to occur was impractical and that the
consequent uncertainty inhibited normal
business transactions.
Explanation of Provisions
After consideration of the comments
received, the IRS and the Department of
the Treasury have decided to withdraw the
1999 proposed regulations and issue new
proposed regulations (hereinafter referred
to as the 2000 proposed regulations) to
provide guidance concerning the interpre-
tation of the phrase “plan (or series of
related transactions).” The 2000 proposed
regulations also address the determination
of Distributing’s gain when multiple con-
trolled corporations are distributed and
the distributions are part of a plan pur-
suant to which a 50-percent or greater
interest in one or more, but not all, of the
distributed controlled corporations is
acquired.
The IRS and the Department of the
Treasury plan to issue regulations
addressing other issues arising under sec-
tion 355(e), including the definition of an
acquisition, the application of the aggre-
gation and attribution rules, the treatment
of successors and predecessors, and the
administration of the statute of limitations
provision of section 355(e)(4)(E).
Comments concerning the 2000 proposed
regulations, the additional issues
described above, and other issues that
should be addressed in regulations are
welcome.
A. Plan or Series of Related
Transactions
The 2000 proposed regulations provide
that whether a distribution and an acquisi-
tion are part of a plan is determined based
on all the facts and circumstances. They
include nonexclusive lists of facts and cir-
cumstances to be considered in making
the determination. Because the determi-
nation of whether a plan exists is depen-
dent on the facts and circumstances, the
2000 proposed regulations provide a gen-
eral statement of the policy underlying
whether a distribution and an acquisition
are part of a plan for purposes of section
355(e).
In the case of an acquisition after a dis-
tribution, the 2000 proposed regulations
provide that, in general, the distribution
and acquisition are considered part of a
plan if Distributing, Controlled, or any of
their respective controlling shareholders
intended, on the date of the distribution,
that the acquisition or a similar acquisi-
tion occur in connection with the distribu-
tion. The reference to “a similar acquisi-
tion” ensures that changes in the terms of
the acquisition intended at the time of the
distribution (including, in certain circum-
stances, a substitution of acquirer) do not
prevent the distribution and the acquisi-
tion that actually occurs from being con-
sidered part of a plan.
In the case of an acquisition before a
distribution, the 2000 proposed regula-
tions provide that, in general, the distribu-
tion and acquisition are considered part of
a plan if Distributing, Controlled, or any
of their respective controlling sharehold-
ers intended, on the date of the acquisi-
tion, that a distribution occur in connec-
tion with the acquisition.
As indicated above, the facts and cir-
cumstances surrounding the distribution
and the acquisition must be examined to
determine whether the transactions were
intended to occur in connection with each
other. In addition, the 2000 proposed reg-
ulations contain six safe harbor provisions
that, when applicable, provide that the
acquisition and distribution are not part of
a plan.
Under the 2000 proposed regulations,
Distributing must test each acquisition of
Distributing or Controlled stock to deter-
mine whether it is part of a plan that
includes a distribution. The 2000 pro-
posed regulations aggregate all acquisi-
tions of stock of a corporation that are
pursuant to a plan including a particular
distribution to determine whether the 50
percent threshold of section
355(e)(2)(A)(ii) is met.
1. Facts and Circumstances
For those situations to which the safe
harbor provisions do not apply, the 2000
proposed regulations provide two nonex-
clusive lists of facts and circumstances
(hereinafter referred to as factors) to con-
sider in assessing whether an acquisition
and a distribution are part of a plan. One
list of factors tends to demonstrate that a
distribution and an acquisition are part of
a plan and the other list tends to demon-
strate that a distribution and an acquisition
are not part of a plan. The weight of the
factors depends on the particular case.
The existence of a plan should not be
determined merely by comparing the
number of factors tending to show that the
acquisition and distribution are, or are not,
part of a plan.
Plan Factors
Many of the factors tending to show
that a distribution and an acquisition are
part of a plan (the plan factors) focus on
whether Distributing, Controlled or their
2001–3 I.R.B.347January 16, 2001

respective controlling shareholders partic-
ipated in discussions with outside parties
regarding the second transaction of the
pair being tested before the first transac-
tion occurred (factors (i), (ii), (iii), (iv),
(v), and (vi)). Such discussions provide
evidence that Distributing, Controlled or
any of their respective controlling share-
holders had an intent that the transactions
occur in connection with each other.
Other plan factors (factors (vii), (viii),
and (ix)) inquire into other indications of
the intent of Distributing, Controlled and
their respective controlling shareholders.
Factor (vii) considers whether the distrib-
ution was motivated by a business pur-
pose to facilitate the acquisition or a sim-
ilar acquisition of Distributing or
Controlled. The operating rule in pro-
posed §1.355–7(e)(1)(i) states that evi-
dence of a business purpose to facilitate
an acquisition of Distributing or
Controlled exists if there was a reasonable
certainty that within 6 months after the
distribution an acquisition would occur,
an agreement, understanding, or arrange-
ment would exist, or substantial negotia-
tions would occur regarding an acquisi-
tion. The operating rule in proposed
§1.355–7(e)(1)(ii) applies to acquisitions
before a distribution, asking whether the
acquisition occurred after the date of the
public announcement of the planned dis-
tribution, or whether, at the time of the
acquisition, it was reasonably certain that
within 6 months after the acquisition the
distribution would occur, an agreement,
understanding, or arrangement would
exist, or substantial negotiations would
occur regarding the distribution. The
operating rule in proposed §1.355–7(e)(2)
provides that the fact that internal discus-
sions occurred may be indicative of the
business purpose that motivated the distri-
bution. The operating rule contained in
proposed §1.355–7(e)(3) provides that, if
Distributing distributes Controlled stock
intending, in whole or substantial part, to
decrease the likelihood of the acquisition
of Distributing or Controlled by separat-
ing it from another corporation that is
likely to be acquired, Distributing is treat-
ed as having a business purpose to facili-
tate the acquisition of the corporation that
was acquired.
The rule regarding reasonable certainty
is necessary to implement section 355(e)
because where a taxpayer was reasonably
certain that an acquisition would occur,
that acquisition was likely to be taken into
account in determining whether to effect a
distribution. While the IRS and the
Department of the Treasury believe that
reasonable certainty (even where no dis-
cussions with potential acquirers have
occurred) is relevant in determining
whether a plan exists, it should be noted
that this concept is significantly modified
from the 1999 proposed regulations. This
operating rule will apply only in cases
where there was a strong probability that,
within 6 months after the distribution, an
acquisition would occur, an agreement,
understanding, or arrangement would
exist, or substantial negotiations would
occur.
Factor (viii) considers whether an
acquisition and a distribution occured
within 6 months of each other, or whether
there was an agreement, understanding,
arrangement, or substantial negotiations
regarding the second transaction (or, if an
acquisition is the second transaction, a
similar acquisition) within 6 months after
the first transaction.
Finally, factor (ix) examines whether
the debt allocation between Distributing
and Controlled made an acquisition of
Distributing or Controlled likely in order
to service the debt.
Nonplan Factors
The 2000 proposed regulations also
provide a nonexclusive list of factors
tending to show that a distribution and an
acquisition are not part of a plan (the non-
plan factors). Just as discussions with
outside parties about the second transac-
tion prior to the first transaction tend to
show that Distributing, Controlled or their
respective controlling shareholders had an
intent that the second transaction occur in
connection with the first transaction, the
absence of such discussions tends to show
that the transactions did not occur in con-
nection with each other. Thus, there are
nonplan factors that are analogous to the
plan factors related to discussions (factors
(i), (ii), and (iv)).
The existence of a corporate business
purpose, other than a business purpose to
facilitate the acquisition or a similar
acquisition, that motivated Distributing,
in whole or substantial part, to make the
stock distribution tends to show that a dis-
tribution and an acquisition are not part of
a plan (factor (vi)). The presence of a
business purpose to facilitate the acquisi-
tion or a similar acquisition is relevant in
determining the extent to which the distri-
bution was motivated in whole or sub-
stantial part by another corporate business
purpose within the meaning of §1.355–2.
Analyzing whether there is another sub-
stantial corporate business purpose for the
distribution in light of an acquisition-
related purpose is similar to analyzing
whether there is a corporate business pur-
pose for a distribution in light of the
potential avoidance of federal taxes. See
§1.355–2(b)(1) and (5), Example 8. Thus,
another business purpose must be real and
substantial even in light of the acquisition
business purpose. In making this determi-
nation, the operating rules in proposed
§1.355–7(e) apply.
Factors (iii) and (v) consider whether
there was an identifiable, unexpected
change in market or business conditions
after the first of the two transactions being
tested that resulted in the second, unex-
pected transaction. Factor (vii) considers
whether the distribution would have
occurred at approximately the same time
and in similar form regardless of the
acquisition or a previously proposed sim-
ilar acquisition.
2. Safe Harbors
The 2000 proposed regulations include
six safe harbor provisions. A distribution
and an acquisition are not part of a plan if
they are described in one of the safe har-
bors. The first two safe harbors address
acquisitions more than 6 months after a
distribution. Safe Harbor I applies to an
acquisition more than 6 months after a
distribution if there was no agreement,
understanding, arrangement, or substan-
tial negotiations concerning the acquisi-
tion before a date that is 6 months after the
distribution and the distribution was moti-
vated in whole or substantial part by a
corporate business purpose other than a
business purpose to facilitate an acquisi-
tion. The nonacquisition corporate busi-
ness purpose for the distribution is con-
sidered in light of any business purpose to
facilitate an acquisition, and the operating
rules in proposed §1.355–7(e) apply.
Safe Harbor II, like Safe Harbor I,
applies only to acquisitions more than 6
months after a distribution for which there
was no agreement, understanding,
arrangement, or substantial negotiations
January 16, 20013482001–3 I.R.B.

concerning the acquisition before a date
that is 6 months after the distribution.
However, where Safe Harbor I applies to
cases where the distribution was motivat-
ed in whole or substantial part by a nonac-
quisition business purpose, Safe Harbor II
applies to situations where the distribution
was motivated in whole or substantial part
by a business purpose to facilitate an
acquisition. Under Safe Harbor II, an
acquisition will not be treated as part of a
plan with a distribution if the distribution
was motivated in whole or substantial part
by a corporate business purpose to facili-
tate an acquisition or acquisitions of no
more than 33 percent of the stock of
Distributing or Controlled, and no more
than 20 percent of the stock of the corpo-
ration whose stock was acquired in the
acquisition or acquisitions that motivated
the distribution was either acquired or the
subject of an agreement, understanding,
arrangement, or substantial negotiations
before a date that is 6 months after the dis-
tribution. Safe Harbor II is intended to
alleviate the concerns commentators
expressed about the unavailability of the
rebuttals in the 1999 proposed regulations
if the distribution was motivated by an
intent to facilitate an acquisition regard-
less of its type or size.
Safe Harbors III and IV address acqui-
sitions and distributions more than 2 years
apart. Under Safe Harbor III, acquisitions
more than 2 years after a distribution are
not pursuant to a plan if there is no agree-
ment, understanding, arrangement, or
substantial negotiations concerning the
acquisition at the time of the distribution
or within 6 months thereafter. Under Safe
Harbor IV, acquisitions more than 2 years
before a distribution are not part of a plan
if there is no agreement, understanding,
arrangement, or substantial negotiations
concerning the distribution at the time of
the acquisition or within 6 months there-
after.
Safe Harbor V provides that an acquisi-
tion of Distributing or Controlled stock
that is listed on an established market (as
defined in the 2000 proposed regulations)
is not part of a plan if the stock is trans-
ferred between shareholders of Distribut-
ing or Controlled who are not 5-percent
shareholders. In general, a person will be
considered a 5-percent shareholder if,
immediately before or after each transfer,
the person owns, directly or indirectly, or
together with related persons (as
described in sections 267(b) and 707(b)),
5 percent or more of any class of stock of
the corporation whose stock is trans-
ferred.
Safe Harbor VI provides that an acqui-
sition of stock by an employee or director
in connection with the performance of
services, including an acquisition result-
ing from the exercise of certain compen-
satory stock options, is not part of a plan.
3. Agreement, Understanding,
Arrangement, or Substantial Negotiations
There are many references in the 2000
proposed regulations to the existence of
an agreement, understanding, arrange-
ment, or substantial negotiations. The
2000 proposed regulations do not define
those concepts precisely. A binding con-
tract clearly is included as an agreement
but, depending on all relevant facts and
circumstances, parties can have an agree-
ment, understanding, or arrangement even
though they have not reached agreement
on all terms. Under certain circum-
stances, such as in public offerings or auc-
tions of Distributing’s or Controlled’s
stock, an agreement, understanding,
arrangement, or substantial negotiations
can exist regarding an acquisition even if
the acquirer has not been specifically
identified.
4. Options
The 2000 proposed regulations enu-
merate interests treated as options. If
stock of Distributing or Controlled is
acquired pursuant to an option, the option
is treated as an agreement to acquire stock
on the date of writing unless Distributing
establishes that, on the later of the date of
the stock distribution or the writing of the
option, the option was not more likely
than not to be exercised. The 2000 pro-
posed regulations also address the treat-
ment of an agreement, understanding, or
arrangement to write an option and sub-
stantial negotiations regarding the writing
of an option. The 2000 proposed regula-
tions exempt certain options from treat-
ment as options unless they are written,
transferred, or listed with a principal pur-
pose of avoiding the application of section
355(e) or the 2000 proposed regulations.
The enumerated exceptions cover certain
commercially customary options that are
unlikely to be used to avoid section 355(e)
or the 2000 proposed regulations.
B. Any Controlled Corporation
Section 355(e)(2)(A)(ii) provides that
section 355(e)(1), which causes
Distributing to recognize its gain in
Controlled stock as if Distributing had
sold the stock for its fair market value,
applies to any distribution to which sec-
tion 355 (or so much of section 356 as
relates to section 355) applies and “which
is part of a plan . . . pursuant to which 1 or
more persons acquire directly or indirect-
ly stock representing a 50-percent or
greater interest in the distributing corpora-
tion or any controlled corporation”
(emphasis added). A question has arisen
concerning the measure of gain to
Distributing if, pursuant to a plan, the
stock of more than 1 controlled corpora-
tion is distributed and stock representing a
50-percent or greater interest is acquired
in some, but not all, of the distributed con-
trolled corporations. The 2000 proposed
regulations clarify that under those cir-
cumstances, Distributing only recognizes
gain on the stock of the distributed con-
trolled corporations that were subject to
50-percent or greater acquisitions. If
Distributing is the acquired corporation, it
must recognize gain on all of the distrib-
uted controlled corporations.
Proposed Effective Date
The regulations in this section are pro-
posed to apply to distributions occurring
after the regulations in this section are
published as final regulations in the
Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information
on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
2001–3 I.R.B.349January 16, 2001

the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(preferably a signed original and eight (8)
copies) and comments sent via the
Internet that are submitted timely to the
IRS. The Department of the Treasury and
the IRS specifically request comments on
the clarity of the proposed regulations and
how they may be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for May 15, 2001, beginning at 10 a.m. in
Room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW.,
Washington, DC. Due to building securi-
ty procedures, visitors must enter at the
10
th
Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the “FOR FURTHER INFORMA-
TION CONTACT” section of this pream-
ble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments
and an 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 24, 2001. A
period of 10 minutes will be allotted to
each person for making comments. An
agenda showing the scheduling of the
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Brendan P. O’Hara, Office
of the Associate Chief Counsel
(Corporate). However, other personnel
from the Department of the Treasury and
the IRS participated in their develop-
ment.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355–7 also issued under 26
U.S.C. 355(e)(5). * * *
Par. 2. Section 1.355–0 is amended by
revising the section heading and adding
introductory text and an entry for
§1.355–7 to read in part as follows:
§1.355–0 Outline of sections.
In order to facilitate the use of
§§1.355–1 through 1.355–7, this section
lists the major paragraphs in those sec-
tions as follows:
* * * * *
§1.355–7 Recognition of gain on certain
distributions of stock or securities in
connection with an acquisition.
(a) In general.
(b) Plan.
(c) Multiple acquisitions.
(d) Facts and circumstances.
(e) Operating rules.
(1) Reasonable certainty evidence of
business purpose to facilitate an acquisi-
tion.
(2) Internal discussion evidence of busi-
ness purpose.
(3) Hostile takeover defense.
(4) Effect of distribution on trading in
stock.
(5) Consequences of section 355(e) dis-
regarded for certain purposes.
(6) Substantial diminution of risk.
(f) Safe harbors.
(1) Safe Harbor I.
(2) Safe Harbor II.
(3) Safe Harbor III.
(4) Safe Harbor IV.
(5) Safe Harbor V.
(i) In general.
(ii) Special rules.
(6) Safe Harbor VI.
(g) Stock acquired by exercise of
options, warrants, convertible obliga-
tions, and other similar interests.
(1) Treatment of options.
(i) General rule.
(ii) Agreement, understanding, arrange-
ment, or substantial negotiations to write
an option.
(2) Instruments treated as options.
(3) Instruments generally not treated as
options.
(i) Escrow, pledge, or other security
agreements.
(ii) Compensatory options.
(iii) Options exercisable only upon death,
disability, mental incompetency, or sepa-
ration from service.
(iv) Rights of first refusal.
(v) Other enumerated instruments.
(h) Multiple controlled corporations.
(i) [Reserved]
(j) Valuation.
(k) Definitions.
(1) Agreement, understanding, arrange-
ment, or substantial negotiations.
(2) Controlled corporation.
(3) Controlling shareholder.
(4) Established market.
(5) Five-percent shareholder.
(l) [Reserved]
(m) Examples.
(n) Effective date.
Par. 3. Section 1.355–7 is added to read
as follows:
§1.355–7 Recognition of gain on certain
distributions of stock or securities in
connection with an acquisition.
(a) In general.Except as provided in
section 355(e) and in this section, section
355(e) applies to any distribution—
(1) To which section 355 (or so much of
section 356 as relates to section 355)
applies; and
(2) That is part of a plan (or series of
related transactions) (hereinafter, plan)
pursuant to which 1 or more persons
acquire directly or indirectly stock repre-
senting a 50-percent or greater interest in
the distributing corporation (Distributing)
or any controlled corporation
(Controlled).
(b) Plan. (1) Whether a distribution
and an acquisition are part of a plan is
determined based on all the facts and cir-
cumstances. In general, in the case of an
acquisition after a distribution, the distrib-
ution and the acquisition are considered
part of a plan if Distributing, Controlled,
January 16, 20013502001–3 I.R.B.

or any of their respective controlling
shareholders intended, on the date of the
distribution, that the acquisition or a sim-
ilar acquisition occur in connection with
the distribution. In general, in the case of
an acquisition before a distribution, the
acquisition and the distribution are con-
sidered part of a plan if Distributing,
Controlled, or any of their respective con-
trolling shareholders intended, on the date
of the acquisition, that a distribution occur
in connection with the acquisition.
(2) For purposes of paragraph (b)(1) of
this section, the actual acquisition and the
intended acquisition may be similar even
though the identity of the person acquir-
ing stock of Distributing or Controlled
(acquirer), the timing of the acquisition or
the terms of the actual acquisition are dif-
ferent from the intended acquisition. For
example, in the case of a public offering
or auction, the actual acquisition and the
intended acquisition may be similar even
though there are changes in the terms of
the stock, the class of stock being offered,
the size of the offering, the timing of the
offering, the price of the stock, or the par-
ticipants in the public offering or auction.
(c) Multiple acquisitions. All acquisi-
tions of stock of Distributing or
Controlled that are considered to be part
of a plan with a distribution pursuant to
paragraph (b) of this section will be
aggregated for purposes of the 50-percent
test of paragraph (a)(2) of this section.
(d) Facts and circumstances. (1) The
facts and circumstances to be considered
in demonstrating whether a distribution
and an acquisition are part of a plan
include, but are not limited to, the facts
and circumstances specified in paragraphs
(d)(2) and (d)(3) of this section. The
weight to be given each of the facts and
circumstances depends on the particular
case. Therefore, whether a distribution
and an acquisition are part of a plan does
not depend on the relative number of facts
and circumstances present under para-
graph (d)(2) as compared to paragraph
(d)(3) of this section.
(2) Among the facts and circumstances
tending to show that a distribution and an
acquisition are part of a plan are the fol-
lowing:
(i) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, Distributing or
Controlled and the acquirer (or any of
their respective controlling shareholders)
discussed the acquisition or a similar
acquisition by the acquirer before the dis-
tribution. The weight to be accorded the
discussions depends on the nature, extent
and timing of the discussions. The exis-
tence of an agreement, understanding,
arrangement or substantial negotiations at
the time of the distribution is given sub-
stantial weight.
(ii) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, Distributing or
Controlled and a potential acquirer (or
any of their respective controlling share-
holders) discussed an acquisition before
the distribution and a similar acquisition
by a different person occurred after the
distribution. The weight to be accorded
the discussions depends on the nature,
extent and timing of the discussions and
the similarity of the acquisition actually
occurring to the acquisition discussed
before the distribution.
(iii) In the case of an acquisition
involving a public offering or auction
after a distribution, Distributing or
Controlled (or any of their respective con-
trolling shareholders) discussed the acqui-
sition with an investment banker or other
outside adviser before the distribution.
The weight to be accorded the discussions
depends on the nature, extent and timing
of the discussions.
(iv) In the case of an acquisition before
a distribution, Distributing or Controlled
and the acquirer (or any of their respective
controlling shareholders) discussed a dis-
tribution before the acquisition. The
weight to be accorded the discussions
depends on the nature, extent and timing
of the discussions.
(v) In the case of an acquisition before
a distribution, Distributing or Controlled
and a potential acquirer (or any of their
respective controlling shareholders) dis-
cussed a distribution before the acquisi-
tion and a similar acquisition by a differ-
ent person occurred before the
distribution. The weight to be accorded
the discussions depends on the nature,
extent and timing of the discussions and
the similarity of the acquisition actually
occurring to the potential acquisition that
was discussed.
(vi) In the case of an acquisition involv-
ing a public offering or auction before a
distribution, Distributing or Controlled
(or any of their respective controlling
shareholders) discussed a distribution
with an investment banker or other out-
side adviser before the acquisition. The
weight to be accorded the discussions
depends on the nature, extent and timing
of the discussions.
(vii) In the case of an acquisition either
before or after a distribution, the distribu-
tion was motivated by a business purpose
to facilitate the acquisition or a similar
acquisition of Distributing or Controlled.
(viii) In the case of an acquisition either
before or after a distribution, the acquisi-
tion and the distribution occurred within 6
months of each other or there was an
agreement, understanding, arrangement,
or substantial negotiations regarding the
second transaction within 6 months after
the first transaction. Also, in the case of
an acquisition occurring after a distribu-
tion, there was an agreement, understand-
ing, arrangement, or substantial negotia-
tions regarding a similar acquisition at the
time of the distribution or within 6 months
thereafter.
(ix) In the case of an acquisition either
before or after a distribution, the debt allo-
cation between Distributing and
Controlled made an acquisition of
Distributing or Controlled likely in order
to service the debt.
(3) Among the facts and circumstances
tending to show that a distribution and an
acquisition are not part of a plan are the
following:
(i) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, neither
Distributing nor Controlled and the
acquirer or any potential acquirer (nor any
of their respective controlling sharehold-
ers) discussed the acquisition or a similar
acquisition before the distribution.
(ii) In the case of an acquisition involv-
ing a public offering or auction after a dis-
tribution, neither Distributing nor
Controlled (nor any of their respective con-
trolling shareholders) discussed the acquisi-
tion with an investment banker or other out-
side adviser before the distribution.
(iii) In the case of an acquisition after a
distribution, there was an identifiable,
unexpected change in market or business
conditions occurring after the distribution
that resulted in the acquisition that was
otherwise unexpected at the time of the
distribution.
2001–3 I.R.B.351January 16, 2001

(iv) In the case of an acquisition (other
than involving a public offering or auc-
tion) before a distribution, neither
Distributing nor Controlled and the
acquirer (nor any of their respective con-
trolling shareholders) discussed a distrib-
ution before the acquisition. This para-
graph (d)(3)(iv) does not apply if the
acquisition occurred after the date of the
public announcement of the planned dis-
tribution.
(v) In the case of an acquisition before
a distribution, there was an identifiable,
unexpected change in market or business
conditions occurring after the acquisition
that resulted in a distribution that was oth-
erwise unexpected.
(vi) In the case of an acquisition either
before or after a distribution, the distribu-
tion was motivated in whole or substantial
part by a corporate business purpose
(within the meaning of §1.355–2(b)) other
than a business purpose to facilitate the
acquisition or a similar acquisition of
Distributing or Controlled. The presence
of a business purpose to facilitate the
acquisition or a similar acquisition of
Distributing or Controlled is relevant in
determining the extent to which the distri-
bution was motivated by a corporate busi-
ness purpose (within the meaning of
§1.355–2(b)) other than a business pur-
pose to facilitate the acquisition or a sim-
ilar acquisition of Distributing or
Controlled.
(vii) In the case of an acquisition either
before or after a distribution, the distribu-
tion would have occurred at approximate-
ly the same time and in similar form
regardless of the acquisition or a similar
acquisition (including a previously pro-
posed similar acquisition that did not
occur).
(e) Operating rules. The operating
rules contained in this paragraph (e) apply
for all purposes of this section.
(1) Reasonable certainty evidence of
business purpose to facilitate an acquisi-
tion. (i) In the case of an acquisition after
a distribution, if, at the time of the distrib-
ution, it was reasonably certain that before
a date that is 6 months after the distribu-
tion an acquisition would occur, an agree-
ment, understanding, or arrangement
would exist, or substantial negotiations
would occur regarding an acquisition of
Distributing or Controlled, the reasonable
certainty is evidence of a business pur-
pose to facilitate an acquisition of
Distributing or Controlled.
(ii) In the case of an acquisition before
a distribution, if the acquisition occurred
after the date of the public announcement
of the planned distribution, or if, at the
time of the acquisition, it was reasonably
certain that before a date that is 6 months
after the acquisition the distribution
would occur, an agreement, understand-
ing, or arrangement would exist, or sub-
stantial negotiations would occur regard-
ing the distribution, the public
announcement or reasonable certainty is
evidence of a business purpose to facili-
tate an acquisition of Distributing or
Controlled.
(2) Internal discussions evidence of
business purpose. The fact that internal
discussions regarding an acquisition
occurred may be indicative of the busi-
ness purpose that motivated the distribu-
tion.
(3) Hostile takeover defense. If
Distributing distributes Controlled stock
intending, in whole or substantial part, to
decrease the likelihood of the acquisition
of Distributing or Controlled by separat-
ing it from another corporation that is
likely to be acquired, Distributing will be
treated as having a business purpose to
facilitate the acquisition of the corpora-
tion that was likely to be acquired.
(4) Effect of distribution on trading in
stock.The fact that the distribution made
all or a part of the stock of Controlled
available for trading or made Distributing
or Controlled’s stock trade more actively
is not taken into account in determining
whether the distribution and an acquisi-
tion of Distributing or Controlled stock
were part of a plan.
(5) Consequences of section 355(e) dis-
regarded for certain purposes. For pur-
poses of determining the intentions of the
relevant parties under this section, the
consequences of the application of section
355(e), and the existence of any contrac-
tual indemnity by Controlled for tax
resulting from the application of section
355(e) caused by an acquisition of
Controlled, are disregarded.
(6) Substantial diminution of risk. The
running of any time period prescribed in
this section shall be suspended for any
period during which risk of loss is sub-
stantially diminished under the principles
of section 355(d)(6)(B).
(f) Safe harbors—(1) Safe Harbor I. (i)
A distribution and an acquisition occur-
ring after the distribution will not be con-
sidered part of a plan if—
(A) The acquisition occurred more than
6 months after the distribution and there
was no agreement, understanding,
arrangement, or substantial negotiations
concerning the acquisition before a date
that is 6 months after the distribution; and
(B) The distribution was motivated in
whole or substantial part by a corporate
business purpose (within the meaning of
§1.355–2(b)) other than a business pur-
pose to facilitate an acquisition of
Distributing or Controlled.
(ii) For purposes of paragraph
(f)(1)(i)(B) of this section, the presence of
a business purpose to facilitate an acquisi-
tion of Distributing or Controlled is rele-
vant in determining the extent to which
the distribution was motivated by a corpo-
rate business purpose (within the meaning
of §1.355–2(b)) other than a business pur-
pose to facilitate an acquisition of
Distributing or Controlled.
(2) Safe Harbor II. A distribution and
an acquisition occurring after the distribu-
tion will not be considered part of a plan
if—
(i) The acquisition occurred more than
6 months after the distribution and there
was no agreement, understanding,
arrangement, or substantial negotiations
concerning the acquisition before a date
that is 6 months after the distribution; and
(ii) The distribution was motivated in
whole or substantial part by a corporate
business purpose (within the meaning of
§1.355–2(b)) to facilitate an acquisition or
acquisitions of no more than 33 percent of
the stock of Distributing or Controlled,
and no more than 20 percent of the stock
of the corporation (whose stock was
acquired in the acquisition or acquisitions
that motivated the distribution) was either
acquired or the subject of an agreement,
understanding, arrangement, or substan-
tial negotiations before a date that is 6
months after the distribution.
(3) Safe Harbor III. If an acquisition
occurs more than 2 years after a distribu-
tion and there was no agreement, under-
standing, arrangement, or substantial
negotiations concerning the acquisition at
the time of the distribution or within 6
months thereafter, the acquisition and the
distribution are not part of a plan.
January 16, 20013522001–3 I.R.B.

(4) Safe Harbor IV. If an acquisition
occurs more than 2 years before a distrib-
ution, and there was no agreement, under-
standing, arrangement, or substantial
negotiations concerning the distribution at
the time of the acquisition or within 6
months thereafter, the acquisition and the
distribution are not part of a plan.
(5) Safe Harbor V—(i) In general. An
acquisition of Distributing or Controlled
stock that is listed on an established mar-
ket is not part of a plan if the acquisition
is pursuant to a transfer between share-
holders of Distributing or Controlled, nei-
ther of whom is a 5-percent shareholder.
For purposes of the preceding sentence,
the term 5-percent shareholder is defined
in paragraph (k)(5) of this section, except
that the corporation can rely on Schedules
13D and 13G (or any similar schedules)
filed with the Securities and Exchange
Commission to identify its 5-percent
shareholders.
(ii) Special rules—(A) This paragraph
(f)(5) does not apply to public offerings or
redemptions.
(B) This paragraph (f)(5) does not
apply to a transfer of stock by or to a per-
son who, pursuant to a formal or informal
understanding with other persons (the
coordinating group), has joined in coordi-
nated transfers of stock if, at any time dur-
ing the period the understanding exists,
the coordinating group owns, in the aggre-
gate, 5 percent or more of the stock of the
corporation whose stock is transferred
(determined by vote or value) immediate-
ly before or after each transfer or at the
time of the distribution. A principal ele-
ment in determining if such an under-
standing exists is whether the investment
decision of each person is based on the
investment decision of 1 or more other
existing or prospective shareholders.
(C) This paragraph (f)(5) does not
apply to a transfer of stock by or to a per-
son if the corporation the stock of which
is being transferred knows, or has reason
to know, that the person (or a coordinating
group, treating it as a single person)
intends to become a 5-percent sharehold-
er at any time during the 4-year period
beginning 2 years before the distribution.
(6) Safe Harbor VI. If stock of
Distributing or Controlled is acquired by
an employee or director of Distributing,
Controlled, or a person related to
Distributing or Controlled under section
355(d)(7)(A), in connection with the per-
formance of services as an employee or
director for the corporation or a person
related to it under section 355(d)(7)(A)
(and that is not excessive by reference to
the services performed) in a transaction to
which section 83 applies, the acquisition
is not an acquisition that is part of a plan
as described in paragraph (b)(1) of this
section.
(g) Stock acquired by exercise of
options, warrants, convertible obligations,
and other similar interests—(1) Treatment
of options—(i) General rule. For purpos-
es of this section, if stock of Distributing
or Controlled is acquired pursuant to an
option, the option will be treated as an
agreement to acquire the stock on the date
the option is written unless Distributing
establishes that on the later of the date of
the stock distribution or the writing of the
option, the option was not more likely
than not to be exercised. The determina-
tion of whether an option was more likely
than not to be exercised is based on all the
facts and circumstances, taking control
premiums and minority and blockage dis-
counts into account in determining the fair
market value of stock underlying an
option.
(ii) Agreement, understanding, ar-
rangement, or substantial negotiations to
write an option. If there is an agreement,
understanding, or arrangement to write an
option, the option will be treated as writ-
ten on the date of the agreement, under-
standing, or arrangement. If an agree-
ment, understanding, or arrangement to
write an option is reached, or an option is
written, more than 6 months but not more
than 2 years after the distribution, and
there were substantial negotiations
regarding the writing of the option or the
acquisition of the stock underlying the
option before the end of the 6-month peri-
od beginning on the date of the distribu-
tion, the option will be treated as written
within 6 months after the distribution.
(2) Instruments treated as options. For
purposes of this paragraph (g), except to
the extent provided in paragraph (g)(3) of
this section, call options, warrants, con-
vertible obligations, the conversion fea-
ture of convertible stock, put options,
redemption agreements (including rights
to cause the redemption of stock), any
other instruments that provide for the
right or possibility to issue, redeem, or
transfer stock (including an option on an
option), or any other similar interests are
treated as options.
(3) Instruments generally not treated as
options. For purposes of this paragraph
(g), the following are not treated as
options unless (in the case of paragraphs
(g)(3)(i), (iii), and (iv) of this section)
written, transferred (directly or indirect-
ly), or listed with a principal purpose of
avoiding the application of section 355(e)
or this section.
(i) Escrow, pledge, or other security
agreements. An option that is part of a
security arrangement in a typical lending
transaction (including a purchase money
loan), if the arrangement is subject to cus-
tomary commercial conditions. For this
purpose, a security arrangement includes,
for example, an agreement for holding
stock in escrow or under a pledge or other
security agreement, or an option to
acquire stock contingent upon a default
under a loan.
(ii) Compensatory options. An option
to acquire stock in Distributing or
Controlled with customary terms and con-
ditions provided to an employee or direc-
tor of Distributing, Controlled, or a person
related to Distributing or Controlled under
section 355(d)(7)(A), in connection with
the performance of services as an employ-
ee or director for the corporation or a per-
son related to it under section
355(d)(7)(A) (and that is not excessive by
reference to the services performed) and
that immediately after the distribution and
within 6 months thereafter—
(A) Is nontransferable within the mean-
ing of §1.83–3(d); and
(B) Does not have a readily ascertain-
able fair market value as defined in
§1.83–7(b).
(iii) Options exercisable only upon
death, disability, mental incompetency,
or separation from service. Any option
entered into between shareholders of a
corporation (or a shareholder and the
corporation) that is exercisable only
upon the death, disability, or mental
incompetency of the shareholder, or, in
the case of stock acquired in connection
with the performance of services for the
corporation or a person related to it
under section 355(d)(7)(A) (and that is
not excessive by reference to the ser-
vices performed), the shareholder’s sep-
aration from service.
2001–3 I.R.B.353January 16, 2001

(iv) Rights of first refusal. Abona fide
right of first refusal regarding the corpo-
ration’s stock with customary terms,
entered into between shareholders of a
corporation (or between the corporation
and a shareholder).
(v) Other enumerated instruments.
Any other instrument the Commissioner
may designate in revenue procedures,
notices, or other guidance published in the
Internal Revenue Bulletin. See
§601.601(d)(2) of this chapter.
(h) Multiple controlled corporations.
Only the stock or securities of a controlled
corporation in which 1 or more persons
acquire directly or indirectly stock repre-
senting a 50-percent or greater interest as
part of a plan involving the distribution of
that corporation will be treated as not
qualified property under section 355(e)(1)
if—
(1) The stock or securities of more than
1 controlled corporation are distributed in
distributions to which section 355 (or so
much of section 356 as relates to section
355) applies; and
(2) One or more persons do not acquire,
directly or indirectly, stock representing a
50-percent or greater interest in
Distributing pursuant to a plan involving
any of those distributions.
(i) [Reserved]
(j) Valuation. Except as provided in
paragraph (g)(1)(i) of this section, for pur-
poses of section 355(e) and this section,
all shares of stock within a single class are
considered to have the same value. Thus,
control premiums and minority and block-
age discounts within a single class are not
taken into account.
(k) Definitions—(1) Agreement, under-
standing, arrangement, or substantial
negotiations. Whether an agreement,
understanding, or arrangement exists
depends on the facts and circumstances.
The parties do not necessarily have to
have entered into a binding contract or
have reached agreement on all terms to
have an agreement, understanding, or
arrangement. However, an agreement,
understanding, or arrangement clearly
exists if enforceable rights to acquire
stock exist. In public offerings or auc-
tions by Distributing or Controlled of
Distributing or Controlled’s stock, an
agreement, understanding, arrangement,
or substantial negotiations can exist even
if the acquirer has not been specifically
identified. The existence of such an
agreement, understanding, arrangement,
or substantial negotiations will be based
on discussions with an investment banker
or other outside adviser.
(2) Controlled corporation. For pur-
poses of this section, a controlled corpora-
tion is a corporation the stock of which is
distributed in a distribution to which sec-
tion 355 (or so much of section 356 as
relates to section 355) applies.
(3) Controlling shareholder. (i) A con-
trolling shareholder of a corporation the
stock of which is not listed on an estab-
lished market is any person who, directly
or indirectly, or together with related per-
sons (as described in sections 267(b) and
707(b)), possesses voting power in
Distributing or Controlled representing a
meaningful voice in the governance of the
corporation.
(ii) A controlling shareholder of a cor-
poration the stock of which is listed on an
established market is a 5-percent share-
holder who actively participates in the
management or operation of the corpora-
tion.
(iii) For purposes of this section, a per-
son is a controlling shareholder if that per-
son meets the definition of controlling
shareholder in this paragraph (k)(3)
immediately before or immediately after
the acquisition being tested.
(iv) If a distribution precedes an acqui-
sition, Controlled’s controlling sharehold-
ers immediately after the distribution are
considered Controlled’s controlling share-
holders at the time of the distribution.
(4) Established Market. An established
market is—
(i) A national securities exchange regis-
tered under section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. 78f);
(ii) An interdealer quotation system
sponsored by a national securities associ-
ation registered under section 15A of the
Securities Act of 1934 (15 U.S.C. 78o–3);
or
(iii) Any additional market that the
Commissioner may designate in revenue
procedures, notices, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2) of this chapter).
(5) Five-percent shareholder. A person
will be considered a 5-percent sharehold-
er of a corporation the stock of which is
listed on an established market if the per-
son owns, directly or indirectly, or togeth-
er with related persons (as described in
sections 267(b) and 707(b)) 5 percent or
more of any class of stock of the corpora-
tion whose stock is transferred. A person
is a 5-percent shareholder if the person
meets the requirements of the preceding
sentence immediately before or after each
transfer. All options are treated as exer-
cised for the purpose of determining
whether the shareholder is a 5-percent
shareholder.
(l) [Reserved]
(m) Examples. The following exam-
ples illustrate paragraphs (a) through (k)
of this section. Throughout these exam-
ples, assume that Distributing (D) owns
all of the stock of Controlled (C). Assume
further that D distributes the stock of C in
a distribution to which section 355 applies
and to which section 355(d) does not
apply. Unless otherwise stated, assume
the corporations do not have controlling
shareholders. No inference should be
drawn from any example concerning
whether any requirements of section 355
other than those of section 355(e) are sat-
isfied. The examples are as follows:
Example 1. Unwanted assets. (i) D is in business
1. C is in business 2. D is relatively small in its indus-
try. D wants to combine with X, a larger corporation
also engaged in business 1. X and D begin negotiat-
ing for X to acquire D, but X does not want to acquire
C. To facilitate the acquisition of D by X, D agrees to
distribute all the stock of C pro ratabefore the acqui-
sition. D and X enter into a binding contract for D to
merge into X subject to several conditions. D distrib-
utes C and D merges into X one month later. As a
result of the merger, D’s former shareholders own less
than 50 percent of the stock of X.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the merger of D into X are part of a plan. To deter-
mine whether the distribution of C and the merger of
D into X are part of a plan, D must consider all the
facts and circumstances, including those described
in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the merger of D into X are part of a
plan: X and D discussed the acquisition before the
distribution (paragraph (d)(2)(i) of this section), D
was motivated by a business purpose to facilitate the
merger (paragraph (d)(2)(vii) of this section), and
the distribution and the merger occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). Because the merger was not only dis-
cussed, but was agreed to, before the distribution, the
fact described in paragraph (d)(2)(i) of this section is
given substantial weight.
(v) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(vi) The distribution of C and the merger of D
into X are part of a plan under paragraph (b)(1) of
this section.
January 16, 20013542001–3 I.R.B.

Example 2. Substituted acquirer. (i) The facts
are the same as in Example 1, except that after D dis-
tributes C, X is unable to fulfill one of the conditions
of the merger agreement and the merger of D into X
does not occur. Y, one of X’s competitors, perceives
this as an opportunity and begins discussing with D
a merger into Y. Five months after D distributes C,
D merges into Y. As a result of the merger, the D
shareholders own less than 50 percent of the out-
standing Y stock.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the merger of D into Y are part of a plan. To deter-
mine whether the distribution of C and the merger of
D into Y are part of a plan, D must consider all the
facts and circumstances, including those described
in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the merger of D into Y are part of a
plan: X, a potential acquirer, and D discussed an
acquisition before the distribution and a similar
acquisition by Y occurred (paragraph (d)(2)(ii) of
this section), D was motivated by a business purpose
to facilitate an acquisition similar to the merger with
Y (paragraph (d)(2)(vii) of this section), and the dis-
tribution and the merger occurred within 6 months of
each other (paragraph (d)(2)(viii) of this section).
(v) As inExample 1, none of the facts and cir-
cumstances listed in paragraph (d)(3) of this section
exist in this case. Although a substituted acquirer
acquired D, the merger of D into Y was similar to the
negotiated merger of D into X.
(vi) The distribution of C and the merger of D
into Y are part of a plan under paragraph (b)(1) of
this section.
Example 3. Public offering. (i) D’s managers,
directors, and investment banker discuss the possi-
bility of offering D stock to the public. They decide
a public offering of 50 percent of D’s stock with D
as a stand alone corporation would be in D’s best
interest. To facilitate a stock offering by D of 50 per-
cent of its stock, D distributes all the stock of C pro
ratato D’s shareholders. D issues new shares
amounting to 50 percent of its stock to the public in
a public offering 7 months after the distribution.
(ii) No Safe Harbor applies to this acquisition.
Safe Harbor V, relating to public trading, does not
apply to public offerings (paragraph (f)(5)(ii)(A) of
this section).
(iii) The issue is whether the distribution of C and
the public offering by D are part of a plan. To deter-
mine whether the distribution of C and the public
offering by D are part of a plan, D must consider all
the facts and circumstances, including those
described in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the public offering by D are part of a
plan: D discussed the public offering with its invest-
ment banker before the distribution (paragraph
(d)(2)(iii) of this section), D was motivated by a
business purpose to facilitate the public offering
(paragraph (d)(2)(vii) of this section), and there were
substantial negotiations regarding the public offering
within 6 months after the distribution (paragraph
(d)(2)(viii) of this section).
(v) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(vi) The distribution of C and the public offering
by D are part of a plan under paragraph (b)(1) of this
section.
Example 4. Public offering followed by unex-
pected opportunity—(i) Facts. D’s managers, direc-
tors, and investment banker discuss the possibility of
offering C stock to the public. D decides to distrib-
ute C pro ratato D’s shareholders solely to facilitate
a 20 percent stock offering by C. To take advantage
of favorable market conditions, C issues new shares
amounting to 20 percent of its stock in a public offer-
ing 1 month before D distributes its remaining 80
percent of the C stock. The public offering docu-
ments disclose the intended distribution of C, which
is expected to occur shortly after the public offering.
At the time of the distribution, it is not reasonably
certain that an acquisition will occur, an agreement,
understanding, or arrangement concerning an acqui-
sition will exist, or substantial negotiations concern-
ing an acquisition will occur within 6 months. Two
months after the distribution, C is approached unex-
pectedly regarding an opportunity to acquire X. Five
months after the distribution, C acquires X in
exchange for 40 percent of the C stock.
(ii) Public offering. (A) No Safe Harbor applies
to the public offering. Safe Harbor V, related to pub-
lic trading, does not apply to public offerings (para-
graph (f)(5)(ii)(A) of this section).
(B) The issue is whether the 20 percent public
offering by C and the distribution by D of the
remaining C stock are part of a plan. To determine
whether the distribution and the public offering are
part of a plan, D must consider all the facts and cir-
cumstances, including those described in paragraph
(d) of this section.
(C) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the public offering are part of a plan: D dis-
cussed the distribution with its investment banker
before the public offering (paragraph (d)(2)(vi) of
this section), D was motivated by a business purpose
to facilitate the public offering (paragraph
(d)(2)(vii) of this section), and the public offering
and the distribution occurred within 6 months of
each other (paragraph (d)(2)(viii) of this section).
(D) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(E) The public offering of C and the distribution
of C are part of a plan under paragraph (b)(1) of this
section.
(iii) X acquisition. (A) No Safe Harbor applies to
the X acquisition.
(B) The issue is whether the distribution of C and
the acquisition by C of X are part of a plan. To deter-
mine whether the distribution of C and the acquisi-
tion by C of X are part of a plan, D must consider all
the facts and circumstances, including those
described in paragraph (d) of this section.
(C) Under paragraph (d)(2) of this section, the fol-
lowing tends to show that the distribution of C and
acquisition by C of X are part of a plan: The distribu-
tion and the acquisition occurred within 6 months of
each other (paragraph (d)(2)(viii) of this section). The
fact described in paragraph (d)(2)(vii) of this section
does not exist in this case because D’s business pur-
pose was to facilitate the public offering and C’s
acquisition of X is not similar to that acquisition.
(D) Under paragraph (d)(3) of this section, the fol-
lowing tends to show that the distribution of C and the
acquisition by C of X are not part of a plan: Neither
D, C, nor their respective controlling shareholders dis-
cussed the acquisition of X or a similar acquisition
with potential acquirers before the distribution (para-
graph (d)(3)(i) of this section), D had a substantial
business purpose for the distribution other than a busi-
ness purpose to facilitate the acquisition of X or a sim-
ilar acquisition (paragraph (d)(3)(vi) of this section),
and the distribution would have occurred at approxi-
mately the same time and in similar form regardless of
the acquisition of X (paragraph (d)(3)(vii) of this sec-
tion). The distribution was announced and accom-
plished to facilitate the 20 percent public offering by
C. D and C were unaware of the opportunity to
acquire X at the time of the distribution.
(E) Weighing the facts and circumstances, the
acquisition by C of X and the distribution of C by D
are not part of a plan under paragraph (b)(1) of this
section.
(F) If C’s acquisition of X had occurred more
than 6 months after the distribution and had not been
the subject of an agreement, understanding, arrange-
ment, or substantial negotiations before the date that
is 6 months after the distribution, Safe Harbor II
would have applied to C’s acquisition of X.
Example 5. Hot market.(i) D is a widely held
corporation the stock of which is listed on an estab-
lished market. D announces a distribution of C and
distributes C pro rata to D’s shareholders. By con-
tract, C agrees to indemnify D for any imposition of
tax under section 355(e) caused by the acts of C.
The distribution is motivated by a desire to improve
D’s access to financing at preferred customer inter-
est rates, which will be more readily available if D
separates from C. At the time of the distribution,
although D has not been approached by any potential
acquirer of C, it is reasonably certain that within 6
months after the distribution either an acquisition of
C will occur or there will be an agreement, under-
standing, arrangement, or substantial negotiations
regarding an acquisition of C. Corporation Y
acquires C in a merger described in section
368(a)(2)(E) within 6 months after the distribution.
The C shareholders receive less than 50 percent of
the stock of Y in the exchange.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the acquisition of C by Y are part of a plan. To
determine whether the distribution of C and the
acquisition of C by Y are part of a plan, D must con-
sider all the facts and circumstances, including those
described in paragraph (d) of this section.
(iv) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the acquisition of C by Y are part of a plan: The
acquisition and the distribution occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). In addition, the distribution may be moti-
vated by a business purpose to facilitate the acquisi-
tion or a similar acquisition because there is evi-
dence of a business purpose to facilitate an
acquisition by reason of the fact that at the time of
the distribution it was reasonably certain that an
acquisition of C would occur or there would be an
agreement, understanding, arrangement, or substan-
tial negotiations regarding an acquisition of C with-
in 6 months after the distribution (paragraphs
(d)(2)(vii) and (e)(1)(i) of this section).
(v) Under paragraph (d)(3) of this section, the fol-
lowing tends to show that the distribution of C and
2001–3 I.R.B.355January 16, 2001

the acquisition of C by Y are not part of a plan:
Neither D, C, nor their respective controlling share-
holders discussed the acquisition or a similar acqui-
sition with Y or any other potential acquirers before
the distribution (paragraph (d)(3)(i) of this section).
Furthermore, D may be able to demonstrate that the
distribution was motivated in whole or substantial
part by a corporate business purpose other than a
business purpose to facilitate the acquisition or a
similar acquisition (paragraph (d)(3)(vi) of this sec-
tion). D’s stated purpose for the distribution (facili-
tating D’s access to favorable financing) must be
evaluated in light of the evidence of a business pur-
pose to facilitate an acquisition. D also may be able
to demonstrate that the distribution would have
occurred at approximately the same time and in sim-
ilar form regardless of the acquisition (paragraph
(d)(3)(vii) of this section).
(vi) Under paragraph (e)(5) of this section, the
existence of the indemnity is irrelevant in analyzing
whether the distribution and acquisition of C are part
of a plan.
(vii) In determining whether the distribution of C
and the acquisition of C by Y are part of a plan, one
should consider the importance of D’s stated business
purpose for the distribution in light of the reasonable
certainty that C would be acquired or there would be
an agreement, understanding, arrangement, or substan-
tial negotiations regarding an acquisition of C within 6
months after the distribution. If D’s stated business
purpose for the distribution is substantial even though
the reasonable certainty that C would be acquired is
evidence of a business purpose to facilitate an acquisi-
tion, and if D would have distributed C regardless of
Y’s acquisition of C, Y’s acquisition of C and D’s dis-
tribution of C are not part of a plan.
Example 6. Unexpected opportunity. (i) D, the
stock of which is listed on an established market,
announces that it will distribute all the stock of C pro
ratato D’s shareholders. At the time of the announce-
ment, the distribution is motivated wholly by a corpo-
rate business purpose (within the meaning of
§1.355–2(b)) other than a business purpose to facili-
tate an acquisition. After the announcement but
before the distribution, widely held X becomes avail-
able as an acquisition target. There were no discus-
sions between D and X before the announcement. D
negotiates with and acquires X before the distribution.
After the acquisition, X’s former shareholders own 55
percent of D’s stock. D distributes the stock of C pro
ratawithin 6 months after the acquisition of X.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the acquisition of X by
D and the distribution of C are part of a plan. To
determine whether the distribution of C and the
acquisition of X by D are part of a plan, D must con-
sider all the facts and circumstances, including those
described in paragraph (d) of this section.
(iv) Under paragraph (d)(2) of this section, the
following tends to show that the acquisition of X by
D and the distribution of C are part of a plan: The
acquisition and the distribution occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). Also, the distribution may be motivated by
a business purpose to facilitate the acquisition or a
similar acquisition because there is evidence of a
business purpose to facilitate an acquisition by rea-
son of the fact that the acquisition occurred after the
public announcement of the planned distribution
(paragraphs (d)(2)(vii) and (e)(1)(ii) of this section).
(v) Under paragraph (d)(3) of this section, D
would assert that the following tends to show that
the distribution of C and the acquisition of X by D
are not part of a plan: The distribution was motivat-
ed by a corporate business purpose other than a busi-
ness purpose to facilitate the acquisition or a similar
acquisition (paragraph (d)(3)(vi) of this section), and
the distribution would have occurred at approxi-
mately the same time and in similar form regardless
of the acquisition (paragraph (d)(3)(vii) of this sec-
tion). That D decided to distribute C and announced
that decision before it became aware of the opportu-
nity to acquire X suggests that the distribution would
have occurred at approximately the same time and in
similar form regardless of D’s acquisition of X. X’s
lack of participation in the decision also helps estab-
lish that fact.
(vi) In determining whether the distribution of C
and acquisition of X by D are part of a plan, one
should consider the importance of D’s business pur-
pose for the distribution in light of D’s opportunity
to acquire X. If D can establish that the distribution
continued to be motivated by the stated business pur-
pose, and if D would have distributed C regardless of
D’s acquisition of X, then D’s acquisition of X and
D’s distribution of C are not part of a plan.
Example 7.
Multiple acquisitions—(i) Facts.
(A) D, the stock of which is listed on an established
market, engages in business 1. C engages in busi-
ness 2. D has a business strategy of growth through
acquisitions and is interested in continually expand-
ing business 1. D’s ownership of C has been an
impediment to acquisitions by D. D believes the dis-
tribution of C will make its acquisition program
more economical overall, regardless of D’s success
with any particular acquisition target. D has no spe-
cific goals regarding how much D stock will be used
for acquisitions.
(B) D and its investment banker identify X and Y
as potential acquisition targets before D publicly
announces the planned distribution. After D pub-
licly announces the distribution, the sole purpose of
which is to facilitate acquisitions by D, but before
the distribution date, D negotiates with X, but has no
contact with Y. D distributes all of the C stock. One
month after the distribution, D consummates the
negotiated acquisition of X. A, X’s sole sharehold-
er, receives 30 percent of D’s stock. Seven months
after the distribution, D begins negotiating with Y.
One year after the distribution, D acquires Y. Y’s
shareholders receive 19 percent of D’s stock. After
the distribution, D and its investment banker identi-
fy Z as another desirable target. Eighteen months
after the distribution, D acquires Z. Z’s shareholders
receive 17 percent of D’s stock. If aggregated, the
acquisitions of X, Y and Z would result in a change
in the stock ownership of D of more than 50 percent.
(ii) X acquisition. (A) No Safe Harbor applies to
the X acquisition.
(B) The issue is whether the distribution of C and
the acquisition of X by D are part of a plan. To
determine whether the distribution of C and the
acquisition of X by D are part of a plan, D must con-
sider all the facts and circumstances, including those
described in paragraph (d) of this section.
(C) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the acquisition of X by D are part of a plan: D
and X discussed the acquisition before the distribu-
tion (paragraph (d)(2)(i) of this section), D had a
business purpose to facilitate the X acquisition or a
similar acquisition (paragraph (d)(2)(vii) of this sec-
tion), and the distribution and the X acquisition
occurred within 6 months of each other (paragraph
(d)(2)(viii) of this section).
(D) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(E) The distribution of C and the acquisition of X are
part of a plan under paragraph (b)(1) of this section.
(iii) Y acquisition. (A) No Safe Harbor applies to
the Y acquisition. Safe Harbor I does not apply
because the distribution was not motivated in whole
or substantial part by a corporate business purpose
(within the meaning of §1.355–2(b)) other than a
business purpose to facilitate an acquisition. Safe
Harbor II does not apply because D’s business pur-
pose to facilitate acquisitions was not limited to 33
percent or less of the D stock. Also, more than 20
percent of D’s stock was acquired in an acquisition
that motivated the distribution before the date that
was 6 months after the distribution (D’s acquisition
of X using 30 percent of D’s stock 1 month after the
distribution).
(B) The issue is whether the distribution of C and
the acquisition of Y by D are part of a plan. To deter-
mine whether the distribution of C and the acquisi-
tion of Y by D are part of a plan, D must consider all
the facts and circumstances, including those
described in paragraph (d) of this section.
(C) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the acquisition of Y by D are part of a plan: D
and a potential acquirer (X) discussed an acquisition
before the distribution and a similar acquisition with
a different acquirer (Y) occurred (paragraph
(d)(2)(ii) of this section) and D had a business pur-
pose to facilitate the Y acquisition or a similar acqui-
sition (paragraph (d)(2)(vii) of this section).
(D) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(E) The distribution of C and the acquisition of Y are
part of a plan under paragraph (b)(1) of this section.
(iv)Z acquisition.The analysis is identical to the
Y acquisition. The distribution of C and the acquisi-
tion of Z are part of a plan under paragraph (b)(1) of
this section.
(v) Under paragraph (c) of this section, all acqui-
sitions of stock of D pursuant to a plan involving a
distribution will be aggregated for purposes of the
50-percent test of paragraph (a)(2) of this section.
Because the acquisitions by D of X, Y, and Z are
each part of a plan involving D’s distribution of C,
those three acquisitions are aggregated.
(n) Effective date. This section applies
to distributions occurring after these regu-
lations are published as final regulations
in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
January 16, 20013562001–3 I.R.B.

(Filed by the Office of the Federal Register on De-
cember 29, 2000, 8:45 a.m., and published in the
issue of the Federal Register for January 2, 2001, 66
F.R. 66)
New Revision of Publication
547, Casualties, Disasters, and
Thefts
Announcement 2001–6
Publication 547, revised December
2000, will be available soon from the In-
ternal Revenue Service. It replaces the
February 1999 revision.
This publication explains the tax treat-
ment of casualties, thefts, and losses on
deposits.
You can get a copy of this publication by
calling 1-800-TAX-FORM (1-800-829-
3676). You can also write to the IRS Forms
Distribution Center nearest you. Check your
income tax package for the address. The
publication is also available on the IRS
Internet web site at www.irs.gov.
New Code V for the 2001 Form
W-2, Box 12; Correction
Announcement 2001–7
Purpose
The purpose of this announcement is to
advise employers of a change to An-
nouncement 2000–97(2000–48 I.R.B.
557). Announcement 2000–97 advised
employers that a new code (Code V—In-
come from the exercise of nonstatutory
stock options) was added for use in box
12. In response to employer concerns
about implementing the reporting proce-
dures, the use of Code V is optionalfor
the 2001 Forms W-2.
Nonstatutory Stock Options
When an employee (or former employee)
exercises nonstatutory stock option(s), em-
ployers are currently required to include the
excess of the fair market value of the stock
received upon exercise of the option(s) over
the amount paid for that stock on Form W-2
in boxes 1, 3 (up to the social security wage
base), and 5. Any compensation related to
the exercise of the nonstatutory stock op-
tion(s) currently included in boxes 1, 3 (if
applicable), and 5 should also be reported
separately in box 12, using Code V. This
separate reporting in box 12 is optionalfor
the 2001 Forms W-2.
New Revision of Publication
583, Starting a Business and
Keeping Records
Announcement 2001–8
Publication 583, revised December
2000, is now available from the Internal
Revenue Service. It replaces the January
1999 revision.
This publication provides basic federal
tax and recordkeeping information for
people who are starting a business.
You can get a copy of this publication by
calling 1-800-TAX-FORM (1-800-829-
3676). You can also write to the IRS Forms
Distribution Center nearest you. Check
your income tax package for the address.
The publication is also available on the IRS
Internet web site at www.irs.gov.
Extension of Test of Mediation
Procedure for Appeals
Announcement 2001–9
Summary:This document extends the
test of the mediation procedure set forth
in Announcement 98–99, 1998–2 C.B.
650, for an additional one-year period be-
ginning on January 16, 2001, the date this
announcement is published in the Internal
Revenue Bulletin.
The mediation procedure allows tax-
payers, in certain cases that are already in
the Appeals administrative process and
that are not docketed in any court, to re-
quest mediation of one or more issues as a
dispute resolution technique. Under the
procedure, the taxpayer and Appeals at-
tempt to negotiate a settlement, assisted
by an objective and neutral third party
who has no authority to impose a deci-
sion.
Background: Announcement 98–99,
which contains the procedures that taxpay-
ers may use to request mediation, applies to
factual issues involving an adjustment of $1
million or more that are already in the
Appeals administrative process. A two-
year test of the mediation procedure con-
cluded on November 15, 2000.
As Appeals transitions to its modern-
ized structure, it is considering proposals
to expand its alternative dispute resolution
(ADR) processes. After this review is
completed, Appeals plans to promulgate
guidance expanding the mediation pro-
gram as provided for under § 7123(b)(1)
of the Internal Revenue Code.
Changes:To meet the goals of the
Service’s restructuring, Appeals has reor-
ganized its staffing. Therefore, position
and office titles in Announcement 98–99
are substituted as follows, along with an
updated mailing address for Headquarters
Appeals:
2001–3 I.R.B.357January 16, 2001
Position Title Changes
OldNew
National Director of AppealsChief Appeals
Assistant Regional Director of Appeals (ARDA-LC)Area Director
Appeals Associate ChiefAppeals Team Manager
Appeals Team Chief Appeals Team Case Leader

January 16, 20013582001–3 I.R.B.
Office Title/Address Changes
OldNew
National Director of AppealsChief Appeals
901 D Street, SW1099 14
th
Street, NW
Box 68Suite 4200 - East
Washington, DC 20024Washington, DC 20005
Attn: C:AP:ADR & CS, Room 236Attn: Appeals LMSB Operations
National Office AppealsHeadquarters Appeals
Appeals RegionAppeals Area
Office of Alternative Dispute ResolutionAppeals LMSB Operations
and Customer Service Programs
In addition to the above changes,
responsibility for the management of the
Appeals mediation program has been
transferred from the Office of Alternative
Dispute Resolution and Customer Service
Programs to Appeals LMSB Operations.
Effective Date:This Announcement
extends the test of the mediation proce-
dure set forth in Announcement 98–99,
for an additional one-year period begin-
ning on January 16, 2001, the date this
Announcement is published in the
Internal Revenue Bulletin.
Drafting Information:The author of
this announcement is Sandy Cohen,
Appeals LMSB Operations, Headquarters
Appeals. For further information regard-
ing this announcement, call Mr. Cohen at
(202) 694-1818 (not a toll-free number).

2001–3 I.R.B.iJanuary 16, 2001
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

January 16, 2001ii2001–3 I.R.B.
Numerical Finding List
1
Bulletins 2001–1 and 2
Announcements:
2001–1, 2001–2 I.R.B. 277
2001–2, 2001–2 I.R.B. 277
2001–3, 2001–2 I.R.B. 278
2001–4, 2001–2 I.R.B. 286
2001–5, 2001–2 I.R.B. 286
Notices:
2001–1, 2001–2 I.R.B. 261
2001–2, 2001–2 I.R.B. 265
2001–3, 2001–2 I.R.B. 267
2001–4, 2001–2 I.R.B. 267
Railroad Retirement Quarterly Rates:
2001–2 I.R.B. 258
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
Revenue Rulings:
2001–2, 2001–2 I.R.B. 255
Treasury Decisions:
8910, 2001–2 I.R.B. 258
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–27 through
2000–52 is in Internal Revenue Bulletin 2001–1,
dated January 2, 2001.

2001–3 I.R.B.iiiJanuary 16, 2001
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 and 2
Announcement:
99–79
Superseded by
Ann. 2001–3, 2001–2 I.R.B. 278
Cumulative Bulletin:
1998–2
Corrected by
Ann. 2001–5, 2001–2 I.R.B. 286
Notices:
Notice 2000–21
Superseded by
Notice 2001–1, 2001–2 I.R.B. 261
Revenue Procedures:
99–49
Modified and amplified by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
2000–22
Modified and superseded by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
Treasury Decisions:
8889
Corrected by
Ann. 2001–4, 2001–2 I.R.B. 286
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–27 through 2000–52 is in Internal Revenue
Bulletin 2001–1, dated January 2, 2001.

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