Internal Revenue Bulletin 2001-17 (PDF rendition): IRS Revenue Rulings

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. 2001–18, page 1092.
LIFO; price indexes; department stores. The February
2001 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, February 28,
2001.
EXEMPT ORGANIZATIONS
Announcement 2001–33, page 1137.
Request for comments regarding the instructions for Form
990, Return of Organization Exempt From Income Tax, Form
990–EZ, Short Form Return of Organization Exempt From
Income Tax, and Form 990–PF, Return of Private Foundation
or Section 4947(a)(1) Nonexempt Charitable Trust Treated
as a Private Foundation.
ESTATE TAX
Announcement 2001–40, page 1141.
This document contains corrections to final regulations (T.D.
8912, 2001–5 I.R.B. 452) relating to the retention of a
trust’s exempt status for generation-skipping transfer tax
purposes in the case of modifications, etc., to a trust.
ADMINISTRATIVE
Notice 2001–31, page 1093.
Credit for sales of fuel produced from a nonconven-
tional source, inflation adjustment factor, and refer-
ence price.This notice publishes the nonconventional
source fuel credit, the inflation adjustment factor, and the ref-
erence price under section 29 of the Code for calendar year
2000. This data is used to determine the credit allowable on
sales of fuel produced from a nonconventional source.
Rev. Proc. 2001–26, page 1093.
Specifications are set forth for the private printing of paper
substitutes for tax year 2001 Form W–2, Wage and Tax
Statement, and Form W–3, Transmittal of Wage and Tax
Statements. Rev. Proc. 2000–23 superseded.
Announcement 2001–31, page 1113.
This document contains corrections to final regulations (T.D.
8933, 2001–11 I.R.B. 794) providing guidance on qualified
transportation fringes (vanpooling, transit passes, and quali-
fied parking) provided by employers to their employees.
Announcement 2001–32, page 1113.
This announcement concerns Advance Pricing Agreements
(APAs) and the experience of the APA Program during calen-
dar year 2000.
Announcement 2001–38, page 1138.
This document contains the annual report concerning pre-fil-
ing agreements under the Pre-Filing Agreement Program of
the Large and Mid-Size Business Division for calendar year
2000.
Announcement 2001–39, page 1141.
The Service announces the release, in March 2001, of new
Publication 584–B,
Business Casualty, Disaster, and Theft
Loss Workbook.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–17
April 23, 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.

April 23, 20012001–17 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part 1100.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The February 2001 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, February 28, 2001.
Rev. Rul. 2001–18
The following Department Store Inven-
tory Price Indexes for February 2001
were issued by the Bureau of Labor Sta-
tistics. The indexes are accepted by the
Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inven-
tories of department stores employing the
retail inventory and last-in, first-out in-
ventory methods for tax years ended on,
or with reference to, February 28, 2001.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups – soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food,
liquor, tobacco, and contract departments.
April 23, 200110922001–17 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsFeb.Feb.from Feb. 2000
20002001to Feb. 2001
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .502.6507.20.9
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .611.8606.8-0.8
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .612.7642.94.9
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .893.0881.9-1.2
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .648.8620.5-4.4
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .577.0563.4-2.4
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .330.8351.5 6.3
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .542.1550.11.5
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . .381.7388.01.7
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .622.6594.4-4.5
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .619.2608.1-1.8
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .496.2484.7 -2.3
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .973.4943.6-3.1
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .763.6794.54.0
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .967.0986.12.0
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .700.0685.9-2.0
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .604.0630.24.3
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .787.3774.9-1.6
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233.9227.8-2.6
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61.556.3-8.5
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94.290.7-3.7
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128.1128.0-0.1
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.3108.81.4
Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .593.9592.0-0.3
Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .444.9433.1-2.7
Groups 21 - 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101.399.2-2.1
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .537.7532.4-1.0
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract depart-
ments.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Alan J. Tomsic of the Office of
Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, con-
tact Mr. Tomsic at (202) 622-4970 (not a
toll-free call).

Nonconventional Source Fuel
Credit, Section 29 Inflation
Adjustment Factor, and Section
29 Reference Price
Notice 2001–31
This notice publishes the nonconven-
tional source fuel credit, inflation adjust-
ment factor, and reference price under § 29
of the Internal Revenue Code for calendar
year 2000. These are used to determine the
credit allowable on fuel produced from a
nonconventional source under § 29. The
calendar year 2000 inflation-adjusted credit
applies to the sales of barrel-of-oil equiva-
lent of qualified fuels sold by a taxpayer to
an unrelated person during the 2000 calen-
dar year, the domestic production of which
is attributable to the taxpayer.
BACKGROUND
Section 29(a) provides for a credit for
producing fuel from a nonconventional
source, measured in barrel-of-oil equiva-
lent of qualified fuels, the production of
which is attributable to the taxpayer and
sold by the taxpayer to an unrelated per-
son during the tax year. The credit is
equal to the product of $3.00 and the ap-
propriate inflation adjustment factor.
Section 29(b)(1) and (2) provides for a
phaseout of the credit. The credit allow-
able under § 29(a) must be reduced by an
amount which bears the same ratio to the
amount of the credit (determined without
regard to § 29(b)(1)) as the amount by
which the reference price for the calendar
year in which the sale occurs exceeds
$23.50 bears to $6.00. The $3.00 in
§ 29(a) and the $23.50 and $6.00 must
each be adjusted by multiplying these
amounts by the 2000 inflation adjustment
factor. In the case of gas from a tight for-
mation, the $3.00 amount in § 29(a) must
not be adjusted.
Section 29(c)(1) defines the term
“qualified fuels” to include oil produced
from shale and tar sands; gas produced
from geopressurized brine, Devonian
shale, coal seams, or a tight formation, or
biomass; and liquid, gaseous, or solid
synthetic fuels produced from coal (in-
cluding lignite), including such fuels
when used as feedstocks.
Section 29(d)(1) provides that the
credit is to be applied only for sale of
qualified fuels the production of which is
within the United States (within the
meaning of § 638(1)) or a possession of
the United States (within the meaning of
§ 638(2)).
Section 29(d)(2)(A) requires that the
Secretary, not later than April 1 of each
calendar year, determine and publish in
the Federal Register the inflation adjust-
ment factor and the reference price for the
preceding calendar year.
Section 29(d)(2)(B) defines “inflation
adjustment factor” for a calendar year as
the fraction the numerator of which is
the GNP implicit price deflator for the
calendar year and the denominator of
which is the GNP implicit price deflator
for calendar year 1979. The term “GNP
implicit price deflator” means the first
revision of the implicit price deflator for
the gross national product as computed
and published by the Department of
Commerce.
Section 29(d)(2)(C) defines “reference
price” to mean with respect to a calendar
year the Secretary’s estimate of the annual
average wellhead price per barrel for all
domestic crude oil the price of which is
not subject to regulation by the United
States.
Section 29(d)(3) provides that in the
case of a property or facility in which
more than one person has an interest, ex-
cept to the extent provided in regulations
prescribed by the Secretary, production
from the property or facility (as the case
may be) must be allocated among the per-
sons in proportion to their respective in-
terests in the gross sales from the property
or facility.
Section 29(d)(5) and (6) provides that
the term “barrel-of-oil equivalent” with
respect to any fuel generally means that
amount of the fuel which has a Btu con-
tent of 5.8 million.
INFLATION ADJUSTMENT FACTOR
AND REFERENCE PRICE
The inflation adjustment factor for cal-
endar year 2000 is 2.0454. The reference
price for calendar year 2000 is $26.73.
These amounts were published in the Fed-
eral Register on April 5, 2001.
PHASEOUT CALCULATION
Because the calendar year 2000 refer-
ence price does not exceed $23.50 multi-
plied by the inflation adjustment factor,
the phaseout of the credit provided for in
§ 29(b)(1) does not occur for any quali-
fied fuel sold in calendar year 2000.
CREDIT AMOUNT
The nonconventional source fuel credit
under § 29(a) is $6.14 per barrel-of-oil
equivalent of qualified fuels ($3.00 x
2.0454). This amount was published in
the Federal Register on April 5, 2001.
DRAFTING INFORMATION
CONTACT
The principal author of this notice is
David McDonnell of the Office of Associ-
ate Chief Counsel (Passthroughs and Spe-
cial Industries). For further information
regarding this notice contact Mr. McDon-
nell at (202) 622-3120 (not a toll-free
call).
Publication 1141 (04/2001)
General Rules and
Specifications for Private
Printing of Substitute Forms
W-2 and W-3
26 CFR 601.602: Tax forms and instructions. (Also
Part I, sections 6041, 6051, 6071, 6081, 6091;
1.6041–1, 1.6041–2, 31.6051–1, 31.6051–2,
31.6071(a)–1, 31.6081(a)–1, 31.6091–1.)
Rev. Proc. 2001–26
PART A. GENERAL
SECTION 1. PURPOSE
.01 The purpose of this revenue proce-
dure is to provide the general rules for fil-
ing and to state the requirements of the In-
ternal Revenue Service (IRS) and the
Social Security Administration (SSA) for
reproducing paper substitutes for
Form W-2, Wage and Tax Statement, and
Form W-3, Transmittal of Wage and Tax
Statements, for amounts paid during the
2001calendar year. The information re-
ported on Forms W-2 and W-3 is required
to establish tax liability for employees
2001–17 I.R.B.1093April 23, 2001
Part III. Administrative, Procedural, and Miscellanous

April 23, 200110942001–17 I.R.B.
and their eligibility for Social Security
and Medicare benefits.
.02 Forms W-2 and W-3 have signifi-
cant changes for year 2001. Please see
“Nature of Changes” (Section 2 below)
and the exhibits at the end of this revenue
procedure for changes to Forms W-2 and
W-3.
.03 For the purpose of this revenue
procedure, a substitute form is one that is
not printed by the IRS. A substitute
Form W-2 or W-3 MUST conform to
the specifications in this revenue proce-
dure to be acceptable to the IRS and
the SSA.No IRS office is authorized to
allow deviations from this revenue proce-
dure. Preparers should also refer to the
separate, 2001 Instructions for Forms W-2
and W-3, for details on how to complete
these forms. See Part C, Sec. 4.01 for in-
formation on obtaining the official IRS
forms and instructions. See Part B, Sec.
2, for requirements for substitute forms
furnished to employees.
.04 IRS maintains its centralized call
site at Martinsburg Computing Center
(IRS/MCC) to answer questions related to
information returns (Forms W-2, W-3,
1099, etc.). The call site phone number is
304-263-8700 (not a toll-free number).
The Telecommunication Device for the
Deaf (TDD) number is 304-267-3367
(not a toll-free number). The hours of
operation are Monday through Friday
from 8:30 A.M. to 4:30 P.M. Eastern
Time. You may also send questions to the
Call Site via the Internet at
mccirp@irs.gov.
.05 This revenue procedure supersedes
Rev. Proc. 2000–23, 2000–21 I.R.B.
1018, dated May 22, 2000. (Reprinted as
Publication 1141).
SEC. 2. NATURE OF CHANGES
.01 Increased width of Form W-2 from
6.5 inches to 8.0 inches (exclusive of left
and right margin measurements) (printed
on standard size paper 8.5 by 11 inches)
to accommodate widened boxes, specifi-
cally state/local wage and tax informa-
tion.
.02 Added four (4) corner blackregis-
ter marks, and red dropout ink shading,
and red dropout ink dollar signs to Copy
A of Form W-2 (excluding Copies B, C,
D, 1, and 2) for SSA processing.
.03 Reformatted Box e (Employee’s
name) of Form W-2. The red vertical line
shown on Copy A is not included on
Copies B, C, D, 1, and 2 thereby provid-
ing for greater flexibility in reporting em-
ployees’ names.
.04 Deleted former Box 12 of Form
W-2 (Benefits included in box 1). Refor-
matted new Box 12 as Boxes 12a, 12b,
12c, and 12d for enhanced scanning of
four entries for SSA processing. Added
new Code “V” Employee Stock Option.
.05 Changed 4 year-digit designation
(i.e., #2000) to 2 year-digit designation
(i.e., #00) for reporting prior year data on
Forms W-2 (Box 12) regarding the Uni-
formed Services Employment and Reem-
ployment Rights Act of 1994.
.06 Changed relative positions of
Boxes 13 and 14 of Form W-2.
.07 Moved checkboxes from Box 15 of
Forms W-2 to Box 13. Changed one
checkbox title from “Pension plan” to
“Retirement plan”, added a “Third-party
sick pay” checkbox; and deleted “De-
ceased, Legal rep., and Deferred compen-
sation” checkboxes.
.08 Renumbered Form W-2 Boxes
16–18 as 15–17. Renumbered Boxes
19–21 as 20, 18, and 19.
.09 Specified 12-Point Courier font is
preferred for all data entries on Form W-2.
.10 Increased the width size of Form
W-3 from 6.5 inches to 8.0 inches (exclu-
sive of left and right margin measure-
ments) to accommodate widened boxes
specifically state/local wage and tax in-
formation. The document/forms will be
printed on standard 8 1/2 x 11 inches
paper.
.11 Added four (4) corner register
marks, shading, and dollar signs to Form
W-3 for SSA processing.
.12 Added “Third-party sick pay”
checkbox to Box b of Form W-3 and la-
beled Box 13 as “For third party sick pay
use only”.
.13 Renumbered Box 15 of Form W-3
as Box 14.
.14 Created Boxes 15 – 19 of Form
W-3 for reporting of state/local wages and
income tax information.
.15 Widened Form W-3 box sizes for
“Contact person,” “Telephone number,”
“E-mail address,” and “Fax number”.
.16 Specified 12-Point Courier font
size is preferred for all data entries to
Form W-3.
.17 Added new laser print formats,
specifications, and dimensions (Exhibits
G and H) black/white versions of the offi-
cial Forms W–2 and W–3.
.18 Added new Section 1.B within Part
B providing requirements and specifica-
tions for new laser printed black/white
Forms W-2 and W-3.
.19 An Electronic Filing (E-File) logo
has been added to copies B and C. The
E-File logo is notrequired on any Substi-
tute Forms W-2 copies.
.20 Other editorial section title
changes distinguishing between the stan-
dard red/white Copy (A) and the alterna-
tive black/white laser printed Copy (A)
characteristics, requirements, and for-
mats.
SEC. 3. GENERAL RULES FOR
FILING PAPER FORMS W-2
.01 Employers mustuse magnetic or
electronic media for filing with the SSA if
they file 250 or more Year 2001 Forms W-2
(Copy A). This requirement applies unless:
1. The employer can establish that fil-
ing on magnetic media or electronically
will result in undue hardship, AND
2. The employer is granted a waiver of
the requirement by the IRS.
To request a waiver of the magnetic
media or electronic filing requirement, for
the current tax year only, send Form 8508,
Request for Waiver From Filing Informa-
tion Returns on Magnetic Media, to:
IRS - Martinsburg Computing Center
Information Reporting Program
ATTN: Extension of Time Coordinator
240 Murall Drive
Kearneysville, WV 25430.
Martinsburg Computing Center
(304) 263-8700 Call Site
Form 8508 may be obtained electroni-
cally on the IRS Web Site at
http://www.irs.govor by calling 1-800-
829-3676. It is recommended that com-
pleted requests for waivers (Form 8508)
be submitted at least 45 days before, but
no later than the due date, of the return
(see Sec. 3.07, below). The requester will
receive an approval or denial letter from
IRS/MCC, but must allow a minimum of
30days for IRS/MCC to respond. If you
have any questions concerning
Form 8508, contact IRS/MCC at the ad-
dress or phone number shown above.
Employers who do not comply with the
magnetic media or electronic filing re-

quirements for Form W–2 and who are
not granted a waiver may be subject to
penalties.Since many state and local
governments accept Form W-2 data on
magnetic media or electronically, savings
may be obtained if magnetic media or
electronic data is used for filing with both
the SSA and state or local governments.
In many instances, the state or local gov-
ernment is willing to accept the data for-
mat specifications set out in the SSA’s
publication “Magnetic Media Reporting
and Electronic Filing (MMREF–1)”.
You mustcontact each individual state or
local taxing agency to receive approval
and make arrangements to file electroni-
cally or on magnetic media.
EMPLOYERS WHO FILE
FORM W–2 INFORMATION ON
MAGNETIC MEDIA OR ELEC-
TRONICALLY (USING MMREF–1
INSTRUCTIONS) WITH THE SSA
MUST NOT SEND THE SAME DATA
TO THE SSA ON PAPER FORMS
W-2.This would result in duplicate re-
porting and may subject the filer to un-
necessary contacts by the SSA or IRS.
.02 MMREF-1, Magnetic Media Re-
porting and Electronic Filing (SSA Pub.
No. ICN, revised, 2001) contains specifi-
cations and procedures for filing Form
W-2 information electronically or on
magnetic media with the SSA. The
MMREF-1 format is mandatory begin-
ning with TY 2001 wage reports regard-
less of the media utilized including mag-
netic tape, tape cartridge, diskette, or
electronic.
.03 MMREF-1 may be obtained by
writing to:
Social Security Administration
OCO, DES
Attn: Employer Reporting
Services Center
300 North Greene Street
Baltimore, MD 21290-0300.
Employers may also call their local SSA
Employer Service Liaison Officer
(ESLO) to obtain the MMREF-1 (see list
of Employer Service Liaison Officers’
telephone numbers at the end of this doc-
ument). The MMREF-1 is also available
on the SSA Online Wage Reporting Ser-
vice (OWRS) dial up or via the SSA Web
Site http://www.ssa.gov/employer. The
number for the OWRS dial up is (410)
966-4105 (not a toll-free number). Em-
ployers using magnetic or electronic
media are cautioned to obtain the most re-
cent revision of the MMREF-1 and sup-
plementsdue to possible changes in the
specifications and procedures.
.04 Employers not filing on magnetic
media or electronically mustfile a paper
Copy A of Form W-2 with the SSA using
either the IRS printed official form or a
privately printed substitute paper form
that exactly meets the specifications
shown in Parts B and C of this revenue
procedure.
.05 Employers may design their own
statements to give to employees. This ap-
plies to employers who file with the SSA
on magnetic media, electronically, or on
paper. Employee statements designed by
employers mustcomply with the require-
ments shown in Parts B and C, below.
.06 Employers who terminate their
business must provide their employees
with Form W-2 on or before the due
date of their final Form 941. Employ-
ers must also file Forms W-2 and W-3
with the SSA by the last day of the
month that follows the due date of their
final Form 941. See Rev. Proc. 96–57,
1996–2 C.B. 389, for information on
automatic extensions.
Note: Use of a reporting agent or
other third-party payroll service
provider does not relieve an employer
of the responsibility to ensure that
Forms W-2 are provided to employees
and filed correctly with the SSA on
time.
.07 Forms W-2 for 2001, filed on
paper or magnetic media must be filed
with the SSA on or beforeFebruary 28,
2002. Employers who file electronic
Forms W-2 for 2001 must file them on
or before April 1, 2002. Copies B, C,
1, and 2 must be furnished to the em-
ployee by January 31, 2002. If em-
ployment ended before December 31,
2001, the employee may be furnished
his/her copy any time after employment
ends, but no later than January 31,
2002.However, if the employee re-
quests Form W-2, you mustfurnish him
or her the completed copies within 30
days of the request or within 30 days of
the final wage payment, whichever is
later. This requirement is met if the
form is properly addressed, mailed, and
postmarked on or before the due date.
Failure to timely file with the SSA or to
timely provide the employee copies may
subject the employer to penalties. Em-
ployers needing additional time to file
Form W-2 (paper, magnetic media, or
electronic) with the SSA may request an
extension of time to file by submitting
Form 8809, Request for Extension of
Time to File Information Returns, to the
IRS/MCC “ATTN: Extension of Time
Coordination” at the address listed in
Sec. 3.01,above. The extension request
should be filed as early as possible, but
mustbe postmarked (for paper or mag-
netic media) no later than the due date of
the forms (February 28, 2002). Exten-
sions for electronically filed Forms W-2
mustbe postmarked no later than April
1, 2002. DO NOT SEND FORM 8809
TO THE SSA.
NOTE: APPROVAL OF THE EX-
TENSION IS NOT AUTOMATIC. Ap-
proval or denial is based on administra-
tive criteria and guidelines. The
requestor will receive an approval or de-
nial letter from the IRS and mustallow a
minimum of 30 days from the date of the
request for the IRS to respond. You do
not have to wait for a response before fil-
ing your return. File your return as soon
as it is ready. If you have received a re-
sponse, positive or negative, do notsend
a copy of the letter or Form 8809 with
your return. Form 8809 may be obtained
on the IRS Web Site at http://www.irs.gov
or by using the IRS Fax Forms Program
at 703-368-9694, or by calling 1-800-
829-3676.
.08 When requesting extensions of
time for more than 10 employers, the IRS
encourages filers to submit the request on
tape, tape cartridge (4mm, 8mm, or Quar-
ter Inch Cartridge), 3-1/2 inch diskette, or
electronically. Transmitters requesting
an extension of time to file for more
than 50 employers are required to file
the extension request on magnetic
media or electronically.Transmitters
who submit requests for multiple em-
ployers will receive one approval letter
with an attached list of employers cov-
ered under that approval. Publication
1220, Specifications for Filing Forms
1098, 1099, 5498, and W-2G Magneti-
cally or Electronically, provides informa-
tion on how to file requests for exten-
sions of time on tape, tape cartridge
(4mm, 8mm, or Quarter Inch Cartridge),
3 -1/2 inch diskette, or electronically.
2001–17 I.R.B.1095April 23, 2001

April 23, 200110962001–17 I.R.B.
NOTE: To file a request for extension
of time magnetically or electronically
for multiple payers, third party
filers/transmitters must have an IRS
Transmitter Control Code (TCC) (au-
thorization to file information returns).
SEC. 4. GENERAL RULES FOR
FILING FORM W-3 (Standard Red
Ink Format)
.01 Employers submitting Form(s)
W-2 (Copy A) to the SSA on papermust
also file a Form W-3.
.02 Form W-3 mustbe the same width
(8.0 inches) as the Form(s) W-2. The
Form W-3 is printed on standard size
paper 8.5 by 11 inches.
.03 Form W-3 now contains “four cor-
ner black register marks,” and red
dropout ink shading, and red dropout ink
dollar signs for all money boxes.
.04 Form W-3 has a new checkbox
“Third-party sick pay” within Box b (Kind
of Payer). Also a new Box 13 “For third-
party sick pay use only” has been added.
.05 Box 14 has been opened/unzipped
to include “Income tax withheld by payer
of third-party sick pay” which was for-
merly box 15. The new Box 15 becomes
“State and Employer’s state ID number”.
The new boxes 15, 16, 17, 18, and 19 will
now report state/local wage and income
tax information.
.06 Also the “Contact person”, “Tele-
phone number”, “E-mail address”, and
“Fax number” information boxes at the
bottom have been expanded.
.07 Separate instructions for the Form
W-3 are provided in the Instructions for
2001 Forms W-2 and W-3.Form W-3 is
a single sheet including only essential fil-
ing information. Be sure to make a copy
of Form W-3 for your records.
.08 Form W-3 should be used only to
transmit paper Forms W-2 (Copy A).
Magnetic media or electronic filers do
not file Form W-3.Employers submit-
ting Form(s) W-2 data via magnetic
media must transmit Form(s) W-2 data
with Form 6559, Transmitter Report
and Summary of Magnetic Media, and
Form 6559-A, Continuation Sheet for
Form 6559, if necessary. Employers
submitting Form(s) W-2 data electroni-
cally using the MMREF-1 via OWRS,
Electronic Data Transfer (EDT), or
diskette need not submit a Form 6559.
However, employers musthave com-
pleted a PIN registration process that re-
places the signature on Form 6559. If
employers submit wage reports/Form(s)
W-2 data in the MMREF-1 file using
OWRS, EDT, or diskette, a Form 6559
will not be required upon completion of
the PIN registration process. If employ-
ers submit MMREF-1 file on magnetic
tape cartridge, a Form 6559 is required.
Please refer to the latest edition of
MMREF-1 for further information.
PART B. REQUIREMENTS FOR
FILING PAPER SUBSTITUTES
WITH THE SOCIAL SECURITY
ADMINISTRATION (SSA)
SEC. 1.A. REQUIREMENTS FOR
SUBSTITUTE “PRIVATELY
PRINTED” FORMS SUBMITTED TO
THE SSA (FORM W-2 (COPY A),
AND FORM W-3 STANDARD RED
INK FORMAT)
.01 Employers may file privately
printed substitute Forms W-2 and W-3
with the SSA. The substitute form mustbe
an exact replica of the IRS printed form
with respect to layout and contents because
it will be read by scanner equipment. The
Government Printing Office (GPO) sym-
bol mustbe deleted (see Sec. 1.16, below).
The specifications and allowable toler-
ances for Copy A of substitute Forms W-2
are provided later in this revenue proce-
dure. See Exhibit A for the Form W-2
specifications. The specifications for
Forms W-3 are provided in Exhibit B.
.02 Paper used for substitute Forms
W-2, Copy A, and Form W-3 (cut sheets
and continuous pinfeed forms) that are to
be filed with the SSA must be white 100%
bleached chemical wood, 18-20 pound
paper only, optical character recognition
(OCR) bond produced in accordance with
the specifications shown as follows:
Paper Requirements
1 Acidity: pH value, average,
not less than . . . . . . . . . . . . . . . .4.5
2 Basis Weight 17 x 22 inch
500 cut sheets, pound, 18-20
Metric equivalent grams
per. sq. meter . . . . . . . . . . . . .68-75
A tolerance of +5 pct. is allowed.
3 Stiffness: Average, each
direction, not less than
Gurley milligrams —
Cross direction . . . . . . . . . . . .50
Machine direction . . . . . . . . .80
4 Tearing Strength: Average,
each direction, not less than—
Grams . . . . . . . . . . . . . . . . . . . . .40
5 Opacity: Average, not less
than — Percent . . . . . . . . . . . . . .82
6 Reflectivity: Average not
less than — percent . . . . . . . . . . .68
7 Thickness:
Average. Inch 0.0038
Metric equivalent. . . . . . .mm 0.097
A tolerance of +0.0005 inch
(0.0127mm) is allowed. Paper can
not vary more than 0.0004 inch
(0.012mm) from one edge to the
other.
8 Porosity:
Average, not less than —
seconds . . . . . . . . . . . . . . . . . . .10
9 Finish (smoothness):
Average, each side —
seconds . . . . . . . . . . . . . . . .20-55
(For information only),
the Sheffield equivalent
unit . . . . . . . . . . . . . . . . . . .170-d200
10 Dirt: Average, each side,
not to exceed —Parts
per million . . . . . . . . . . . . . . . . . .8
NOTE: Reclaimed fiber in any per-
centage is permitted, provided the re-
quirements of this standard are met.
.03 All printing of Copy A of
Forms W-2 and Form W-3 mustbe in
Red OCR drop-out Flint Ink, exceptas
specified below.
The following mustbe printed in non-
reflective black ink:
1. Identifying control number
“22222” (Exhibit C) at the top of
Form W-2.
2. Tax year at the bottom of the Form
W-2 (see Exhibit C).
3. The four (4) corner register marks
on Form W-2 (Exhibit A).
4. Identifying control number
“33333” (Exhibit D) at the top of
Form W-3.
5. Tax year at the bottom of Form
W-3 (Exhibit D).
6. Form identification “W-3” at the
bottom of Form W-3 (Exhibit D).
7. The four (4) corner register marks
on Form W-3 (Exhibit B).
8. The Jurat and “Signature, Title,
Date” line at middle of Form W-3
(Exhibit B).
9. All instructions beginning with the
“Send this entire page....” Line to
the bottom of Form W-3 (Exhibit B).

2001–17 I.R.B.1097April 23, 2001
As in the past, Forms W-2 (Copy A) and
Form W-3 may be generated by use of a
laser printer following all the guidelines
and specifications per Exhibit A. The print-
ing of the data should be centered. All other
printing on Forms W-2, Copy A, and W-3
must be in RedOCR drop-out Flint Ink
J-6983 (formerly Sinclair and Valentine) or
an exact match. This is the same ink that is
used for Copy A of the Form 1099 series
(see Pub. 1179), Rules and Specifications
for Private Printing of Substitute Forms
1096, 1098, 1099, 5498, and W-2G. The
use of this ink is required for2001
Forms W-3 and W-2 (Copy A).
.04 Type mustbe substantially identi-
cal in size and shape with corresponding
type on the official form. The form iden-
tifying number mustbe printed in non-re-
flective black ink using an OCR-A font;
10characters per inch.
1. On Form W-3 and Copy A of
Forms W-2, all the perimeter rules
mustbe 1-point (0.014 inch), while
all other rules must be one-half
point (0.007 inch).
2. Vertical rules mustbe parallel to the
left edge of the form; horizontal
rules parallel to the top edge.
.05 Two official Forms W-2 (Copy A)
or one official Form W-3 are contained on
a single page that is 8.5 inches wide (ex-
clusive of any snap-stubs) by 11 inches
deep. The official Form W-2 is 8.0 inches
in width printed on single sheet 8.5 inches
in width. The form identifying control
number for the official forms (8.0 inches
wide) is “22222” (5 digits) for Form W-2
and “33333” (5 digits) for Form W-3. The
top margin for the 2001Forms W-3 and
W-2 Copy A is .375 inch (3/8 inch). The
right margin mustbe .2-inch and the left
margin .3-inch (plus or minus .0313 inch).
The margins have changedfrom Tax Year
2000. Margins must be free of all print-
ing. No printing should appear any-
where near the Form ID control num-
ber (33333 or 22222).For Forms W-2,
Copy A, the combination width of Box a,
“Control number,” and the box containing
the form identifying number (22222)
mustalways be 2.54 inches. For Form
W-3, the combined width of these boxes
mustalways be 2.54 inches.
NOTE:All form identifying numbers
mustbe printed in non-reflective black
ink, using OCR-A font, printed 10charac-
ters per inch.
.06 The depth of the individual
scannable image on a page mustbe the
same as that on the IRS printed forms.
For Form W-2, the depth of one individ-
ual form is 4.92 inches (see Exhibit A).
The scannable image depth of the
Form W-3 on a page mustbe 4.8 inches
(see Exhibit B).
.07 The words “Do Not Cut, Fold, or
Staple Forms on This Page” mustbe
printed twicein Red OCR drop-out Flint
Ink between the two Forms W-2 on
Copy A only (see Exhibit A).Perfora-
tions are required on all copies (except
Copy A) to enable the separation of in-
dividual forms. Continuous pinfeed
Copy A forms must be separated at the
page perforation into individual 11 inch
deep pages before submission to the
SSA. The pinfeed strips must also be
removed. However, the two Forms W-2
documents contained on the 11 inch
deep page mustnotbe separated.
.08 Box 12 of Copy A, Form W-2, has
been broken down into four entry boxes
12a, 12b, 12c, and 12d. Do not make
more than one entry per box. If more
than four itemsneed to be reported in
box 12, use a separate Form W-2 to report
the additional items (see “Multiple
forms”in the 2001 Instructions for
Forms W-2 and W-3).Do not report the
same Federal tax data to the SSA on more
than one Copy A, Form W-2.
.09 The words “For Privacy Act and
Paperwork Reduction Act Notice, see
separate instructions,” mustbe printed
in Red OCR drop-out Flint Ink on
Forms W-2, Copy A (see Exhibit A for
format and location). The 2001 Instruc-
tions for Forms W-2 and W-3 contain
the Privacy Act Notification previously
shown on the Form W-3.
.10 The Office of Management and
Budget (OMB) Number mustbe printed
on each ply of Forms W-2 and on W-3 (see
Exhibits A and B for format and location).
.11 The instructions on the official
Form W-3, must beprinted in their en-
tirety on all substitute Forms W-3 (see
Exhibit B).
Note: Household employers, even
those with only one household em-
ployee, must file a Form W-3 with
Form W-2. On Form W-3 mark the
“Hshld Emp.” box in Box b.
.12 Privately printed continuous sub-
stitute Form W-2, Copy A, must be perfo-
rated at each 11 inch page depth. No
perforations are allowed between the in-
dividual forms (5-1/2 inch Forms W-2)
on a single copy page of Copy A. Con-
tinuous pinfeed Copy A forms must be
separated at the page perforation prior
to submitting them to the SSA.Two
Copy A forms are contained on each page.
The two copies must remain together on
one page. Only the pages are to be sepa-
rated (burst). Perforations are required
between all the other individualcopies on
a page (Copies B, C, D, 1, and 2) included
in the set.
.13 The back of substitute Form W-2,
Copy A, and Form W-3 must be free of
all printing.
.14 Spot carbons are NOT permitted
for Copy A of Forms W-2. Interleaved
carbon should be black and mustbe of
good quality to assure legibility of infor-
mation on all copies and to preclude
smudging.
.15 Chemical transfer paper is permit-
ted for Form W-2, Copy A, only if the fol-
lowing standards are met:
1. Only chemically backedpaper is ac-
ceptable for Copy A.
2. Chemically transferred images must
be black in color.
3. Carbon-coated forms are notper-
mitted. Front and back chemically
treated paper cannot be processed
properly by scanning equipment.
In general, the use of black ink for data
submitted on Forms W-2 and W-3 pro-
vides better readability for processing by
the scanning equipment. Colors other
than black are not easily read by the scan-
ner and/or may result in delays/errors in
the processing of Forms W-2 and W-3.
“Spot carbons” are NOT permitted.
.16 The GPO symbol must not be
placed on substitute Copy A of Forms W-2.
.17 The Catalog Numbers, shown on
the 2001 Forms W-2 as “Cat. No.
10134D,” and Form W-3 as “Cat. No.
10159Y,” are used for IRS distribution
purposes and should notbe printed on
substitute forms.
.18 Form W-3, box 13 is now labeled
as “For third-party sick pay use only” for
quick identification.
SEC. 1.B. REQUIREMENTS FOR 8-
1/2 INCH “LASER PRINTED BLACK
AND WHITE FORMS” FOR
SUBMISSION TO THE SSA (FORMS
W-2 COPY A AND W-3).

April 23, 200110982001–17 I.R.B.
.01 Specifications for the laser printed
black and white forms are the same as the
red and white forms with the exception of
the following items and the actual form
dimensions as shown in the Exhibits G
and H respectively.
1. Forms are printed on 8.5 by 11-
inches single/page sheet paper not
continuous feed. There must not be
any horizontal perforations be-
tween the two copies.
2. All forms and data print must be in
non-reflective black ink.
3. The forms must not contain any
corner register marks.
4. The forms must not contain any
shaded areas including entirely
shaded boxes.
5. It is preferred that the preprinted
Form ID Numbers on both the
Form W-2 (22222) and the Form
W-3 (33333) be printed in 12-point
(10 characters per inch) Courier
font.
6. The form numbers “W-2” and
“W-3” preceding the form title and
the tax year at the bottom of the
form font size must be 14-point
Courier bold print (W-2 W-3
2001).
7. No part of the box titles or the data
printed on the forms may touch any
of the vertical or horizontal lines,
nor should any of the data intermin-
gle with the box titles.
8. The word “Code” must not appear
in box 12 on the W-2.
9. A four (4) digit vendor code must
appear under the tax year and above
the catalogue number on the Form
W-2 (see Exhibit G) and on the
Form W-3 at the bottom of “For
Official Use Only” box (see Exhibit
H). The catalogue number below
the tax year on Form W-2 is not re-
quired to be printed.
10. Do not print the check boxes on
the Forms W-3 Kind of Payer (box
b), W-2 Box 13, or the Void box.
The Forms W-3, Kind of Payer,
designation “X” should be placed
directly below the applicable title
and centered as best possible.
Box 13 instructions should say
place an “X” below the applicable
title. The Form W-2 Void Box
designation “X” must be posi-
tioned to the right of the title be-
cause of the limited space under-
neath the title.
11. Do not print dollar signs in any of
the money amounts.
12. See Exhibits G and H for specific
dimensions and box size specifica-
tions.
13. Exhibits are for sample only and
must not be downloaded to meet
tax obligations.
14. You must submit samples of
your laser printed forms to the
SSA for approval. Send one set
of blank laser printed Forms
W-3 and W-2, and one set of
dummy data laser printed
Forms W-3 and W-2. Sample
data entries should be filled in to
the maximum length for each
box entry using numeric data or
alpha data depending upon the
type of the data being entered.
Include in your submission the
name and telephone number of a
contact person who can answer
questions regarding your sample
forms. The four-position vendor
code must appear on the sample
forms. You can expect approval
or disapproval within 30 days of
receipt of sample.
15. You may send your laser
printed sample forms to:
Social Security Administration
Data Operations Center
ATTN: Program Analyst Office
Room 449
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997.
16.Send your sample forms to the
above address via private mail
carrier or certified mail in order
to be able to verify receipt of
your sample forms.
17. Forms W-2 and W-3 are not re-
quired to display the form pro-
ducer’s EIN to the left of the “De-
partment of the Treasury”
statement. The vendor code will
be used to identify the forms
producer. The data and forms
must be produced simultaneously.
Forms can not be produced sepa-
rately from wage data entries.
18. Vendor code must be present on
all laser printed (black/white)
forms to identify the company
producing the forms. If you do
not have a vendor code, you may
contact the National Association
of Computerized Tax Processors
at 816-504-1188 or via EMail ad-
dress at MNolan@hrblock.com.
“Forms not containing a vendor
code will be rejected”. Sample
forms without a vendor code will
not be submitted for testing or ap-
proval.
SEC. 2. REQUIREMENTS FOR
SUBSTITUTE FORMS FUNISHED
TO EMPLOYEES (COPIES B, C,
AND 2 OF FORMS W-2)
.01 All employers (including those
who file on magnetic media or electroni-
cally) must furnish employees with at
least two copies of the Forms W-2 (three
or more for employees required to file a
state, city, or local income tax return).
The dimensions of these copies (Copies
B, C, and 2), but not Copy A, may be ex-
panded from the dimensions of the offi-
cial form to allow space for conveying ad-
ditional information, including additional
entries for Box 14, such as withholding
from pay for health insurance, union dues,
bonds, or charity. The limitation that a
maximum of four itemsare permitted in
Box 12 of Form W-2 applies onlyto the
paper Copy Athat is filed with the SSA.
Also, on these copies (Copies B, C, and
2), the size of these boxes may be ad-
justed. (However, see the minimum sizes
for certain boxes, below). This may per-
mit the employer to eliminate other state-
ments or notices that would otherwise be
furnished to employees.
1. The MAXIMUMallowable dimen-
sions for employee copies of Forms W-2
are:
(a) Depth should be no more than 6.5
inches;
(b) Width should be no more than 8.5
inches.
2. The MINIMUMallowable dimen-
sions for employee copies of Forms W-2
are:
(a) 2.67 inches deep by 4.25 inches
wide;
(b) Horizontal or vertical format is per-
mitted.
NOTE: These maximum and minimum
size specifications are for the Tax Year
2001 only and may change in future

2001–17 I.R.B.1099April 23, 2001
years. The maximum width of 8.5 inches
is for employee copies of Form W-2 only.
The width of the paper Copy A, submitted
to the SSA, is specified in Part B, Sec.1.
A.05 above. Also, the electronic tax logo
has been added to the employee copies;
however, the logo is notrequired on any
of the substitute forms copies.
.02 The paper for all copies mustbe
white. The substitute Copy B (or its
equal), which employees are instructed to
attach to their Federal income tax return,
must be at least 12 pound paper (basis
17 x 22-500), while the other copies fur-
nished the employee must be at least 9
pound paper (basis 17 x 22-500).
.03 Interleaved carbon and chemical
transfer paper for employee copies must
meet the following standards:
1. All copies mustbe CLEARLY LEG-
IBLE,
2. All copies musthave the capability
to be photocopied, and
3. Fading must notbe of such a degree
as to preclude legibility and the abil-
ity to photocopy.
.04 The following requirements govern
the private printing of employee copies of
Forms W-2. All substitutes mustbe a
form that contains boxes, box numbers,
and box titles that, when applicable, match
the IRS printed form. The employee
copy of Forms W-2 (Copy C) must con-
tain the note “This information is being
furnished to the Internal Revenue Ser-
vice. If you are required to file a tax re-
turn, a negligence penalty or other
sanction may be imposed on you if this
income is taxable and you fail to report
it.” The placement, numbering, and size
of certain boxes (the “core” information)
is specified as follows:
1. The items and box numbers that
constitute the core data are:
Box 1 - Wages, tips, other compensation,
Box 2 - Federal income tax withheld,
Box 3 - Social security wages,
Box 4 - Social security tax withheld,
Box 5 - Medicare wages and tips, and
Box 6 - Medicare tax withheld.
NOTE: Railroad employees may not be
subject to social security coverage but are
subject to Railroad Retirement Tax Act
(RRTA) Tier 1 and Tier 2 coverage. Rail-
road employers covered by RRTA Tier 1
and Tier 2 mustreport taxes withheld in
box 14 of Form(s) W-2 and mark check-
box “CT-1” within box bof Form W-3.
The “core” boxes mustbe printed in
the exact order shown on the IRS printed
form (see the Exhibits at the end of this
revenue procedure). Boxes 1 and 2 must
be next to each other, with boxes 3 and 4
below on the next line, and boxes 5 and 6
on the line below boxes 3 and 4.
2. The block of core data (boxes 1
through 6) mustbe placed in the upper
right of the form. Substitute employee
copies of Form(s) W-2 that are printed
using a vertical format with dimensions
smaller than the IRS printed form may
have the core data entirely on the top of
the form (see Exhibit F). In no instance
will boxes or other information be permit-
ted to the right of the core data. Standard
margins or a small amount of other blank
space may appear to the top or right of
this data.
The form title, number, or copy (Copy
B, C, or 2) may be at the top of the form.
Also, a reversed or blocked-out area to
accommodate a postal permit number or
other postal considerations is permitted at
the upper right of the form.
3. Boxes 1 through 6 each mustbe a
minimum of 1 3/8 inches wide and 1/4
inch deep.
4. Other required boxes:
- Employer identification number
(EIN),
- Employer’s name, address, and ZIP
code,
- Employee’s social security number,
and
- Employee’s name, address, and ZIP
code.
These items are required to be present on
the form and mustbe in boxes similar to
those on the IRS printed form. However,
they may be placed in any location, other
than the top or upper right. The lettering
system used on the IRS printed form (“a”
through “f”) need not be used. The em-
ployer identification number may be in-
cluded in the box for the employer’s name
and address. If this is done, a separate
box for the EIN is not required. The
“Control number” box (box “a” on the
IRS printed form) is not required.
5. The Tax Year (2001) mustbe clearly
printed (in non-reflective black ink) on
all copies of substitute Forms W-2. It is
recommended (but not required) that this
information be located to the right of the
form title on the lower left of the Form
W-2. The use of 24 pt. OCR-A font is
recommended but not required.
6. If applicable, box 7, “Social security
tips”, mustbe shown separately from
“Social security wages.” A separate box is
not required unless social security tips are
to be reported. Boxes 1 and 2 on Copy B
are required to be outlined in bold 2-point
rule (see Exhibit E) or highlighted in some
manner to distinguish these boxes.
7. If box 9 for “Advance EIC” pay-
ment (Advance Earned Income Credit) is
present, the box mustbe outlined in bold
2-point rule or highlighted in some man-
ner to distinguish this box. However, if
no amounts are paid for “Advance EIC”,
this box is not required and may be omit-
ted by printers. Do not use box 9 for any
other purpose than reporting Advance
EIC payments.
8. If box 8 “Allocated tips” are being re-
ported for an employee (or class of employ-
ees that are being provided Forms W-2), it
is recommended (but not required) that this
box also be outlined in bold 2-point rule or
highlighted on Copy B. However, if allo-
cated tips are not being reported, this box
may be omitted by printers.
9. Employers who are required to
withhold and report state income tax in-
formation are required to include the fol-
lowing boxes on substitute Forms W-2:
Box 15 - State and Employer’s state
I.D. number.
Box 16 - State wages, tips, etc.
Box 17 - State income tax.
10. Employers who are required to
withhold and report local income tax in-
formation are required to include the fol-
lowing boxes on substitute Forms W-2:
Box 18 - Local wages, tips, etc.
Box 19 - Local income tax.
Box 20 - Locality name.
11. If state or local tax information is
required, this information is also consid-
ered “core data.” The state and local in-
formation mustbe placed at the bottom of
the form. See the exhibits at the end of
this revenue procedure.
12. Other boxes on the IRS printed
form (boxes 7 through 14) need not ap-
pear on substitute Forms W-2 provided to
employees unlessan employer has that
item of information to report to an em-
ployee. For example, if an employee did

April 23, 200111002001–17 I.R.B.
not have Social security tips (box 7), Al-
located tips (box 8), or Advance EIC pay-
ment (box 9), the form could be printed
without those boxes. However, if the em-
ployer provided amounts for (box 10) De-
pendent care benefits, those amounts
would be required to be reported sepa-
rately and shown in a box labeled “De-
pendent care benefits” as on the IRS
printed form and the exhibits in this rev-
enue procedure.
13. Employers may provide multiple
entries in box 12, but each entry mustuse
the same code as assigned by the IRS for
that type of item. (See the “Reference
Guide for Box 12 Codes” in the 2001 In-
structions for Forms W-2 and W-3.) For
example, employers reporting elective de-
ferrals to a section 401(k) plan mustenter
in box 12 “D” and not “A”, even though it
is the first or only item to go in this box.
Use the codes shown with the dollar
amount. Employers may enter more
than four codes in box 12 of Copies 1, 2,
B, C, and D of Forms W-2.Do not re-
port in box 12 any items that are not listed
as Codes A-T or the new Code “V” in
the 2001 Instructions for Forms W-2.
14. For codes D, E, F, G, H, and S, if
any elective deferrals, salary reduction
amounts, or non-elective contributions to
a section 457(b) plan during the year are
make-up amounts under the Uniformed
Services Employment and Reemploy-
ment Rights Act of 1994 (USERRA) for
a prior year, you must enter the prior year
contributions separately. You mustenter
the code, the year (two positions only),
and the amount. For example, elective
deferrals under USERRA to a section
401(k) plan are reported in box 12 as fol-
lows: D 00 2250.00, D 99 1250.00. The
2001 contribution does not require a year
designation; enter it as D 7000.00.
15. If you are a military employer and
provide your employee with basic hous-
ing, subsistence allowances, and combat
zone compensation, report the amount in
box 12, Form W-2, using code Q.
16. Employer contributions to an em-
ployee’s Medical Savings Accounts
(MSA), mustbe reported in box 12, Form
W-2, using code R.
17. An employee elective contribution
to a salary reduction SIMPLE retirement
account mustbe included in box 12, Form
W-2, using code S. However, if the amount
is contributed to a SIMPLE retirement that
is part of a section 401(k) arrangement, that
amount mustbe reported in box 12, Form
W-2, using code D.
18. Amounts paid or expenses incurred
on behalf of an employee for qualified
adoption expenses mustbe reported in
box 12, Form W-2, using code T.
19. Code V(optional) for 2001, shows
the spread (i.e., fair market value of stock
over the exercise price of option(s) granted
to your employee with respect to that stock)
from your employee’s exercise of non-
statutory stock option(s). The spread is to
be included in boxes 1, 3 (up to the social
security wage base), 5, and 12.
20. Employers may use box 14 for any
other information they wish to give their
employee. Each item must be labeled.
Examples are union dues, health insur-
ance premiums deducted, nontaxable in-
come, voluntary after-tax contributions,
or educational assistance payments.
21. If you are reporting prior year
contributions under USERRA (see item
14 above), you may report in box 14
makeup amounts for nonelective em-
ployer contributions, voluntary after-tax
contributions, required employee contri-
butions, and employer matching contri-
butions. Report such amounts sepa-
rately for each year.
22. If the employer has employees
who are subject to any of the three cate-
gories/check boxes within box 13, the
entire box 13 (ballot boxes) is required
to be reported with the proper check
mark designation. For example, if an
employer provides a retirement plan,
box 13 mustbe reported and check
marked for retirement plan designation.
.05 Substitute forms for employees
(Copies B, C, and 2 of Forms W-2) must
also meet the following requirements:
1. All copies of Form W-2 must
clearly show the form number, the form
title, and the tax year prominently dis-
played together in one area of the form.
The title of Form W-2 is “Wage and Tax
Statement.” It is recommended (but not
required) that this be located on the bot-
tom left of Form W-2. The reference to
the “Department of the Treasury - Inter-
nal Revenue Service” mustbe on all
copies of Form W-2 provided to the em-
ployee. It is recommended (but not re-
quired) that this be located on the bot-
tom right of Form W-2.
2. If the substitute forms are not la-
beledas to the disposition of the copies,
then written notification mustbe pro-
vided to each employee as specified
below:
(a) The first copy of the form (Copy
B) is filed with the employee’s Federal
tax return.
(b) The second copy of the form
(Copy C) is for the employee’s records.
(c) If applicable, the third copy
(Copy 2) of the form is filed with the
employee’s state, city, or local income
tax return.
3. If the substitute forms are labeled,
the forms mustcontain the applicable
description:
“Copy B, To Be Filed With Em-
ployee’s FEDERAL Tax Return,” and
“CopyC, for EMPLOYEES
RECORDS.” It is recommended (but not
required) that this be located on the
lower left of Form W-2. “Copy 2, To Be
Filed with Employee’s State, City, or
Local Income Tax Return”.
4. Instructions similar to those con-
tained on the back of Copies B and C of
the official Form W-2 must be provided
to each employee. Employers may
modify or delete certain information in
these instructions (such as modification
for employees of railroads to cover Rail-
road Retirement Tier 1 and Tier 2 com-
pensation and taxes). Employers are al-
lowed to delete instructions that do not
apply to the employee. For example, if
none of the employees have dependent
care benefits (box 10), the employer
may delete the instructions for that item.
Also, if an employer will only be report-
ing amounts for a 401(k) plan in box 13,
those instructions may be modified to
cover only Code D and its instructions.
5. Employers mustnotify employees
who have no income tax withheld that
they may be able to claim a tax refund
because of the earned income credit
(EIC). You will meet this notification
requirement if you issue the official IRS
Form W-2 with the EIC notice on the
back of the Copy B, or a substitute Form
W-2 with the same statement. You may
also meet the requirement by providing
a substitute Form W-2 without the EIC
notification by including Notice 797,
Possible Federal Tax Refund Due to the
Earned Income Credit (EIC),or your
own statement that contains the same
wording. You may change the font on

2001–17 I.R.B.1101April 23, 2001
Copy C (back page only) so that the EIC
notification and W-2 instructions fit en-
tirely on the back of Copy C. For more
information about notification require-
ments, see Notice 1015(formerly Pub.
1325), Have You Told Your Employees
About the Earned Income Credit (EIC)?
NOTE:Printers are cautioned that
the rules set forth here (Part B., Sec. 2)
apply to employee copies (Copies B, C,
and 2) only. Paper filers who send Copy
A of Form W-2 to the SSAmustfollow
the requirements in Parts B, Sec. 1 and
Sec. 3, for those paper submissions.
SEC. 3. GENERAL RULES FOR
FILING “PAPER SUBSTITUTES”
FOR FORMSW-2 AND W-3
(STANDARD RED INK FORMAT)
.01 Paper substitutes that conform TO-
TALLYto the specifications contained in
this revenue procedure may be privately
printed withoutthe prior approvalof the
IRS. Please do not mail yourpaper
Forms W-2 or W-3 tax year submissions
to the IRS address below. The address
below is for correspondence or questions
relating to specifications in this publica-
tion only. Penalties may be assessed for
not complying with the form specifica-
tions set forth in this publication. SUB-
STITUTE FORMS THAT DO NOT CON-
FORM TOTALLYTO THESE
SPECIFICATIONS ARE NOT ACCEPT-
ABLE. This applies to both paper substi-
tutes that are filed with the SSA and those
that are given to employees. Forms W-2
(Copy A) and W-3 filed with the SSA
that do not conform totally to the specifi-
cations, may be returned. Forms cannot
be submitted to the IRS or the SSA for
specific approval with exception to the
laser printed (black/white) forms only.If
you are uncertain of any specification set
forth herein and want that specification
clarified, you may submit a letter citing the
specification in question, your interpreta-
tion of that specification, and an example of
how the form would appear if produced
using your understanding of the specifica-
tion. Any questions about Copies B, C, and
2 of Forms W-2 should be sent to:
Internal Revenue Service
ATTN: Substitute Form
W-2 Coordinator
Forms and Publications
W:CAR:MP:FP:S:SP
1111 Constitution Ave., N.W.
Washington, DC 20224
Any questions about Copy A, Form W-2,
and Form W-3 should be forwarded to:
Social Security Administration
Data Operations Center
ATTN: Program Analyst Office,
Room 449
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997
NOTE:You should allow at least 30days
for the IRS or the SSA to respond.
.02 Forms W-2 and W-3 are subject to
annual review and possible change. Em-
ployers are cautioned against overstock-
ing supplies of privately printed substi-
tutes.
.03 Copies of the current year IRS
printed Forms W-2 and W-3, and the in-
structions for these forms may be ob-
tained using IRS Web Site www.irs.gov, or
from most IRS offices, or by calling 1-
800-829-3676. The IRS provides only
cut-sheet sets of Forms W-2 and W-3.
.04 Substitute Forms W-2 and W-3
filed with the SSA should contain only
data that is required according to the 2001
Instructions for Forms W-2 and W-3 and
this revenue procedure.
.05 Substitute Forms W-2, Copy A,
and W-3 are machine imaged and scanned
by the SSA; therefore, these forms must
meet the same specifications as Forms
W-2 and W-3 produced by the IRS. The
vertical and horizontal spacing for all
Federal payment and data boxes on Form
W-2 mustbe in compliance with the
specifications contained herein.
.06 The ballot boxes in box 13 of
Forms W-2, Copy A must be point-14
inch (.14) boxes (see Exhibit A). The
spacing on each side of the the three bal-
lot boxes are point-36 inch (.36) (see Ex-
hibit A). The space after the last/third
ballot box is point-46 inch (.46) (see Ex-
hibit A). The Form W-3 box b must be
point-14 inch (.14) ballot boxes (see Ex-
hibit B). Please insure you adhere to the
dimensions provided in the exhibits.
NOTE:If a box is marked, more than 50
percent of the applicable ballot box must
be covered by an “X”.
.07 Copy A of Forms W-2 and Form
W-3 musthave the form producer’s EIN
entered to the left of the “Department of
the Treasury.”
PART C. ADDITIONAL
INSTRUCTIONS
SEC. 1. INSTRUCTIONS FOR
FORMS PRINTERS
.01 Except as provided below, if mag-
netic or electronic media is not used for
filing with the SSA, the substitute copies
of Forms W-2 assembly should be
arranged in the same order as the IRS
printed Forms W-2. Copy A (red/white)
should be first, followed sequentially by
perforated sets (Copies 1, B, C, 2, and D).
The substitute form to be filed by the em-
ployer with the SSA must carry the desig-
nation “Copy A” for the red/white forms.
The black/white laser printed forms re-
quire the “Copy A” designation also.
See Part B, Sec. 1. B for laser specifica-
tions along with exhibits G and H.
NOTE:Magnetic media/electronic filers
do not submit paper Copy A (red/white or
black/white) of Form W-2 or Form W-3
(red/white or black/white) to SSA.
MMREF-1 specifications require a
Form 6559 transmittal for magnetic
media tape and cartridge filers of
Forms W-2. MMREF-1 specifications do
not require Form 6559 if filed on diskette
or electronically if the employer has reg-
istered for a PIN and Password.
1. Privately printed substitute forms
are not required to contain a copy to be re-
tained by employers (Copy D). However,
employers mustbe prepared to verify or
duplicate this information if it is re-
quested by the IRS or the SSA. Paper fil-
ers who do not keep Copy D should be
able to generate a Facsimile of Copy A
(red/white or black/white) in case of loss.
2. Except as provided in the arrange-
ment of the official assemblies, additional
copies that may be prepared by employers
shall not be placed ahead of the copy
“FOR EMPLOYEE’S RECORDS,” on
Form W-2 (Copy C).
3. Instructions similar to those con-
tained on the back of Copies B and Cof
the official form mustbe provided to
each employee. These instructions may
be printed on the back of the substitute
Copies B and C or may be provided to
employees on a separate statement. Do
not print these instructions on the back of
Copy 1 or 2 that is to be filed with the em-
ployee’s state or local income tax return.
.02 All privately printed Forms W-2
(Copy A red/white) and W-3(red/white)

April 23, 200111022001–17 I.R.B.
must have the tax yearform number,
and form title printed on the bottom face
of each form using identical type to that
of the official format. The tax year
must be printed in non-reflective
black ink using 24-point OCR-A font
on Copy A (red/white) of Forms W-2
and Form W-3 (red/white). See Part
B, Sec. 1.B “REQUIREMENTS FOR
8-1/2 INCH LASER PRINTED
BLACK AND WHITE FORMS” for
specifications for the black/white
laser printed form Copy A. The form
titles for Forms W-2 (Copy A
red/white) and W-3 (red/white) respec-
tively, e.g., “Wage and Tax
Statements”and “Transmittal of Wage
and Tax Statements” must be printed
in Red OCR drop-out Flint Ink. The
form identifying control number for
Forms W-2 (red/white) and Form W-3
(red/white) must be printed in non-re-
flective black ink, using OCR-A font
printed 10 characters per inch. The
word “Form” on the W-2 (red/white)
and W-3 (red/white) must be printed
in Red OCR drop-out Flint Ink. The
four corner black register marks on
the Forms W-3 (red/white) and W-2
(Copy A red/white) must be printed in
non-reflective black ink.
.03 The substitute Form W-2, Copy B,
which employees attach to their Federal
income tax return, must be printed on at
least 12-pound paper (basis 17 x 22-500)
while the other copies furnished to em-
ployee should be at least 9-pound paper
(basis 17 x 22-500).
.04 Employee copies of Forms W-2
(Copies B, C, etc.), including those that
are printed on a single sheet of paper,
must be easily separated by the em-
ployee. Perforations between the individ-
ual copies that are printed on a single
sheet of paper satisfy this requirement.
The use of scissors to separate Copies B,
C, etc., indicates that they are not easily
separated forms.
.05 The Form W-2, Copy A (red/white
or black/white), and Form W-3
(red/white or black/white) that are filed
with the SSAmust have no printing on
the reverse side.
.06 Instructions similar to those pro-
vided as part of the official forms must be
provided as part of any substitute
Form W-2 or W-3.
SEC. 2. INSTRUCTIONS FOR
EMPLOYERS
.01 Only originals of Copy A
(red/white and black/white) Form W-2
and Form W-3 (red/white and
black/white) may be filed with the SSA.
CARBON COPIES AND PHOTOCOPIES
ARE NOT ACCEPTABLE.
.02 Employers should type or machine
print entries on non-laser generated forms
whenever possible and provide good
quality data entries by using a high qual-
ity type face, inserting data in the middle
of blocks that are well separated from
other printing and guidelines, and taking
any other measures that will guarantee
clear, sharp images.USE 12-point
Courier font (data entries).
Note: (SSA prefers 12-point Courier
font.)
Form W-2 Copy A (red/white and
black/white) requires decimal entries
for wage data. Dollar signs are prefor-
matted on Forms W-2 (red/white) and
W-3 (red/white) and should not be en-
tered as part of money amounts. The
employer must provide a machine
scannable Form W-2 (Copy A red/white
or black/white.) The employer must re-
frain from printing any data in the top
margin of the forms. UNLESS AB-
SOLUTELY NECESSARY, DO NOT
PRINT ANYTHING IN THE CON-
TROL NUMBER BOX ON ANY OF
THE FORMS W-2 OR W-3.The em-
ployer must also provide payee copies
(Copies B, C, and 2) that are legible and
capable of being photocopied (by the em-
ployee). When non-laser Form W-2 or
W-3 is typed, black ink must be used with
no script type, inverted font, italics or
dual case alpha characters used.
.03 The Employer Identification Num-
ber (EIN) mustbe entered in box b of
Form W-2. The EIN must also be entered
in box e of Form W-3. Note: The EIN
entered on Form W-3 in box e must be
the same EIN entered on Forms W-2 in
box b, and on Forms 941, 943, CT-1,
Schedule H (Form 1040), or any other
corresponding forms filed with the IRS.
.04 The employer’s name, and address
may be preprinted.
.05 Generally, an agent that has an ap-
proved Form(s) 2678, Employer Appoint-
ment of Agent, should enter its name as
the employer in box cof Form W-2 and
file one Form W-2. However, if the agent
is (a) acting as an agent for two or more
employers, or is an employer and is acting
as an agent for another employer; and (b)
pays social security wages in excess of
the wage base to an individual, special re-
porting for payments to that individual
may be needed. The agent should file
separate Forms W-2 reflecting the wages
paid by each employer. Box cof Forms
W-2 should include the name of the agent,
agent for (name of employer), and ad-
dress of agent. Each Form W-2 should
reflect the EIN of the agent in box b. In
addition, the employer’s EIN should be
shown in box hof Form W-3.
.06 The preparation and filing instructions
for Forms W-2 and W-3 are included in the
2001 Instructions for Forms W-2 and W-3.
.07 To avoid confusion and questions by
employees, employers are encouraged to
delete the following items from the em-
ployee copies of Forms W-2 that are pro-
vided to employees:
1 Form identifying number (e.g.,
22222),
2 The word “Void” and associated box,
and
3 Any other captions or box numbers
that would not be of any informational
use to employees (unless otherwise re-
quired).
.08 Employers should use the IRS
preprinted Form W-3 they received with
Pub. 393 or 2184 if available when fil-
ing (red/white) Form W-2(s) with the
SSA.
SEC. 3. OFFICE OF MANAGEMENT
AND BUDGET (OMB) REQUIRE-
MENTS FOR SUBSTITUTE FORMS
(STANDARD RED INK FORMAT AND
BLACK/WHITE LASER PRINTED
FORMAT)
.01 The Paperwork Reduction Act re-
quires: (1) OMB approval of IRS tax
forms, (2) that each form (all copies) show
the OMB approval number, and (3) that the
form (or its instructions) state why the IRS
needs the information, how it will be used
and whether it must be furnished. The offi-
cial IRS form and instructions will contain
this information.
.02 As it applies to substitute IRS
forms, this means:
1. All substitute forms (all copies)
mustshow the OMB number as it appears

2001–17 I.R.B.1103April 23, 2001
on the official IRS printed form (see Ex-
hibits A and B).
2. The OMB number mustbe in one of
the following formats:
OMB No. 1545–0008 (preferred), or
OMB # 1545–0008
3. You must inform the users of your
substitute forms of the reasons for IRS
use and collection requirements as stated
in the instructions for the official IRS
form. If you provide your users or cus-
tomers with the official IRS instructions,
page 1 of each form must retain either the
Privacy Act/Paperwork Reduction Act
Notice, or a reference to it as the IRS does
on the official forms.
SEC. 4. FORMS and PUBLICATIONS
(STANDARD RED INK FORMAT
AND BLACK/WHITE LASER
PRINTED FORMAT)
.01 Electronic access to IRS tax forms,
instructions, publications, and other tax
data is available through the following:
WWW- http://www.irs.gov
Fax Forms: (703) 368-9694
Note: Forms W-2 and W-3 obtained
as specified above cannot be filed with
the SSA nor can they be used to meet
personal tax obligations. Tax forms ob-
tained in this manner are for informa-
tional purposes only.
.02 A list of the Social Security Admin-
istrations ESLO Coordinators is included
at the end of this document.
SEC. 5. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2000–23, 2000–21,
dated May 22, 2000 (Reprinted as Publi-
cation 1141, Revised 7–00), is super-
seded.

April 23, 200111042001–17 I.R.B.

2001–17 I.R.B.1105April 23, 2001

April 23, 200111062001–17 I.R.B.

2001–17 I.R.B.1107April 23, 2001

April 23, 200111082001–17 I.R.B.

2001–17 I.R.B.1109April 23, 2001

April 23, 200111102001–17 I.R.B.

2001–17 I.R.B.1111April 23, 2001

April 23, 200111122001–17 I.R.B.

2001–17 I.R.B.1113April 23, 2001
Qualified Transportation
Fringes; Correction
Announcement 2001–31
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regula-
tions.
SUMMARY: This document contains a
correction to final regulations that were
published in the Federal Registeron
Thursday, January 11, 2001 (66 FR 2241)
that ensure that transportation benefits
provided to employees are excludable
from gross income.
DATES: This correction is effective Janu-
ary 11, 2001.
FOR FURTHER INFORMATION CON-
TACT: John Richards at (202) 622-6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the sub-
ject of this correction are under section
132(f) of the Internal Revenue Code.
Need for Correction
As published, the final regulations
(T.D. 8933, 2001–11 I.R.B. 794), do not
address what taxable year is used for pur-
poses of the applicability dates in the reg-
ulations. These final regulations are
being corrected to clarify that the applica-
bility dates in the regulations are based on
the employee taxable year and that, for
this purpose, an employer may assume
that the employee taxable year is the cal-
endar year.
Correction of Publication
Accordingly, the publication of the
final regulations (T.D. 8933), which were
the subject of FR Doc. 01–294, is cor-
rected as follows:
1. On page 2251, column 3,
§1.132–9(b), paragraph (a) of A–25, last
two lines of the paragraph, the language
“section is applicable for taxable years
beginning after December 31, 2001.” is
corrected to read “section is applicable for
employee taxable years beginning after
December 31, 2001. For this purpose, an
employer may assume that the employee
taxable year is the calendar year”.
2. On page 2251, column 3,
§1.132–9(b), paragraph (b) of A–25, last
three lines of the paragraph, the language
“transit passes are readily available) is ef-
fective for taxable years beginning after
December 31, 2003.” is corrected to read
“transit passes are readily available) is ap-
plicable for employee taxable years be-
ginning after December 31, 2003. For
this purpose, an employer may assume
that the employee taxable year is the cal-
endar year.”
LaNita Van Dyke,
Acting Chief, Regulations Unit,
Office of Special Counsel
(Modernization & Strategic Planning).
(Filed by the Office of the Federal Register on April
5, 2001, 8:45 a.m., and published in the issue of the
Federal Register for April 6, 2001, 66 F.R. 18190)
Part IV. Items of General Interest
Announcement and Report Concerning Advance Pricing Agreements
Announcement 2001–32
March 30, 2001
This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act of
1999, requiring that the Secretary of the Treasury annually report to the public concerning Advance Pricing Agreements (APAs) and
the APA Program. The first report, in Announcement 2000–35, 2000–16 I.R.B. 922, covered calendar years 1991 through 1999.
This second report describes the experience of the APA Program during calendar year 2000 consistent with the mandate of § 521(b).
This document does not provide general guidance regarding the application of the arm’s length standard; rather, it reports on the
structure and activities of the APA program.
Sean F. Foley
Director, Advance Pricing Agreement Program
Background
IRC § 482 provides that the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances be-
tween or among two or more commonly controlled businesses if necessary to reflect clearly the income of such businesses. Under
the regulations, the standard to be applied in determining the true taxable income of a controlled business is that of a business deal-
ing at arm’s length with an unrelated business. The arm’s length standard also has been adopted by the international community and
is incorporated into the transfer pricing guidelines issued by the Organization for Economic Cooperation and Development (OECD).
OECD, T
RANSFERPRICINGGUIDELINES FORMULTINATIONALENTERPRISES ANDTAXADMINISTRATORS(1995). Transfer pricing issues
by their nature are highly factual and have traditionally been one of the largest issues identified by the IRS in its audits of multina-
tional corporations. The Advance Pricing Agreement (APA) Program is designed to resolve actual or potential transfer pricing dis-
putes in a principled, cooperative manner, as an alternative to the traditional adversarial process. An APA is a binding contract be-
tween the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment under IRC § 482 for a covered
transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method. In year 2000, the
IRS and taxpayers executed 63 APAs.

April 23, 200111142001–17 I.R.B.
Since 1991, with the issuance of Rev. Proc. 91–22, 1991–1 C.B. 526, the IRS has offered taxpayers through the APA Program the op-
portunity to reach an agreement in advance of filing a tax return on the appropriate transfer pricing methodology (TPM) to be ap-
plied to related party transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Direc-
tives Manual (CCDM), ¶¶ (42)(10)10 –(42)(10)(16)0 (November 15, 1996). Also in 1996, the IRS updated Rev. Proc. 91–22 with
the release of Rev. Proc. 96–53, 1996–2 C.B. 375. The APA Program continues to operate under the provisions of Rev. Proc. 96–53,
which provides taxpayers with instructions of how to apply for an APA, and what to expect in the processing of the case. In an effort
to encourage taxpayers to utilize the APA process, in 1997 the IRS instituted an Early Referral Program by which, in appropriate
cases, field examination teams may suggest to taxpayers that APAs be pursued before substantial time is spent examining transfer
pricing issues. In addition, in 1998, the IRS published Notice 98–65, 1998–2 C.B. 803, which set forth streamlined APA procedures
for Small Business Taxpayers (SBTs). That Notice also expanded the availability of the lowest APA user fee in an effort to attract
taxpayers who may not have the resources to do the sophisticated economic studies normally required in APA submissions.
Advance Pricing Agreements
An APA generally combines an agreement between a taxpayer and the IRS on an appropriate transfer pricing methodology (TPM)
for the transactions at issue (Covered Transactions) with an agreement between the U.S. and one or more foreign tax authorities
(under the authority of the mutual agreement process of our income tax treaties) that the TPM is correct. With such a “bilateral”
APA, the taxpayer ordinarily is assured that the income associated with the Covered Transactions will not be subject to double taxa-
tion by the IRS and the foreign tax authority. It is the policy of the United States, as set forth in § 7 of Rev. Proc. 96–53 to encourage
taxpayers that enter the APA program to seek bilateral or multilateral APAs when competent authority procedures are available with
respect to the foreign country or countries involved. However, the IRS may execute an APA with a taxpayer without reaching a com-
petent authority agreement (a “unilateral” APA).
A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved transfer pricing methodology for U.S. tax
purposes. A unilateral APA binds the taxpayer and the IRS, but obviously does not prevent foreign tax administrations from taking
different positions on the appropriate transfer pricing methodology for a transaction. As stated in Rev. Proc. 96–53, should a trans-
action covered by a unilateral APA be subject to double taxation as the result of an adjustment by a foreign tax administration, the
taxpayer may seek relief by requesting that the U.S. competent authority consider initiating a mutual agreement proceeding, pro-
vided there is an applicable income tax treaty in force with the other country.
The APA Program
APAs are negotiated with the taxpayer by an IRS team headed by an APA team leader. As of December 31, 2000, the APA program
had 16 team leaders, of whom 14 were attorneys and 2 were former international examiners. The team leader is responsible for or-
ganizing the IRS APA team, arranging meetings with the taxpayer, securing whatever information is necessary from the taxpayer to
analyze the taxpayer’s related party transactions, analyzing the available facts under the arm’s length standard of § 482 and the regu-
lations, and negotiating with the taxpayer.
The APA team generally includes an economist, an international examiner and, in a bilateral case, a competent authority analyst who
leads the discussions with the treaty partner. The economist may be from the APA Program or from the IRS field organization. The
APA team may include Large and Mid-Size Business (LMSB) field counsel, other LMSB exam personnel, and an appeals officer.
The APA Process
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc. 96–53.
The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and
(5) drafting and execution.
(1) The
APAApplication
In many APA cases, the taxpayer’s application is preceded by a pre-file conference with the APA staff in which the taxpayer can solicit
the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer must disclose its
identity when it applies for an APA. The APA Program’s jurisdiction over a particular year is established by the filing of the appropri-
ate user fee on or before the due date of the tax return for that year. Many taxpayers file a user fee first and then follow up with a full
application later. The procedures for pre-file conferences, user fees, and delayed applications can be found in Rev. Proc. 96–53.
The APA application can be a relatively modest document for a small business taxpayer consisting of about 30 to 50 pages. Notice
98–65 describes the special APA procedures for small businesses. For most taxpayers, however, the APA application is a substantial
document filling several binders. The APA Program makes every effort to reach agreement on the basis of the taxpayer’s application.
Two recent applications from two taxpayers in the same industry illustrate this point. Each taxpayer has proposed differing algo-
rithms, within the same transfer pricing method, for valuing a service associated with the development of a product. The APA Pro-
gram believes that both algorithms, if applied correctly, should converge and provide an accurate measure of the value of the service.
As a consequence, the APA Program will work with both algorithms proposed by the two taxpayers, and will not insist that taxpay-
ers adopt one algorithm over another.

2001–17 I.R.B.1115April 23, 2001
The application is assigned to an APA team leader who will be responsible for the case. The APA team leader’s first responsibility is
to organize the APA team. This involves contacting the appropriate LMSB International Territory manager to secure the assignment
of an international examiner to the APA case and the LMSB Counsel’s office to secure a Division Counsel lawyer. In a bilateral
case, the U.S. Competent Authority will assign a competent authority analyst to the team. In a large APA case, the international ex-
aminer may invite his or her manager and other LMSB personnel familiar with the taxpayer to join the team. When the APA may af-
fect taxable years in Appeals, the appropriate appellate conferee will be invited to join the team. The APA team leader will then dis-
tribute copies of the APA application to all team members and will set up an opening conference with the taxpayer. The APA office
strives to hold this opening conference within 45 days of the receipt of the complete application. At the opening conference, the
APA team leader will propose a schedule designed to complete the recommended U.S. negotiating position for a bilateral APA within
9 months from the date the full application was filed and to complete a unilateral APA within 12 months from the application date.
1
(2)Due Diligence
The APA team must satisfy itself that the relevant facts submitted by the taxpayer are complete and accurate. This due diligence as-
pect of the APA is vital to the process. It is because of this due diligence that the IRS can reach advance agreements with taxpayers
in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways, but in a large case the taxpayer and
the APA team typically will agree to a meeting, or more often to a series of meetings on dates, established in the opening conference.
In advance of the meeting, the APA team leader will submit a list of questions to the taxpayer for discussion at the meeting. The
meeting may result in a second set of questions. These questions from the IRS are developed jointly by the APA team leader and the
IRS field. It is important to note that this due diligence is not an audit and is focused only on the transfer pricing issues associated
with the transactions in the taxpayer’s application, or such other transactions that the taxpayer and the IRS may agree to add.
(3)Analysis
A significant part of the analytical work associated with an APA is done typically by the APA or IRS field economist assigned to the
case. The analysis may result in the need for additional information. Once the APA team has completed its due diligence and analy-
sis, the APA team leader will begin negotiations with the taxpayer over the various aspects of the APA including the selection of
comparable transactions, asset intensity and other adjustments, the transfer pricing methodology, which transactions to cover, the ap-
propriate critical assumptions, the APA term, and other key issues. The APA team leader will discuss particularly difficult issues
with his or her managers, but in the main the APA team leader is empowered to negotiate the APA.
(4) Discussion and Agreement
This phase differs for bilateral and unilateral cases. In a bilateral case, the discussions proceed in two parts and involve two IRS of-
fices — the APA Program and the U.S. Competent Authority. In the first part, the APA team will attempt to reach a consensus with
the taxpayer regarding the recommended position that the U.S. Competent Authority should take in negotiations with its treaty part-
ner. This recommended U.S. negotiating position is a paper drafted by the APA team leader and signed by the Associate Chief Coun-
sel (International) or his designee that provides the APA Program’s view of the best transfer pricing methodology for the covered
transaction, taking into account the IRC, the Treasury regulations, the relevant tax treaty, and the U.S. Competent Authority’s expe-
rience with the treaty partner.
The experience of the APA office and the U.S. Competent Authority is that APA negotiations are likely to proceed more rapidly with
a foreign competent authority if the taxpayer fully supports the U.S. negotiating position. Consequently, the APA Office works to-
gether with the taxpayer in developing the recommended U.S. position. On occasion, the APA team will agree to disagree with a tax-
payer. In these cases, the APA office will send a recommended U.S. negotiating position to the U.S. Competent Authority that in-
cludes elements with which the taxpayer does not agree. This disagreement is noted in the paper. The APA team leader also solicits
the views of the field members of the APA team, and, in the vast majority of APA cases, the international examiner, LMSB field
counsel, and other IRS field team members concur in the position prepared by the APA team leader.
Once the APA Program completes the recommended U.S. negotiating position, the APA process shifts from the APA Program to the
U.S. Competent Authority. The U.S. Competent Authority analyst assigned to the APA will take the recommended U.S. negotiating
position and prepare the final U.S. negotiating position which is then transmitted to the foreign competent authority. The negotia-
tions with the foreign competent authority are conducted by the U.S. Competent Authority analyst, most often in face-to-face nego-
tiating sessions conducted periodically throughout the year. At the request of the U.S. Competent Authority analyst, the APA team
leader often will continue to assist the negotiations.
In unilateral APA cases, the discussions proceed solely between the APA Program and the taxpayer. In a unilateral case, the taxpayer
and the APA Program must reach agreement to conclude an APA. Like the bilateral cases, the APA team leader almost always will
achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. The APA Program has a proce-
dure in which the IRS field personnel are solicited formally for their concurrence in the final APA. This concurrence, or any items in
1
The average time for completing a negotiating position in year 2000 was 16.1 months for a new APA. Although statistics regarding negotiating positions were not
published for year 1999, 16.1 months, represents an improvement and progress towards this goal compared to past years. A similar improvement was seen with uni-
lateral APAs, with an average processing time of 14.1 months for year 2000, as compared to 18.9 months for year 1999.

April 23, 200111162001–17 I.R.B.
disagreement, are noted in a cover memorandum prepared by the APA team leader that accompanies the final APA sent forward for
execution by the Associate Chief Counsel (International) or his designee.
(5) Drafting and Execution
Once the IRS and the taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA Program
has developed standard language that is incorporated into every APA. The current version of this language is found in Attachment A.
As noted above, APAs are executed by the Associate Chief Counsel (International) or his designee for the IRS. The APA is executed
for the taxpayer by an appropriate corporate officer.
The Current APA Office Structure, Composition, and Operation
For the past three years, the APA Office has been structured into two branches, each staffed with a mix of APA team leaders, econo-
mists, and support staff and headed by a branch chief. The two branch chiefs report to the Director, APA. As of December 31,
2000, the APA staff was as follows:
The APA staffing grew modestly in 2000, rising from 23 persons at the end of 1999 to 25 as of December 31, 2000. The APA Office,
however, had significant turnover in the past year. Of the 25 members of the APA staff, 9 were new to the program in 2000, replac-
ing 7 people who left for other positions. The number of team leaders grew from 14 to 16, while the number of economists dropped
from 4 to 3. Average caseloads per team leader remained essentially unchanged from year-end to year-end at 13 APAs per team
leader. The affect of the two additional team leaders was mitigated by significantly higher total inventory. As set forth in Table 1
below, new APA filings rose 32% to 91 as compared to 69 in the prior year.
In August 2000, the General Accounting Office published Tax Administration: IRS’Advance Pricing Agreement Program,
GGD–00–168 The report found that the APA program was not meeting consistently its goal of processing unilateral APA cases
within 12 months and completing recommended U.S. negotiating positions within 9 months. In his response to the GAO, which was
also published in the August report, the Commissioner of Internal Revenue stated:
The main reason APA cases take longer than the ideal to process is resource constraints. In this way, the APA Pro-
gram has been a victim of its own success. As the Program’s reputation for reaching principled, even-handed, prac-
tical solutions to some of the most difficult cases facing the IRS and taxpayers has grown, demand for APAs has
also grown. Even though we are processing APAs at a record pace, this demand has outstripped the Program’s re-
sources.
Recognizing these resource constraints, the Chief Counsel in June 2000 approved an initiative to expand the APA program from two
to four branches. These additional positions have been announced and applications are now being processed.
Approximately 25% of the APA caseload comes from taxpayers located west of the Mississippi. The majority of these cases (rang-
ing between 50% and 75% depending on the year) are from California. Servicing these Western cases involves significant travel by
both APA staff and taxpayers. The processing of Western cases from Washington, D.C. also is more difficult due to time zone differ-
ences. To better service these Western cases, the APA Program plans to establish a new Branch Four located in California. The Cal-
ifornia APA cases are divided almost evenly between northern and southern California. As a consequence, the APA Program plans to
establish a split branch with two offices. One office would be located in Los Angeles and one would be located in the San Francisco
Bay area. The San Francisco office will open first, with the Los Angeles office to follow as resources are available. Establishing a
Western branch is expected to have a number of benefits to the APA Program and taxpayers including more rapid case processing,
reduction in travel cost, and closer relations with Western taxpayers and taxpayer organizations.
The planned APA Program structure, as memorialized in Chief Counsel Notice N(30)000–346, Nov. 19, 2000, (Organization and
Function of the Office of Associate Chief Counsel (International)) is as follows:
Director’s Office
1 Director
1 Secretary to the Director
Branch 1Branch 2
1 Branch Chief (vacant)1 Branch Chief
1 Secretary1 Secretary
11 Team Leaders5 Team Leaders
1 Economist2 Economists
1 Paralegal

UnilateralBilateralMultilateralYear TotalCumulative Total
APA applications filed246791492
during year 2000
APAs executed
• Year 20003130263294
• 1991–1999112114
2
5231
APA renewals101012154
executed during year
2000
Revised or Amended225
APAs executed during
year 2000
Pending requests for45166211211
APAs
Pending requests for14455959
renewal APAs
APAs revoked or01
canceled
APAs withdrawn349
2001–17 I.R.B.1117April 23, 2001
The August GAO report also noted that the APA Program was not systematically tracking the reasons why particular APA cases had
required more time to process. In response, the APA Program this past fall adopted a procedure by which APA team leaders periodi-
cally record whether each APA case assigned to them is proceeding within the timeliness goals, and if not, identifies the reason for
the delay. This information is recorded in the central case processing computer data base of the IRS Chief Counsel and will be avail-
able for analysis by management.
Model APA at Attachment A
[§ 521(b)(2)(B)]
APA Program Statistical Data
[§ 521(b)(2)(C) and (E)]
The statistical information required under § 521(b)(2)(C) is contained in Tables 1 and 9 below; the information required under
§ 521(b)(2)(E) is contained in Tables 2 and 3 below:
TABLE 1: APA APPLICATIONS, EXECUTED APAs, AND PENDING APAs
Director
Branch 1Branch 2Branch 3Branch 4
Washington, DCSan FranciscoLos
OfficeOfficeAngeles
Office
2
One 1996 APA involving a US Possession is counted as a bilateral APA.

April 23, 200111182001–17 I.R.B.
TABLE 3: APA COMPLETION TIME – MONTHS PER APA
TABLE 4: RECOMMENDED NEGOTIATING POSITIONS
MonthsNumberMonthsNumberMonthsNumberMonthsNumber
of APAsof APAof APAsof APAs
11161310460
23171321472
31182332482
40190344490
54202350500
61211360511
70222370520
81232380530
92242390540
103252400552
113260410560
124271422571
130280432581
140290440590
154302451600
Recommended Negotiating Positions Completed in Year 200036
CombinedNew Renewal
Average14.9Average16.1Average11.9
Median15.0Median15.0Median12.5
TABLE 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS
TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME – MONTHS PER APA
MonthsNumberMonthsNumberMonthsNumberMonthsNumber
11112211310
20122220320
30132232330
40143240341
50152250350
62160261361
72172270370
81183284380
92191290390
100200300401
3
Although the time required to complete a negotiating position has substantially improved in the past year, the average time required to conclude a bilateral or mul-
tilateral APA has historically been split roughly equally between the APA and Competent Authority Offices.
Months to Complete Advance Pricing Agreements in Year 2000
Combined Unilateral, Bilateral, Multilateral: Average24.0
Combined Unilateral, Bilateral, Multilateral: Median20.5
Unilateral NewUnilateral RenewalUnilateral Combined
Average16.3Average12.8Average15.2
Median11.0Median11.5Median11.0
Bilateral/Multilateral NewBilateral/Multilateral RenewalBilateral/Multilateral Combined
3
Average34.4Average27.4Average32.5
Median34.0Median24.0Median33.0
TABLE 2: MONTHS TO COMPLETE APAs

2001–17 I.R.B.1119April 23, 2001
Months to Complete Small Business Taxpayer APAs in Year 2000
NewRenewalCombined
Average8.5Average6.5Average8.1
Median7.5Median6.5Median7.0
TABLE 7: SMALL BUSINESS TAXPAYER APAs
4
Small Business Taxpayer APAs Completed in Year 200010
Renewals 2
New 8
Unilateral10
Bilateral0
4
A “small business taxpayer” is a U.S. taxpayer with total gross income of $200 million of less, and the APA is processed under the special procedures set forth in
Notice 98–65.
TABLE 8: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs
TABLE 9: INDUSTRIES COVERED
Industry InvolvedNumber
5
Financial institutions and products10 - 13
Industrial and commercial machinery7 - 9
Food, beverages, and related products7 - 9
Transportation equipment7 - 9
Consumer electronics, not including computers4 - 6
Computer hardware, components, and related products, and computer software4 - 6
Photographic equipment and supplies1 - 3
Chemicals and related products (industrial, pharmaceutical, cosmetics)1 - 3
Transportation services 1 - 3
Petroleum refining and related industries1 - 3
Hotel and related services1 - 3
Electrical equipment and components (excluding computers and1 - 3
consumer electronics)
Information services1 - 3
Construction services; construction, ground moving, and mining equipment1 - 3
Mining1 - 3
Measuring, analyzing, and controlling instruments1 - 3
Jewelry, sporting equipment, and toys1 - 3
Printing, publishing, and related industries1 - 3
Metal industries and metal products (not machinery)1 - 3
Engineering, research, consulting, accounting, management, legal, real1 - 3
estate, subscription, and related services
Telecommunications equipment, components, and services1 - 3
5
Several APAs listed in this table covered more than one industry.

April 23, 200111202001–17 I.R.B.
Transaction TypeNumber
Sale of tangible property into the U.S.25
Use of intangible property by a U.S. entity16
Performance of services by a U.S. entity16
Performance of services by a Non- U.S. entity12
Use of intangible property by a Non- U.S. entity10
Sale of tangible property from the U.S.8
Financial products – U.S. branch of foreign company7
Financial products – U.S. parent company4
Financial products – Non- U.S. parent company3
Research & Development cost sharing – Non-U.S. parent company3
TABLE 11: TYPES OF COVERED TRANSACTIONS
TABLE 12: TYPES OF COVERED TRANSACTIONS – SERVICES
Intercompany Services Involved in the Covered TransactionsNumber
Marketing and/or Distribution12
Headquarters and Administrative Services10
Management Services5
Research and Development5
Technical and Product Support Services5
Warranty Services4
Product Assembly2
Communication Services1
Purchasing1
Other Services2
Business Functions Performed and Risks Assumed
[§ 521(b)(2)(D)(ii)]
The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose
results are tested in the covered transactions in the APAs executed in Year 2000 are set forth in Tables 13 and 14 below:
Covered Transactions
[§ 521(b)(2)(D)(ii)]
The controlled transactions covered by APAs executed in Year 2000 are set forth in Table 11 and Table 12 below:
RelationshipNumber of APAs
Foreign Parent — U.S. Subsidiary (-ies)39
U.S. Parent — Foreign Subsidiary (-ies)16
Foreign Company and U.S. Branch8
U.S. Company and Non-U.S. Branch0
Partnership0
U.S. Parent, U.S. Possessions subsidiary0
Trades or Businesses
[§ 521(b)(2)(D)(i)]
The nature of the relationship between the related organizations, trades, or businesses covered by APAs executed in Year 2000 are
set forth in Table 10 below:
TABLE 10: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES

2001–17 I.R.B.1121April 23, 2001
Risks AssumedNumber
Market risks, including fluctuations in costs, demand, pricing, and inventory40
Financial risks, including interest rates and currency32
General business risks (e.g., related to ownership of Property, Plant, and Equipment)24
Credit and collection risks18
Product liability risks17
Research & Development risks16
Functions PerformedNumber
Marketing and distribution functions38
Manufacturing23
Product assembly and/or packaging23
Licensing of intangibles23
Purchasing and materials management21
Product testing and quality control21
Research and development20
Transportation and warehousing19
Process engineering17
Managerial, legal, accounting, finance, personnel, and other support services17
Product design and engineering16
Trading and risk management of financial products15
Technical training and tech support for sales staff 13
Product service (repairs, etc.)11
Consulting services7
Other services4
TABLE 13: FUNCTIONS PERFORMED BY THE TESTED PARTY
TABLE 14: RISKS ASSUMED BY THE TESTED PARTY
Discussion
The vast majority of APAs have covered transactions that involve numerous business functions and risks. For instance, with respect
to functions, companies that manufacture products have typically conducted research and development, engaged in product design
and engineering, manufactured the product, marketed and distributed the product, and performed support functions such as legal, fi-
nance, and human resources services. Regarding risks, companies have been subject to market risks, R&D risks, financial risks,
credit and collection risks, product liability risks, and general business risks. In the APA evaluation process a significant amount of
time and effort is devoted to understanding how the functions and risks are allocated amongst the controlled group of companies that
are party to the covered transactions.
In their APA proposals, taxpayers are required to provide a functional analysis. The functional analysis identifies the economic ac-
tivities performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The
importance of the functional analysis derives from the fact that economic theory posits that there is a positive relationship between
risk and expected return and that different functions provide different value and have different opportunity costs associated with
them. It is important that the functional analysis go beyond simply categorizing the tested party as, say, a distributor. It should pro-
vide more specific information since, in the example of distributors, not all distributors undertake similar functions and risks.
Thus, the functional analysis has been critical in determining the TPM (including the selection of comparables). Although functional
comparability has been an essential factor in evaluating the reliability of the TPM (including the selection of comparables), the APA
evaluation process has also involved consideration of economic conditions such as the economic condition of the particular industry.
In evaluating the functional analysis, the APA program has considered contractual terms between the controlled parties and the con-
sistency of the conduct of the parties with respect to the allocation of risk. Per the § 482 regulations, the APA program also has given
consideration to the ability of controlled parties to fund losses that might be expected to occur as the result of the assumption of a
risk. Another relevant factor considered in evaluating the functional analysis is the extent to which each controlled party exercises
managerial or operational control over the business activities that directly influence the amount of income or loss realized. The § 482
Regulations posit that parties at arm’s length will ordinarily bear a greater share of those risks over which they have relatively more
control.

April 23, 200111222001–17 I.R.B.
Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods
[§ 521(b)(2)(D)(iv)]
The TPMs used in APAs executed in Year 2000 are set forth in Tables 16–20 below:
TABLE 16: TRANSFER PRICING METHODS USED FOR TRANSFERS OF TANGIBLE AND INTANGIBLE PROPERTY
Type of OrganizationNumber
6
U.S. Distributor26
U.S. Manufacturer14
Non-U.S. Manufacturer9
U.S. Provider of Services8
U.S. Licensee of Intangible Property8
Non-U.S. Distributor7
Non-U.S. Provider of Services7
U.S. Licensor of Intangible Property6
Non-U.S. Licensee of Intangible Property5
Non-U.S. Licensor of Intangible Property4
Non-U.S. Dealer in Financial Products3
U.S. Participant in Cost-Sharing Agreement2
U.S. Dealer in Financial Products2
Related Organizations, Trades, or Businesses Whose Prices or Results are Tested to Determine Compliance with APA
Transfer Pricing Methods
[§ 521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose prices or results are tested to determine compliance with TPMs prescribed in
APAs executed in Year 2000 are set forth in Table 15 below:
TABLE 15: RELATED ORGANIZATIONS, TRADES, OR BUSINESSES WHOSE PRICES OR RESULTS ARE TESTED
6
For purposes of this report, both sides are counted as tested parties for transactions involving the use of the Comparable Uncontrolled Price, Comparable
Uncontrolled Transaction, and profit split methods, as well as for cost sharing agreements. There was no “tested party” counted for purposes of interbranch alloca-
tions in financial product cases (see Table 18).
TPM usedNumber
7
Comparable Uncontrolled Price (CUP) (tangible property only) – based on2
published market data
Comparable Uncontrolled Transaction (CUT) (intangible property only)6
Resale Price Method (tangible property only)3
Cost Plus Method (tangible property only)2
Comparable Profits Method (CPM): PLI is return on assets or capital employed4
Comparable Profits Method (CPM): PLI is operating margin22
Comparable Profits Method (CPM): PLI is gross margin1
Comparable Profits Method (CPM): PLI is Berry ratio2
Comparable Profits Method (CPM): PLI is a markup on total costs1
Comparable Profits Method (CPM) PLI is net margin1
Residual Profit Split5
Other Profit Split3
Royalty6
7
Profit Level Indicators (“PLIs”) used with the Comparable Profit Method of Treas. Reg. § 1.482–5, and as used in these TPM tables, are as follows: (1) rate of return
on assets or capital employed is the ratio of operating profit to operating assets, (2) operating margin is the ratio of operating profit to sales, (3) gross margin is the
ratio of gross profit to sales, (4) Berry ratio is the ratio of gross profit to operating expenses, (5) markup on total costs is generally a comparative markup on total
costs involved, (6) SG&A to sales refers to the ratio of the costs of sales, general, and administrative expenses to sales, and (7) net margin is the ratio of net (before
tax) profit over sales.

2001–17 I.R.B.1123April 23, 2001
TPM usedNumber
Capitalized R&D1
Other2
TABLE 17: TRANSFER PRICING METHODS USED FOR SERVICES
TPM usedNumber
8
Cost Plus Method9
Cost Method3
Comparable Profits Method: PLI is SG&A to Sales ratio2
Comparable Profits Method: PLI is return on assets or capital employed2
Comparable Profits Method: PLI is a markup on total costs1
Comparable Profits Method: PLI is operating margin1
Comparable Uncontrolled Transaction Method1
Other Method3
TABLE 18: TRANSFER PRICING METHODS USED FOR FINANCIAL PRODUCTS
TPM usedNumber
9
Interbranch allocation (e.g., foreign exchange separate enterprise)8
Residual profit split5
Profit split under Notice 94–402
TABLE 19: TRANSFER PRICING METHODS USED FOR CONTRIBUTIONS TO COST SHARING ARRANGEMENTS
TPM usedNumber
10
Costs allocated based on sales3
Costs allocated based on total costs of R&D, manufacturing, and distribution1
TABLE 20: TRANSFER PRICING METHODS USED FOR COST SHARING BUY-IN PAYMENTS
Discussion
The transfer pricing methods used in APAs completed during Year 2000 were based on those in the § 482 Treasury Regulations.
Under § 1.482–3, the arm’s length amount for controlled transfers of tangible property are determined using the Comparable Uncon-
trolled Price (CUP) method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), and the Profit
Split method. Under § 1.482–4, the arm’s length amount for controlled transfers of intangible property are determined using the
Comparable Uncontrolled Transaction (CUT) method, CPM, and the Profit Split Method. An “Unspecified Method” may be used
for both tangible and intangible property if it provides a more reliable result than the enumerated methods under the best method rule
of § 1.482–1(c). For transfers involving the provision of services, § 1.482–2(b) provides that services performed for the benefit of
another member of a controlled group should ordinarily bear an arm’s length charge, either deemed to be equal to the cost of provid-
ing the services (when non-integral) or which should be an amount that would have been charged between independent parties.
In addition, § 1.482–2(a) provides rules concerning the proper treatment of loans or advances, and § 1.482–7 provides rules for qual-
ified cost sharing arrangements under which the parties agree to share the costs of development of intangibles in proportion to their
shares of reasonably anticipated benefits. APAs involving cost sharing arrangements generally address both the method of allocating
costs among the parties as well as determining the appropriate amount of the “buy-in” payment due for the transfer of intangibles to
the controlled participants.
In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 16, it is clear that the majority of
the APAs followed the specified methods. However, there are several distinguishing points that should be made. The Regulations
note that for transfers of tangible property, the Comparable Uncontrolled Price (CUP) method will generally be the most direct and
reliable measure of an arm’s length price for the controlled transaction when sufficiently reliable comparable transactions can be
identified. § 1.482–3(b)(2)(ii)(A). It was the experience of the APA Program in Year 2000 that in the cases that come into the APA
Program, sufficiently reliable CUP transactions are difficult to find. In APAs executed in Year 2000, there were only two APAs that
used the CUP method, and they both looked to published market data in setting the arm’s length price. See § 1.482–3(b)(5).
8
Some of the service transactions were covered by the transfer pricing methods used in cost sharing arrangements and tangible/intangible property transactions.
9
Some of the financial product APAs used more than one TPM.
10
One of the cost sharing APAs involved two TPMs.

April 23, 200111242001–17 I.R.B.
Similar to the CUP method, for transfers of intangible property, the CUT method will generally provide the most reliable measure of
an arm’s length result when sufficiently reliable comparables may be found. § 1.482–4(c)(2)(ii). It has generally been difficult to
identify external comparables, and APAs using the CUT method tend to rely on internal transactions between the taxpayer and unre-
lated parties. In Year 2000, there were six APAs that utilized the CUT method, and four of those also used one or more other meth-
ods for different covered transactions by the same taxpayer in the same APA.
Some cases in the past have utilized a “step royalty” arrangement to determine the proper transfer price for use of a unique intangi-
ble. For example, taxpayers have argued that an intangible was very valuable and therefore a high royalty rate was appropriate. Be-
cause there were no exact or closely similar comparables, it was difficult to demonstrate objectively whether the taxpayer was cor-
rect. A sliding scale, or step royalty, in conjunction with a CPM analysis, has been used to resolve such cases. The premise of such
APAs was that, if the intangible truly had great value, the taxpayer would earn higher than normal return from its activities utilizing
the intangible. Conversely, as the value of the intangible decreased, the taxpayer’s pre-royalty results would be in the routine arm’s-
length range. Therefore, the royalty rate adopted in these APAs increases as the licensee’s profitability increases.
The Cost Plus Method and Resale Price Method were applied in Year 2000 in two and three APAs respectively. See § 1.482–3(c),
(d). The transactional nature of these methods distinguishes them from the CPM method using either a gross margin PLI (as com-
pared to the Resale Price Method) or a markup on total costs PLI (as compared to the Cost Plus Method). A strict transactional
method focuses on prices for individual or narrow groups of transactions, while a CPM looks at profits from broader groups of trans-
actions or all of a company’s transactions. In Year 2000, only one of the Resale Price Method APAs used only that method alone.
The four other APAs using these methods all were supplemented by a CPM.
The CPM is frequently applied in APAs. This is because reliable public data on comparable business activities of independent com-
panies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and other
relevant considerations is more likely to exist than comparability of product. The CPM also tends to be less sensitive than other
methods to differences in accounting practices between the tested party and comparable companies, e.g., classification of expenses
as cost of goods sold or operating expenses. § 1.482–3(c)(3)(iii)(B), and –3(d)(3)(iii)(B). In addition, the degree of functional com-
parability required to obtain a reliable result under the CPM is generally less than required under the resale price or cost plus meth-
ods, because differences in functions performed often are reflected in operating expenses, and thus taxpayers performing different
functions may have very different gross profit margins but earn similar levels of operating profit. § 1.482–5(c)(2).
There were 31 APAs involving tangible or intangible property that used some form of the CPM (with varying PLIs). The CPM was
also used in some APAs concurrently with other methods. For example, in the eight APAs involving the use of a profit split method,
the CPM was used in five of them to measure routine returns or other discreet parts of the covered transactions. The CPM similarly
was used with two out of the three APAs that used the resale price method, including one of those three that used the resale price
method, the cost plus method, and the CPM. The CPM was used with two out of the six APAs that used the CUT method. Finally,
in two APAs the royalty payments were tested according to a CPM with an operating margin PLI, and were subject to adjustment
based on the taxpayer’s results compared to the CPM range.
The CPM has proven to be versatile in part because of the various PLIs that can be used in connection with the method. Reaching
agreement on the appropriate PLI has been the subject of much discussion in many of the cases, and it depends heavily on the facts
and circumstances. Some APAs have called for different PLIs to apply to different parts of the covered transactions or with one PLI
used as a check against the primary PLI. In three APAs, an operating margin PLI was used in conjunction with other PLIs (rate of re-
turn on assets or capital employed in two and a gross margin in one). In one APA, a Berry ratio
11
was used to measure the distribu-
tion function, while a markup on total costs was used for the manufacturing function. There was one APA that used a gross margin
PLI, but also employed an operating margin PLI in a critical assumption.
The CPM also was used regularly with services as the covered transactions in APAs executed in Year 2000. There were a total of six
service APAs using the CPM method with various PLIs according to the specific facts of the taxpayers involved. Two APAs used a
SG&A to sales PLI, and did not combine these methods with any others (services being the only covered transactions). Both of
these also allocated various overhead expenses based on a percentage of worldwide sales by geographic region. In addition, and
similar to the overlap of PLIs with tangible and intangible property, one APA involving services used separate PLIs for different U.S.
subsidiaries of the foreign parent (return on assets or capital employed and operating margin). Table 17 reflects the methods used to
determine the arm’s length results for APAs involving services transactions.
In Year 2000, there were eight APAs involving tangible or intangible property that used some form of a profit split, primarily the
Residual Profit Split, § 1.482–6(c)(3), in which routine contributions by the controlled parties are allocated routine market returns,
and the residual income is allocated among the controlled taxpayers based upon the relative value of their contributions of intangible
property to the relevant business activity. Profit splits are generally considered in cases in which the parties to the controlled trans-
action own valuable, non-routine, intangible property. Of the eight profit split APAs, none of them involved the use of the Compa-
11
Named after Professor Charles Berry, who used the Berry ratio when serving as an expert witness in E.I. DuPont de Nemours & Co. v. United States, 608 F.2d445
(Ct. Cl. 1979).

2001–17 I.R.B.1125April 23, 2001
rable Profit Split under § 1.482–6(c)(2). Five APAs made use of a Residual Profit Split method. One APA used an unspecified
method profit split based on the proportion of each country’s total manufacturing, research and development, and distribution costs.
See § 1.482–4(d) (unspecified methods for transfers of intangible property). Another APA used a profit split in which only the U.S.
taxpayer’s income was split at a ratio of 25% to the U.S. subsidiary and 75% to the foreign parent (the APA also used a CPM with an
operating margin PLI, and involved royalty payments by the U.S. taxpayer). Lastly, one APA used a profit split based on a range de-
veloped with the use of a CPM with an operating margin PLI. This APA also required the taxpayer to annually update the data set of
comparable companies.
Profit splits have also been used in a number of financial product APAs in which the primary income-producing functions are per-
formed in more than one jurisdiction. Two APAs executed in Year 2000 applied a profit split as described in Notice 94–40. Five
APAs applied Residual Profit Splits as described in Prop. Reg. § 1.482–8(e)(6).
There were eight financial product APAs involving interbranch allocations. These involve a single taxpayer with branches that act
autonomously with respect to the covered transactions, generally involving foreign currency exchanges. These particular APAs de-
termine the appropriate amount of profits attributable to each branch from the activity by reference to the branches’ internal account-
ing methods. The results take into account all trades, and test the arms length results using statistical tests to ensure that all con-
trolled trades are priced the same as uncontrolled trades.
There were three cost sharing APAs during Year 2000. Cost sharing APAs under § 1.482–7 generally address the methods used for
determining each participant’s share of costs (consistent with the reasonably anticipated benefits) for the development of intangibles.
When there is also the transfer of existing intangibles, the APA will also generally address the appropriate buy-in amount. Tables 19
and 20 reflect the methods applied in cost sharing APAs executed in Year 2000.
Critical Assumptions
[§ 521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in Year 2000 are described in Table 21 below:
TABLE 21: CRITICAL ASSUMPTIONS
Critical Assumptions involving the following:Number of APAs
Material changes to the business59
Material changes to tax and/or financial accounting practices45
Changes in affiliated companies18
Use of Mark-to-Market method13
Assets will remain substantially the same5
Major technological changes5
Cost sharing and licensing agreements remain in effect4
Catastrophic events4
Currency fluctuations4
Risks assumed and functions performed remain the same3
Minimum sales volume3
Material sales fluctuations3
Changes in market shares3
Change in market pricing policies3
Change in ratio of SG&A to sales2
Changes in sharing of risks of currency fluctuations2
Marketing conditions remain substantially the same2
Major regulatory changes2
Change in compensation policy that affects the covered entity or transaction2
Changes in sharing of risks of currency fluctuations2
Limitation on R&D expenditures2
Litigation hazards2
Changes in the interest rate1
Variation in budgeted versus actual expense1
Changes involving antidumping/countervailing duties1
Changes in other duties or tariffs1
New import/export non-tariff barriers1
Changes in ratio of R&D to sales1
Renewal of the APA1

Discussion
APAs include critical assumptions upon which their respective TPMs depend. Critical assumptions are objective business and eco-
nomic criteria that form the basis of a taxpayer’s proposed TPM. A critical assumption is any fact (whether or not within the control
of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the continued existence of
which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a particular mode of conduct-
ing business operations, a particular corporate or business structure, or a range of expected business volume. Rev. Proc. 96–53,
§ 5.07. Failure to meet a critical assumption may render an APA inappropriate or unworkable.
A critical assumption may change (and/or fail to materialize) due to uncontrollable changes in economic circumstances, such as a
fundamental and dramatic change in the economic conditions of a particular industry. In addition, a critical assumption may change
(and/or fail to materialize) due to a taxpayer’s actions that are initiated for good faith business reasons, such as a change in business
strategy, mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.
If a critical assumption has not been met, the APA may be revised by agreement of the parties. If such agreement cannot be
achieved, the APA may be canceled. If a critical assumption has not been met, it requires taxpayer’s notice to and discussion with
the Service, and possible Competent Authority activity. Rev. Proc. 96–53,§ 11.07.
Critical assumption provisions are crucial to the APA because a TPM is premised on certain assumptions that apply to a particular
taxpayer, its industry, and the dynamics of the economy. Critical assumptions provide flexibility in an APA by recognizing the real-
ity of change in business cycles and economic circumstances and their effects on varying arm’s length returns. Whether critical as-
sumptions change (and/or fail to materialize) is subject to the examination process.
Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties
[§ 521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in Year
2000 are described in Tables 22 through 24 below. Various formulas for making adjustments to comparables are included as
Attachment B.
TABLE 22: SOURCES OF COMPARABLES
April 23, 200111262001–17 I.R.B.
Comparable SourcesNumber of Times
This Source Used
12
Compustat (database)
13
29
Disclosure (database)
14
8
Moody’s (database)
15
4
Global Vantage (database)
16
3
Worldscope (database)
17
1
Global Researcher’s SEC (database)
18
1
Public exchange or quotation media1
Other sources7
Selection Criteria ConsideredNumber of Times This Criterion Used
Comparable functions39
Comparable risks30
Comparable industry32
Comparable products27
Comparable intangibles17
Comparable geographic market9
Contractual terms4
Comparable market levels2
12
Although still guided by the arm’s length standard, some APAs do not use comparables, for example, when there is a residual profit split or in the case of certain
financial products.
13
See http://www.compustat.com
14
See http://www.primark.com/pfid/content/disclosure. shtml.
15
See http://www.fisonline.com.
16
See http://www.standardpoor.com.
17
See http://www.bvdep.com.
18
See http://www.bvdep.com.
TABLE 23: COMPARABLE SELECTION CRITERIA

TABLE 24: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES
2001–17 I.R.B.1127April 23, 2001
AdjustmentNumber of Times
This Adjustment Used
Asset Intensity: receivables24
Asset Intensity: payables24
Asset Intensity: inventory23
Asset Intensity: property, plant, equipment9
Accounting: LIFO to FIFO inventory7
Accounting: reclassification of expenses (e.g., from COGS to operating expenses)2
Accounting: reclassification of non-operating intangibles1
PLI: operating expense3
R&D adjustments2
Foreign exchange1
Commission expense adjustment to tested party1
Discussion
At the core of most APAs are comparables. The APA program works closely with taxpayers to find the best and most reliable com-
parables for each covered transaction. In some cases, CUPs or CUTs can be identified. In other cases, comparable business activi-
ties of independent companies are utilized in applying the CPM or residual profit split methods. Generally, in the APA Program’s
experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of the taxpayer.
For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA Pro-
gram typically has applied a three-part process. First, a pool of potential comparables has been identified through broad searches.
From this pool, companies having transactions that are clearly not comparable to those of the tested party have been eliminated
through the use of quantitative and qualitative analyses, i.e., quantitative screens and business descriptions. Then, based on a review
of available descriptive and financial data, a set of comparable companies or transactions has been finalized. The comparability of
the finalized set has then been enhanced through the application of adjustments.
Sour
ces of Comparables
Comparables used in APAs can be U.S. or foreign companies. This depends on the relevant market, the type of transaction being
evaluated, and the results of the functional and risk analyses. In general, comparables have been located by searching a variety of
databases that provide data on U.S. publicly-traded companies and on a combination of public and private non-U.S. companies.
Table 22 shows the various databases and other sources used in selecting comparables for the APAs executed in Year 2000.
Although comparables were most often identified from the databases cited in Table 22, in some cases comparables were found from
other sources. For example, comparables derived internally from taxpayer transactions with third parties, those provided by the tax-
payer’s representative using an in-house database, comparables from trade publications in specific industries, and comparables de-
rived from taxpayer information on competitors.
Selecting Comparables
Initial pools of potential comparables generally have been derived from the databases using a combination of industry and keyword
identifiers. Then, the pool has been refined using a variety of selection criteria specific to the transaction or entity being tested and
the transfer pricing method being used.
The listed databases allow for searches by industrial classification (generally, U.S. Standard Industrial Classification (SIC)), by keywords,
or by both. These searches can yield a number of companies whose business activities may or may not be comparable to those of the en-
tity being tested. Therefore, comparables based solely on SIC or keyword searches are rarely used in APAs. Instead, the pool of compa-
rables is examined closely, and companies are selected based on a combination of screens, business descriptions, and other information
found in the companies’ Annual Reports to shareholders and filings with the U.S. Securities and Exchange Commission (SEC).
In virtually all cases, business activities are required to meet certain basic comparability criteria to be considered comparables.
Functions, risks, economic conditions, and the property (product or intangible) and services associated with the transaction must be
comparable. Determining comparability can be difficult – the goal has been to use comparability criteria restrictive enough to elim-
inate companies that are not comparable, but yet not so restrictive as to have no comparables remaining. The APA Program normally
has begun with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool of reliable com-
parables. A determination on the appropriate size of the comparables set, as well as the companies that comprise the set, is highly
fact specific and depends on the reliability of the results.

In addition, the APA Program, consistent with the regulations, generally has looked at the results of comparable companies over a
multi-year period. Sometimes this has been three years, but it has been more or less, depending on the circumstances of the con-
trolled transaction. Using a shorter period might result in the inclusion of companies in different stages of economic development or
use of atypical years of a company subject to cyclical fluctuations in business conditions. Of the APAs executed in Year 2000 in
which financial data over a period of years was used, 5 APAs looked at data over 1 year, 28 looked at data over 3 years, 1 looked at
data over a period of 5 years, 1 over 6 years, and 2 over 7 years.
Many covered transactions have been tested with comparables that have been chosen using additional criteria and/or screens. These
include sales level criteria and tests for financial distress and product comparability. These common selection criteria and screens
have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales level
screen, for example, has been used to remove companies that, due to their size, might face fundamentally different economic condi-
tions from those of the entity or transaction being tested. In addition, some APA analyses have incorporated selection criteria related
to removing companies experiencing “financial distress” due to concerns that companies in financial distress often have experienced
unusual circumstances that would render them not comparable to the entity being tested. These criteria include: an unfavorable au-
ditor’s opinion, bankruptcy, and in certain circumstances, operating losses in a given number of years.
An additional important class of selection criteria is the development and ownership of intangible property. In some cases in which
the entity being tested is a manufacturer, several criteria have been used to ensure, for example, that if the controlled entity does not
own significant manufacturing intangibles or conduct research and development (R&D), neither will the comparables. These selec-
tion criteria have included determining the importance of patents to a company or screening for R&D expenditures as a percentage
of sales or costs. Another criterion used in some cases has been a comparison of the book and market values of a company; this can
be another indicator of intangible value. Again, quantitative screens related to identifying comparables with significant intangible
property generally have been used in conjunction with an understanding of the comparable derived from publicly available business
information.
Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of
property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings, has
been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher PP&E),
regardless of their SIC classification. Similarly, a test involving the ratio of operating expenses to sales or total costs has helped to
determine whether a company undertakes a significant marketing and distribution function.
Table 25 shows the number of times various screens were used in APAs executed in Year 2000:
TABLE 25: COMPARABILITY SCREENS
April 23, 200111282001–17 I.R.B.
Comparability Screen UsedNumber of Times Used
Sales18
Ratio of R&D/Sales12
Non-Startup or Startup Company7
Ratio of Foreign Sales/Total Sales6
Ratio of Operating Expenses/Sales5
Ratio of PP&E/Sales2
Financial Distress Screens—
Bankruptcy7
Unfavorable Auditor’s Opinion4
Losses in One or More Years7
Adjusting Comparables
After the comparables have been selected, the regulations require that “[i]f there are material differences between the controlled and
uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with suf-
ficient accuracy to improve the reliability of the results.” Treas. Reg. §1.482–1(d)(2). In almost all cases involving income-state-
ment-based profit level indicators (PLIs), certain “asset intensity” or “balance sheet” adjustments for factors that have generally
agreed-upon effects on profits have been carried out. In addition, in specific cases, additional adjustments have been performed to
improve reliability.
The most common asset intensity adjustments used in APAs are adjustments for differences in accounts receivable, inventories, and
accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on the prin-
ciple that holding assets such as receivables benefits customers in a way that increases the entity’s operating profit. Such adjust-
ments are based on the assumption that the increase in operating profit is equal to the carrying cost of the assets. Conversely, the
holding of accounts payable is considered to burden suppliers in a way that decreases the entity’s profit. The decrease in operating
profit has generally been assumed to be equal to the cost of funds implicitly borrowed from suppliers.

To compare the profits of two entities with different relative levels of receivables, inventory, or payables, the APA Program has esti-
mated the carrying costs of each item and adjusted profits accordingly. Although different formulas have been used in specific APA
cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions that (1) balance
sheet items should be expressed as mid-year averages, (2) formulas should try to avoid using data items that are being tested by the
transfer pricing method (for example, if sales are controlled, then the denominator of the balance sheet ratio should not be sales), (3)
a short term interest rate should be used, and (4) an interest factor should recognize the average holding period of the relevant asset.
The APA Program has also required that data must be compared on a first-in first-out (FIFO) accounting basis. Although financial
statements may be prepared on a last-in first-out (LIFO) basis, cross-company comparisons are less meaningful when one or more
companies use LIFO inventory accounting methods. This adjustment directly affects costs of goods sold and inventories, and there-
fore affects both profitability measures and inventory adjustments.
Less commonly used but still important in some cases is the adjustment for differences in relative levels of PP&E between a tested
entity and the comparables. Ideally, comparables and the entity being tested will have fairly similar relative levels of PP&E, since
major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E adjustment is made using a
medium term interest rate, while short term interest rates are used for receivables, inventories, and payables.
Additional adjustments used less infrequently include those for differences in other balance sheet items, operating expenses, R&D,
or currency risk. Accounting adjustments, such as reclassifying items from cost of goods sold to operating expenses, for example,
have also been made when warranted to increase reliability. Often, data has not been available for both the controlled and uncon-
trolled transactions in sufficient detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties in APAs executed in Year 2000 are reflected in Table 24 above.
Nature of Ranges and Adjustment Mechanisms
[§ 521(b)(2)(D)(viii)–(ix)]
The types of ranges used in APAs executed in Year 2000 are described in Table 26 and 27 below.
TABLE 26: TYPES OF RANGES
2001–17 I.R.B.1129April 23, 2001
Type of RangeNumber
19
Interquartile range14
Floor (i.e., result must be no less than x)14
Financial products – statistical confidence interval to test for internal CUP8
Specific result (“point”)7
Agreed range4
Ceiling (i.e., result must be no more than x)2
TABLE 27: ADJUSTMENTS WHEN OUTSIDE OF THE RANGE
Adjustment mechanismNumber
Taxpayer makes an adjustment to the closest edge of the range24
Taxpayer makes an adjustment to a specific point17
Competent Authority process invoked if results are outside the range4
Taxpayer makes an adjustment to the median of the range3
APA canceled or revoked if results are outside the range, subject to2
renegotiation, cancellation, or revocation
APA canceled or revoked if results beyond certain limits, otherwise1
taxpayer makes an adjustment to the closest edge
Taxpayer adjusts to specific point each year1
(annual comparables adjustment)
19
This table does not include royalties, cost sharing agreements, and cost plus TPMs. In Year 2000, TPMs involving these methodologies did not use ranges.
Discussion
Treas. Reg. § 1.482–1(e)(1)states that sometimes a pricing method will yield “a single result that is the most reliable measure
of an arm’s length result.” Sometimes, however, a method may yield “a range of reliable results,” called the “arm’s length
range.” A taxpayer whose results fall within the arm’s length range will not be subject to adjustment.
Under § 1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable uncontrolled
transaction of similar comparability and reliability. If these comparables are of very high quality, as defined in the Regulations,

then under § 1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the comparables (from the least to the
greatest). However, the APA Program has only rarely identified cases meeting the requirements for the full range. There were
no APAs executed in Year 2000 that used a full range. If the comparables are of lesser quality, then under
§ 1.482–1(e)(2)(iii)(B), “the reliability of the analysis must be increased, when it is possible to do so, by adjusting the range
through application of a valid statistical method to the results of all of the uncontrolled comparables.”
One such method, the “interquartile range,” is “ordinarily . . . acceptable,” although a different statistical method “may be ap-
plied if it provides a more reliable measure.” The “interquartile range” is defined as, roughly, the range from the 25th to the 75th
percentile of the comparables’ results. See § 1.482–1(e)(2)(iii)(C). The interquartile range was used 14 times in Year 2000.
A variant on the interquartile range involves a “Tukey filter,” which is described as follows. First, the set of comparables is
used to derive a standard interquartile range. Then the difference D between the top and bottom of the interquartile range is
computed. Next, all comparables whose results are more than a certain multiple of D (often the multiple 1.5 is used) outside the
interquartile range are discarded as “outliers.” Finally, the reduced set of comparables (without the outliers) is used to compute
a second interquartile range, which is then used as the arm’s length range. The Tukey filter’s primary purpose has been to elim-
inate companies that were so anomalous that they arguably should not have been included as comparables in the first place. In
the past, this approach has only occasionally been used for APAs, and it was not used for any of the APAs executed in Year
2000.
In 7 APAs executed in Year 2000, the APA specified a single, specific result, or “point.” Five of these involved profit splits in
which the taxpayer’s results for a given APA year under the TPM depended on the amount of system profit. Another of these
specific result APAs involved a bilateral APA with a term encompassing entirely filed years. In the absence of any prospectiv-
ity, the Competent Authorities agreed on a particular result for each year. Finally, one APA involved a CPM in which the tax-
payer agreed to a specific result. Some APAs specify not a point or a range, but a “floor” or a “ceiling.” When a floor is used,
the tested party’s result must be greater than or equal to some particular value. When a ceiling is used, the tested party’s result
must be less than or equal to some particular value. Fourteen APAs executed in Year 2000 used a floor and 2 used a ceiling. Fi-
nally, 4 APAs used an agreed range other than interquartile range.
Some APAs involving financial products have employed a statistical confidence interval to compare pricing of a large set of
controlled transactions with a comparable set of uncontrolled transactions. A statistical confidence interval is typically applied
to a financial institution with autonomous branches in several countries. Pursuant to the business profits article of the applica-
ble income tax treaties and Prop. Reg. § 1.482–8(b), APAs have been executed allowing the taxpayer to allocate profits between
branches with reference to the branches’ internal accounting methods, taking into account all trades, including interbranch
and/or interdesk trades. In order for this method to provide a reliable result, however, it is necessary to ensure that all such con-
trolled trades be priced on the same market basis as uncontrolled trades. To test whether this is so, a branch’s controlled trades
are matched with that branch’s comparable uncontrolled trades made at times close to the controlled trades. A statistical test is
performed to detect pricing bias, by which the controlled trades might as a whole be priced higher or lower than the uncon-
trolled trades. This has been accomplished by construction of a statistical confidence interval (typically 95%), with the tested
hypothesis being that controlled trades are priced on the same basis as uncontrolled trades. An adjustment is necessary if the re-
sults of the controlled trades fall outside of this confidence interval. During Year 2000, there were 8 APAs executed that em-
ployed the statistical confidence interval.
Adjustments
Under § 1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the Service may adjust the result “to any point
within the arm’s length range.” Accordingly, an APA may permit or require a taxpayer and its related parties to make an adjust-
ment after the year’s end to put the year’s results within the range, or at the point, specified by the APA. Similarly, to enforce
the terms of an APA, the Service may make such an adjustment. When the APA specifies a range, the adjustment is sometimes
to the closest edge of the range, and sometimes to another point such as the median of the interquartile range. Depending on the
facts of each case, such automatic adjustments are not always permitted. Some APAs specify that if a taxpayer’s results fall out-
side the applicable point or range, the APA will be canceled or revoked. Some bilateral APAs specify that in such a case there
will be a negotiation between the Competent Authorities involved to determine whether and to what extent an adjustment
should be made. Some APAs permit automatic adjustments unless the result is far outside the range specified in the APA. Thus
they provide flexibility and efficiency (permitting adjustments when normal business fluctuations and uncertainties push the re-
sult somewhat outside the range).
In order to conform the taxpayer’s books to these tax adjustments, the APA usually permits a “compensating adjustment” as
long as certain requirements are met. Such compensating adjustments may be paid between the related parties with no interest,
and the amount transferred will not be considered for purposes of penalties for failure to pay estimated tax. See § 11.02 Rev.
Proc. 96–53.
April 23, 200111302001–17 I.R.B.

APA Term and Rollback Lengths
[§ 521(b)(2)(D)(x)]
The various term lengths for APAs executed in Year 2000 are set forth in Table 28 below:
TABLE 28: TERMS OF APAs
2001–17 I.R.B.1131April 23, 2001
APA Term in YearsNumber of APAs
12
23
37
46
537
64
70
81
90
10 or more3
Number of rollback years to which an APA TPM was applied in Year 2000 are set forth in Table 29 below:
TABLE 29: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM
Number of Rollback YearsNumber of APAs
12
26
33
41
52
61
72
80
91
10 or more1

Nature of Documentation Required
[§ 521(b)(2)(D)(xi)]
APAs executed in Year 2000 required that various documents be provided with the Annual Reports filed by the taxpayers. These
documents are described in Table 30 below:
TABLE 30: NATURE OF DOCUMENTATION REQUIRED
April 23, 200111322001–17 I.R.B.
DocumentationNumber of
Times This
20
Documentation
Required
Financial analysis demonstrating compliance with the TPM60
Statement identifying all material differences between the taxpayer’s61
business operations during the APA year and the description of the
business operations contained in the request for the APA, and if there
have been no such material differences, a statement to that effect
Statement identifying all material changes in the taxpayer’s accounting62
methods and classifications, and methods of estimations, from those
described or used in the request for the APA, or if there have been none,
a statement to that effect
Description of any failure to meet critical assumptions, or if there have62
been none, a statement to that effect
Financial statements as prepared in accordance with GAAP59
Certified Public Accountant’s opinion that the financial statements59
present fairly the financial position of the taxpayer and the results of its
operations, in accordance with GAAP
Description of, reason for, and financial analysis of any compensating58
adjustments with respect to any APA year, including the means by
which any compensating adjustment has been or will be satisfied
Profit and Loss statement29
Various workpapers27
United States income tax return19
Schedule of costs and expenses (e.g., intercompany allocations)17
Certified Public Accountant’s review of financial statements11
Narrative description of the taxpayer’s business8
Book to tax reconciliation7
Cash flow statement6
Description of any matters economically or substantively related to the5
covered transactions, but that are not subject to the APA
Form 5471 or 54724
Organizational chart4
Pertinent intercompany agreements5
Royalty computations2
R&D costs as a percentage of WW sales2
Various other documents or statements
21
33
20
The first seven categories of documentation listed in this table are drawn from the standard APA language found in Attachment A. Certain APAs did not include
this standard language, typically when all of the years covered by the APA were already past and the taxpayer’s results were known. In addition, under some finan-
cial product APAs, the taxpayer agrees to maintain certain records, but the compliance with the TPM is determined by a later audit under an agreed statistical method-
ology. In these cases, a number of the standard documentation requirements may not be appropriate.
21
This category includes particular documents that were highly fact specific to the particular taxpayer involved.

Approaches for Sharing of Currency or Other Risks
[§ 521(b)(2)(D)(xii)]
During Year 2000, there were three APAs that specifically addressed the sharing of currency risks. In one, there was an adjustment
to the tested party’s cost of goods sold if the exchange rate changed by more than a certain amount, in which case the adjustment was
a percentage of the change in the exchange rate. In a second APA, there was an adjustment for currency fluctuations through a
change in the operating margin range. Finally, in a third all currency risk was specifically allocated to the foreign parent.
Other explicit risk sharing in APAs completed in Year 2000 included one APA in which it was provided that if the U.S. licensor’s
worldwide ratio of research and development expenses to sales changed, the royalty paid by the foreign subsidiary to the U.S. parent
changed too. In another, all risks were specifically allocated to the foreign parent, and in a third, the market and inventory risk on all
tangibles purchased from the foreign parent were assumed by the U.S. subsidiary.
In addition, there were three APAs that specifically addressed the risks of a business start-up. The first provided that the risk of start-
up losses was allocated to the foreign parent. The second allowed for the start-up businesses to have a three year phase-in, and the
third APA allowed for losses during the startup phase.
Efforts to Ensure Compliance with APAs
[§ 521(b)(2)(F)]
As described in Rev. Proc. 96–53, § 11, APA taxpayers are required to file annual reports to demonstrate compliance with the terms
and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual report re-
view, the APA program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review provides
current information on the success or problems associated with the various TPMs adopted in the APA process.
All reports received by the APA Office are tracked by one designated APA team leader who also has the prime responsibility for an-
nual report review. Other APA team leaders also assist in this review, especially when the team leader who negotiated the case is
available, since that person will already be familiar with the relevant facts and terms of the agreement. Once received by the APA
Office, the annual report is sent out to the district personnel with exam jurisdiction over the taxpayer. This process changed in No-
vember 2000; previously reports were held until reviewed by an APA team leader. This change has facilitated simultaneous review
of the reports and sped up processing time.
The statistics for the review of APA annual reports are reflected in Table 31 below. As of December 31, 2000, there were 374 pend-
ing annual reports. In Year 2000, there were 118 reports closed. This is up considerably from the 211 reports closed in the 1994-
1999 period. As noted below, annual report review in 2000 resulted in agreed adjustments involving 8 taxpayers for 38 APAs.
TABLE 31: STATISTICS OF ANNUAL REPORTS
2001–17 I.R.B.1133April 23, 2001
Number of APA annual reports pending as of December 31, 2000374
Number of APA annual reports closed in Year 2000118
Number of APA annual reports requiring adjustment in Year 200038
Number of taxpayers involved in adjustments8
Number of APA annual reports required to be filed in Year 2000273
Number of APA annual reports actually filed in Year 2000239
22
Number of APA annual report cases over one and less than two years old197
Number of APA annual report cases two or more years old89
ATTACHMENT A
MODEL ADVANCE PRICING AGREEMENT
between
TAXPAYER
and
THE INTERNAL REVENUE SERVICE
THIS ADVANCE PRICING AGREEMENT (“APA”) is made by and between Taxpayer and the Internal Revenue Service (“Ser-
vice”), acting through the Director, Advance Pricing Agreement Program.
WHEREAS, Taxpayer and the Service (the “Parties”) wish to establish a method for determining whether certain prices used in
international transactions involving Taxpayer are in accordance with the principles of section 482 of the Internal Revenue Code of
1986 as amended (the “Code”) and attendant Regulations and, to the extent applicable, income tax conventions to which the United
States is a party;
22
Of the 34 reports that were due in Year 2000, but not filed by Dec. 31, 2000, there were 28 filed late after January 1, 2001.

NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows:
1. Identifying information. Taxpayer’s EIN is __________. [Taxpayer is included in the consolidated federal income tax return
filed by ________________, EIN ________. All references to Taxpayer’s United States income tax return in this APA refer to that
consolidated return, and all references in this APA to “Taxpayer” shall refer to the ______________ consolidated return group.]
2. Covered transactions. This APA governs the pricing of the transactions specified in Appendix A (the “Covered Transactions”).
3. Legal Effect.
3.1. Taxpayer agrees to comply with the terms and conditions of this APA, including the transfer pricing methodology (“TPM”)
that is described in Appendix A. If Taxpayer complies with the terms and conditions of this APA, then the Service will not contest
the application of the TPM to the Covered Transactions and will not make or propose any reallocation or adjustment under section
482 of the Code with respect to Taxpayer concerning the transfer prices in Covered Transactions for the years covered by this APA
(the “APA Years”).
3.2. Regardless of the date on which Taxpayer filed its request for this APA, Taxpayer and the Service agree, unless otherwise
specified to the contrary in this APA, that Rev. Proc. 96–53, 1996–2 C.B. 375, and not any predecessor to Rev. Proc. 96–53, governs
the interpretation, administration, and legal effect of this APA.
3.3. If, for any APA Year, Taxpayer does not comply with the terms and conditions of this APA, then the Service may:
i. enforce the terms of this APA and propose adjustments to the income, expenses, deductions, credits, or allowances reported
on Taxpayer’s U.S. federal income tax return in keeping with the terms of this APA;
ii. cancel or revoke this APA pursuant to section 11.05 or 11.06 of Rev. Proc. 96–53; or
iii. revise this APA, upon agreement on revision with Taxpayer.
3.4. This APA addresses the arm’s length nature of prices charged or received in the aggregate between Taxpayer and [name of
foreign group], and except as explicitly provided in this APA does not address, and does not bind the Service with respect to, prices
charged or received, or the relative amounts of income or loss realized, by particular legal entities that are members of Taxpayer or
that are members of [foreign group]. The true taxable income of a member of an affiliated group filing a U.S. consolidated return
shall be determined under the regulations governing consolidated returns. See, e.g., Treas. Reg. section 1.1502–12. Similarly, to the
extent relevant for United States tax purposes, and except as explicitly provided in this APA, the relative amounts of income of dif-
ferent entities that are members of [foreign group] shall be determined under the arm’s length standard of section 482 without refer-
ence to this APA.
3.5. The Parties agree that nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Rev.
Proc. 96–53 (including any proposals to use particular TPMs), made in conjunction with this request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
4. T
erm. This APA shall apply only to the APA Years, which shall include only ________________.
5. Financial Statements and APA Records. The determination whether Taxpayer has complied with this APA will be based on its
United States income tax return; its financial statements as prepared in accordance with generally accepted accounting principles
(“GAAP”) on a consistent basis (the “Financial Statements”); the additional records (“APA Records”) specified in Appendix B; and
all information specified in section 8 of this APA. Taxpayer will not be in compliance with the TPM unless an independent certified
public accountant renders an opinion that the Financial Statements present fairly, in all material respects, the financial position of
Taxpayer and the results of its operations, in accordance with GAAP. Taxpayer agrees to maintain the Financial Statements and APA
Records and to make them available within thirty days of a request by the Service in connection with an examination described in
section 11.03 of Rev. Proc. 96–53. Compliance with this section 5 of the APA will constitute compliance with the record mainte-
nance provisions of sections 6038A and 6038C of the Code, with respect to Covered Transactions during the APA Years.
6. Critical
Assumptions. The Critical Assumptions of this APA, within the meaning of section 5.07 of Rev. Proc. 96–53, are listed
in Appendix C.
7. Tax and Compensating Adjustments. In the event Taxpayer’s actual transactions did not result in compliance with the TPM de-
scribed in Appendix A, Taxpayer’s taxable income must nevertheless be reported in an amount consistent with the TPM and the re-
quirements of the APA, either on a timely filed original return or on an amended return. Taxpayer may make Compensating Adjust-
ments as described in and subject to the rules of section 11.02 of Rev. Proc. 96–53, and subject to any restrictions stated in this APA.
8. Annual Report. Taxpayer shall file a timely Annual Report for each APA Year pursuant to the rules of section 11.01 of Rev.
Proc. 96–53. The Annual Report shall contain the information described in Appendix D. In connection with an examination de-
scribed in section 11.03 of Rev. Proc. 96–53, the District Director may request and Taxpayer shall provide additional facts, computa-
tions, data or information reasonably necessary to clarify the Annual Report or verify compliance with the APA.
April 23, 200111342001–17 I.R.B.

9. Disclosure. This APA, and the information, data, and documents related to this APA and Taxpayer’s APA request are: (1) con-
sidered return information pursuant to section 6103(b)(2)(C) of the Code; and (2) not subject to public inspection as a written deter-
mination pursuant to section 6110(b)(1) of the Code. Pursuant to section 521(b) of the Ticket to Work and Work Incentives Im-
provement Act of 1999, Pub. L. 106–170, however, the Secretary of the Treasury is obligated to prepare a report for public
disclosure that would include certain specifically designated information concerning all APAs, including this APA, in such form as
not to reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
10. Disputes. Should a dispute arise concerning the interpretation of this APA, the Parties agree to seek resolution of the dispute
by the Associate Chief Counsel (International), to the extent reasonably practicable, prior to seeking alternative remedies. Disputes
not related to the interpretation of this APA shall be pursued consistent with section 11.03(4) of Rev. Proc. 96–53.
11. Section Captions. The section captions contained in this APA are for convenience and reference only and shall not affect in
any way the interpretation or application of this APA.
12. Notice. Any notices required by this APA or Rev. Proc. 96–53 shall be in writing. Taxpayer shall send notices to the Service
at the address and in the manner prescribed in section 5.13(2) of Rev. Proc. 96–53. The Service shall send notices to Taxpayer at
_____________________________________.
13. Effective date. This APA shall become binding when both Parties have executed the APA [,and the competent authorities of
____________ and the United States have executed a mutual agreement that is consistent with this APA].
14. Counterparts. This APA may be executed in counterparts, with each counterpart deemed an original.
IN WITNESS WHEREOF, the Parties have executed this APA on the dates indicated below.
TAXPAYER
By:___________________________ Date:_________
[Name of Signature]
[Title]
INTERNAL REVENUE SERVICE
By:___________________________ Date:_________
[Name of Signature]
Director, Advance Pricing Agreement Program
APPENDIX A
TRANSFER PRICING METHODOLOGY
For each APA Year:
Covered Transactions.
The Covered Transactions for this APA consist of ___________________.
Transfer Pricing Methodology (“TPM”).
APPENDIX B
APA RECORDS
1. All documents listed in Appendix D for inclusion in the Annual Report, as well as all documents, notes, work papers, records,
or other writings that support the information provided in such documents.
2. [Insert here other records.]
APPENDIX C
CRITICAL ASSUMPTIONS
1. The business activities, functions performed, risks assumed, assets employed, and financial [and tax] accounting methods and
classifications [and methods of estimation] of Taxpayer shall remain materially the same as described or used in Taxpayer’s re-
quest for this APA.
2. [Insert here other Critical Assumptions.]
APPENDIX D
ANNUAL REPORT
Taxpayer shall include the following in its Annual Report for each APA Year:
1. A statement identifying all material differences between Taxpayer’s business operations (including functions performed, risks
2001–17 I.R.B.1135April 23, 2001

assumed and assets employed) during the APA Year and the description of the same contained in Taxpayer’s request for this
APA, or if there have been no such material differences, a statement to that effect.
2. A statement identifying all material changes in Taxpayer’s accounting methods and classifications [and methods of estimation] from
those described or used in Taxpayer’s request for this APA, or if there have been no such material changes, a statement to that effect.
3. The Financial Statements.
4. A financial analysis demonstrating Taxpayer’s compliance with the TPM.
5. A description of any failure to meet Critical Assumptions, or if there have been no such failures, a statement to that effect.
6. A description of the reason for, and financial analysis of, any Compensating Adjustments with respect to the APA Year, includ-
ing the means by which any such Compensating Adjustment has been or will be satisfied.
7. A copy of the certified public accountant’s opinion, described in section 5 of this APA, for the APA Year.
8. [Insert here other items to be included in Annual Report.]
ATTACHMENT B
FORMULAS FOR BALANCE SHEET ADJUSTMENTS
Definitions of Variables:
AP=average accounts payable
AR=average trade accounts receivable, net of allowance for bad debt
cogs=cost of goods sold
INV=average inventory, stated on FIFO basis
opex =operating expenses (general, sales, administrative, and depreciation expenses)
PPE=property, plant, and equipment, net of accumulated depreciation
sales =net sales
tc=total cost (cogs + opex, as defined above)
h=average accounts payable or trade accounts receivable holding period,
stated as a fraction of a year
i=interest rate
t
=entity being tested
c
=comparable
Equations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”):RA = {[(AR
t
/ sales
t
) x sales
c
] - AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/ sales
t
) x sales
c
] - AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/ sales
t
) x sales
c
] - INV
c
} x i
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/ sales
t
) x sales
c
] - PPE
c
} x i
If Sales are controlled (generally, costs in the denominator of PLI):
23
Receivables Adjustment (“RA”):RA = {[(AR
t
/ tc
t
) x tc
c
] - AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/ tc
t
) x tc
c
] - AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/ tc
t
) x tc
c
] - INV
c
} x i
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/ tc
t
) x tc
c
] - PPE
c
} x i
Then Adjust Comparables as Follows:
adjusted sales
c
= sales
c
+ RA
adjusted cogs
c
= cogs
c
+ PA - IA
adjusted opex
c
= opex
c
- PPEA
23
Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).
April 23, 200111362001–17 I.R.B.

Request for Comments
Regarding the Instructions for
Form 990,
Return of
Organization Exempt From
Income Tax,
Form 990–EZ,
Short Form Return of
Organization Exempt From
Income Tax,
and Form 990–PF,
Return of Private Foundation or
Section 4947(a)(1) Nonexempt
Charitable Trust Treated as a
Private Foundation.
Announcement 2001–33
INTRODUCTION
The Internal Revenue Service (IRS) re-
quests comments on the nature and extent
of information about certain compensation
arrangements that tax-exempt organiza-
tions should report on their annual infor-
mation returns. The IRS seeks comments
on whether Forms 990, 990–EZ, and
990–PF should continue to require tax-ex-
empt organizations to report payments for
contracted management services as if the
organization had directly paid the individ-
uals providing the services.
BACKGROUND
Part IV of Form 990–EZ, Short Form
Return of Organization Exempt From In-
come Tax, and Part V of Form 990, Return
of Organization Exempt From Income Tax,
require reporting organizations to list the
names and addresses for contact of officers,
directors, trustees and key employees. Line
1 of Part VIII of Form 990–PF, Return of
Private Foundation or Section 4947(a)(1)
Nonexempt Charitable Trust Treated as a
Private Foundation, requires foundations
to list the same information for officers, di-
rectors, trustees, or foundation managers.
Organizations are also required to report
the title of each listed individual and the
hours the individual spends per week per-
forming the duties of the position.
The forms also require information on
compensation packages for individuals
listed as officers, directors, trustees or key
employees/foundation managers. The
forms ask for amounts paid to each individ-
ual as compensation, contributions made to
employee benefit plans and other deferred
compensation, and payments made to ex-
pense accounts and for other allowances.
Since 1999, the instructions to the forms
have stated, “If you pay any other person,
such as a management services company,
for the services provided by any of your of-
ficers, directors, trustees, or key employees
[or foundation managers for private foun-
dations], report the compensation and other
items as if you had paid them directly.”
The Internal Revenue Service has re-
ceived a number of comments on these in-
structions. These comments have either
criticized the instructions or expressed con-
cern that the Service might reduce their ef-
fectiveness.
Some comments have expressed concern
that the reporting requirements are too bur-
densome on tax-exempt organizations, re-
quiring the organization to obtain detailed
information from third-party contractors to
accurately complete the form.
Other comments expressed concern that
the requirements invade the privacy of indi-
viduals who are not employees of the re-
porting organization. These comments con-
cede, however, that the Service must
protect against individuals who incorporate
to avoid reporting.
Comments in support of the current re-
porting requirements expressed concern
that allowing tax-exempt organizations to
report only the gross amounts they pay for
management would deprive the public
sources of critical information about the re-
porting organization.
PUBLIC COMMENTS
This Announcement seeks further public
comments on these instructions. Comments
should address such issues as:
1. Whether contracting with third parties
who provide the reporting organization
with allocations for completing the form
is consistent with current practices?
2. How can the instructions be revised to
simplify reporting, yet protect against
abuse by an individual officer, director,
trustee, key employee, or private founda-
tion manager who incorporates to avoid
reporting?
The period for comments will be 90 days
from the date this Announcement is pub-
lished in the Internal Revenue Bulletin.
Comments should be sent to the follow-
ing address:
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: David W. Jones,
1750 Penn. Ave., NW
T:EO:RA, Room 3T3
Comments may also be sent electronically
via the Internet to *TE/GE-EO-1@irs.gov.
REASONABLE CAUSE UNDER
SECTION 6652
Until the Service notifies organizations
otherwise, by an Announcement published
in the Bulletin, organizations that payother
persons, such as management services com-
panies, for the services of officers, directors,
trustees, or key employees/foundation man-
agers, will be deemed to have reasonable
cause for purposes of the penalty under Sec-
tion 6652(a)(1)(a)(ii) of the Internal Rev-
enue Code for the failure to provide the in-
formation required by the relevant portions
of Parts IV, V or VIII of the forms, if:
1. Where the form asks for the name of
officers, directors, trustees, or key em-
ployees/foundation managers, the re-
porting organization enters the name
of the person (e.g., management ser-
vices company) that performs those
services under contracts and services
that it performs:
2. Where the form asks for the address of
officers, directors, trustees or key em-
ployees/foundation managers, the re-
porting organization enters the address
where the IRS can contact such person
(management services company);
3. Where the form asks for compensa-
tion paid to officers, directors, trustees
or key employees/foundation man-
agers, the reporting organization en-
ters the amount paid to the person
(management services company) for
the services listed in response to in-
quiry 1, above.
DRAFTING INFORMATION
The principal author of this announce-
ment is David W. Jones of the Exempt Or-
ganizations Technical Division. For fur-
ther information regarding this
announcement contact David W. Jones at
(202) 283-8907 (not a toll-free call).
2001–17 I.R.B.1137April 23, 2001

Announcement and Report
Concerning Pre-Filing
Agreements
Announcement 2001–38
Introduction
This Announcement is issued pursuant
to the Conference Report to H.R. 4577
(Pub. L. 106–554), The Community Re-
newal Tax Relief Act of 2000, which re-
quires that the Secretary of the Treasury
make publicly available an annual report
relating to the Pre-Filing Agreement
(“PFA”) program operations for the pre-
ceding calendar year. The Conference Re-
port states that the report is to include: (1)
the number of pre-filing agreements com-
pleted, (2) the number of applications re-
ceived, (3) the number of applications
withdrawn, (4) the types of issues which
are resolved by completed agreements, (5)
whether the program is being utilized by
taxpayers who were previously subject to
audit, (6) the average length of time re-
quired to complete an agreement, (7) the
number, if any, and subject of technical
advice and Chief Counsel advice memo-
randa issued to address issues arising in
connection with any pre-filing agreement,
(8) any model agreements, and (9) any
other information the Secretary deems ap-
propriate. The PFA pilot program was an-
nounced in Notice 2000–12, 2000–9
I.R.B. 727. This is the first report issued
and sets forth information on the PFA pilot
program, including information on (i) the
applications received for the PFA pilot
program, and (ii) the closing agreements
entered into pursuant to the pilot program.
Background
The Large and Mid-Size Business Di-
vision (“LMSB”) within the Internal Rev-
enue Service serves corporations and
partnerships with assets greater than $5
million. In 2000, approximately 248,000
corporations and partnerships filed re-
turns reporting assets in this range. The
returns filed by these taxpayers present a
wide variety of complex issues. Taxpay-
ers served by LMSB paid more than $700
billion in taxes to the federal government
during 2000. The largest of the taxpayers
deal with the IRS on a continuous basis.
One of LMSB’s strategic initiatives is
issue management. Through effective
issue management, LMSB seeks to re-
duce the time necessary to complete an
examination, to conduct examinations on
a more current basis, and to ensure con-
sistency of issue resolution for all taxpay-
ers. The Pre-Filing Agreement program
was designed to support LMSB’s issue
management strategy. LMSB believes
the Pre-Filing Agreement program will
reduce taxpayer burden and make more
effective use of IRS resources by resolv-
ing or eliminating tax controversy earlier
in the examination process.
Pre-Filing Agreement Program
The PFA program is designed to permit
a taxpayer to resolve, before the filing of
a return, the treatment of an issue that oth-
erwise would likely be disputed in a post-
filing examination. The PFA program is
intended to reach agreement on factual is-
sues and apply settled legal principles to
those facts. Execution of a PFA that re-
solves issues prior to filing will permit
taxpayers to avoid a portion of the costs,
burdens and delays that are frequently in-
cident to post-filing examination disputes
between taxpayers and the IRS.
In calendar year 2000, a pilot program
was implemented which resulted in the
execution of seven PFAs. A PFA is a spe-
cific matter closing agreement under
§ 7121. These PFAs permanently and
conclusively resolve the subject of the
PFA for a taxable period. Based upon
input from internal and external partici-
pants in the pilot program, the IRS has
implemented the PFA program on a con-
tinuing and expanded basis. Rev. Proc.
2001–22, 2001–9 I.R.B. 745.
PFA Pilot Program (Notice 2000–12)
Notice 2000–12, 2000–9 I.R.B. 727,
dated February 11, 2000, announced the
PFA pilot program, which was administered
by LMSB. The PFA pilot program was
open to Coordinated Examination Program
1
(“CEP”) taxpayers that had a CEP exami-
nation team currently on site. The notice
provided a description of a PFA, the proce-
dures for requesting a PFA, and the proce-
dures for LMSB to select taxpayers for the
PFA pilot program. The IRS believed that
this PFA pilot program offered significant
benefits for taxpayers, as well as for the
IRS, and invited large business taxpayers to
participate. Notice 2000–12 requested in-
terested taxpayers to submit applications for
the PFA pilot program by March 15, 2000,
through the on site LMSB team manager.
PFA Process
The PFA process was managed and con-
ducted by LMSB Industry Directors and
field staff, with support from the Office of
Pre-Filing and Technical Guidance in
LMSB Headquarters. LMSB team man-
agers reviewed all applications and made
their recommendations to their respective
Industry Directors. The Office of Chief
Counsel reviewed all applications to en-
sure the issues presented were appropriate
for inclusion in the PFA pilot program.
The Industry Director with jurisdiction
over the taxpayer made the final decision
whether to accept a taxpayer’s request for
participation in the PFA pilot program. The
criteria for selecting a request included:
a. The suitability of the issue presented
by the taxpayer;
b. The direct or indirect impact of a
PFA upon other years, issues, tax-
payers, or related cases;
c. The selection of a cross–section of
issues and industries for the pilot
program; and
d. The probability of completing the
examination of the issue and enter-
ing into a PFA by the target date.
For the cases selected, a mandatory ori-
entation session for the CEP examination
team and the taxpayer was conducted. Sub-
sequently, the taxpayer and CEP examina-
tion team held a joint planning meeting to
seek agreement on a proposed timeframe, to
identify and arrange for IRS access to rele-
vant records and testimony, and to define
the potential scope and nature of the PFA.
The CEP examination team conducted
the factual and issue development consis-
tent with IRS auditing standards. Based
upon an examination of the issue, the
Team Manager prepared a PFA recom-
mendation for the Industry Director. The
Industry Director’s decision to enter into
a PFA was based on the Team Manager’s
recommendation and discussions with the
PFA Program Manager, Chief Counsel at-
torneys, and the taxpayer. Following
Chief Counsel review to ensure that the
proposed PFA conformed with guidance
provided in Rev. Proc. 68–16, 1968–1
April 23, 200111382001–17 I.R.B.
1
This program has recently been renamed. Such
cases are now classified as Coordinated Industry
Cases.

Industry SegmentReceived
Financial Services & Healthcare1
Retailers, Food & Pharmaceuticals4
Natural Resources3
Communications, Technology & Media2
Heavy Manufacturing, Construction & Transportation9
Total19
2001–17 I.R.B.1139April 23, 2001
Issue Received
Valuation of Assets5
Research Credit7
Expense vs. Capitalization2
Tax Motivated Transaction1
Method of Accounting2
Stock Basis Computation1
Investigatory Costs1
Total19
Applications Not Accepted
Seven applications were not considered appropriate for the PFA pilot program.
Reasons for Non-acceptanceApplications
Examination team not on site1
Absence of Agreement on Controlling Legal Principles5
Excluded subject (Tax Motivated Transaction)1
Total7
Applications Accepted
Twelve applications from eleven taxpayers were accepted into the PFA pilot program. The status of these applications on
December 31, 2000, was as follows:
Status of PFAsApplications
Request Withdrawn by Taxpayer 1
PFAs In-process4
PFAs Executed 7
Total12
C.B. 770 (regarding closing agreements),
the Industry Director could execute a PFA
if he or she determined that:
a. Entering into the PFA was consistent
with the goals of the PFA pilot pro-
gram as stated in the Notice;
b. The tax results in the PFA reflected
settled legal principles and correctly
applied those principles (or positions
authorized under Delegation Order
Nos. 236 or 247) to facts found by
the Examination Team; and
c. There appeared to be an advantage in
having the issue(s) permanently and
conclusively closed for the taxable
period covered by the PFA, or that
the taxpayer showed good and suffi-
cient reasons for desiring a closing
agreement and that the United States
would sustain no disadvantage
through consummation of such an
agreement (see section
301.7121–1(a) of the Regulations on
Procedure and Administration).
Program Oversight
A designated PFA Program Manager
and analyst assigned to the Office of Pre-
Filing and Technical Guidance in LMSB
Headquarters provided oversight for the
PFA pilot program. The PFA Program
Manager provided assistance to taxpay-
ers, Industry Directors and Team Man-
agers throughout the process and person-
ally conducted the orientation session at
each taxpayer location.
Pre-Filing Agreement Pilot Program
Accomplishments
Applications Received
Nineteen applications were received
for the PFA pilot program. Applications
were received from each LMSB industry
segment and involved a variety of issues.
Taxpayer Withdrawal (1)
One taxpayer, in accordance with the
procedures set forth in Section 7 of Notice
2000–12, withdrew from the PFA pilot
program after its request had been ac-
cepted into the PFA pilot program. This
withdrawal occurred after the Director,
Field Operations, met with the taxpayer
and the CEP examination team to deter-
mine whether the objective of the PFA
pilot program could be achieved. Several
reasons contributed to the taxpayer’s
withdrawal, including the complexity of
the issue, the time required to complete

PFAs Executed by Issue
Valuation of Assets2
Expense vs. Capitalization1
Method of Accounting2
Stock Basis Computation1
Investigatory Costs1
Total7
April 23, 200111402001–17 I.R.B.
Valuation of Assets (2)
One application concerned the valuation
of a “covenant not to compete.” The other
application concerned the valuation of
patents contributed to a charity. Each of the
taxpayers supported its proposed valuation
with a study conducted by an independent
appraiser. IRS Engineers and Valuation
Specialists assisted the CEP examination
team in the review of the issues. In the first
application, the CEP examination team and
the taxpayer agreed that, in a particular pur-
chase transaction, no amount was allocable
to a “covenant not to compete.” In the sec-
ond application, the CEP examination team
and the taxpayer reached a determination
on the valuation of the patents based on
market values.
Expense vs. Capitalization (1)
The taxpayer sought to determine the
amount to be capitalized in a large repair
expense account. The taxpayer proposed
a statistical model for purposes of deter-
mining the amount subject to capitaliza-
tion. An IRS Computer Audit Specialist
assisted the CEP examination team in a
review of the issue. The issue was re-
solved on the basis of a methodology that
had been utilized in earlier examinations.
The CEP examination team and the tax-
payer agreed on the portion of the account
that would be subject to capitalization.
Method of Accounting (2)
One application concerned whether a
contract newly entered into by the tax-
payer was required to be accounted for as
a long-term contract under § 460. The
issue was whether to account for the con-
tract using an accrual method and not a
long-term contract method. A technical
advisor assisted the CEP examination
team. The CEP examination team con-
cluded that an accrual method of account-
ing was the appropriate method. A
change in method of accounting pursuant
to § 446 was not required because the
change in treatment resulted from a
change in the underlying facts.
The other application concerned the de-
termination of the appropriate asset
classes for depreciable property placed in
service in prior years. The taxpayer pro-
posed to change its method of accounting
for certain depreciable property that the
taxpayer believed had been misclassified.
An IRS Engineer and a Computer Audit
Specialist assisted the CEP examination
team. The CEP examination team agreed
with the taxpayer’s revised classifications
and with the taxpayer’s proposal automat-
ically to change its method of accounting
for depreciation pursuant to Rev. Proc.
99–49, 1999–2 C.B. 725. The CEP exam-
ination team and the taxpayer reached an
agreement as to the appropriate § 481 ad-
justment.
Stock Basis Computation (1)
This application concerned the tax
basis of stock acquired in a transaction
that qualified under § 368(a)(1)(B). An
IRS Economist and a Computer Audit
Specialist assisted the CEP examination
team. The CEP examination team agreed
with the taxpayer’s computation of the
amount of the stock basis under § 362(b).
Investigatory Costs (1)
This application concerned costs in-
curred to acquire a business. The taxpayer
proposed that certain of the costs were in-
vestigatory in nature and therefore de-
ductible under §162. Based on the princi-
ples contained in Rev. Rul. 99–23, 1999–1
C.B. 998, the CEP examination team and
the taxpayer agreed as to which items were
§162 costs and which were § 263 costs.
Closing Agreements
Seven PFAs were concluded as of De-
cember 31, 2000. Apro formaor model
agreement does not exist for a PFA. A
PFA represents a specific matter closing
agreement under §7121. The closing
agreements entered into under this pilot
program were prepared with assistance
from the Office of Chief Counsel and
conform to the guidance provided in Rev.
Proc. 68–16, supra.
Processing Statistics
The total average time to complete the
seven PFAs executed in calendar 2000
was 166.1 days.
the analysis and a misunderstanding by
the taxpayer of the purpose of the PFA
process.
PFAs In Process (4)
The taxpayers and the respective Indus-
try Directors, in accordance with the pro-
visions of Notice 2000–12
2
, have agreed
to continue discussions relating to four
PFA applications in an effort to reach
agreement.
PFAs Executed (7)
Seven PFAs were completed in calen-
dar year 2000.
Notice 2000–12, Section 1, Introduc-
tion of Pilot Programstates in part, “In
its pilot phase, the program is open to
large businesses that currently have a Co-
ordinated Examination Team on site.”
Each of the taxpayers accepted into the
PFA pilot program met this requirement.
The Office of Chief Counsel provided
advice to the CEP examination teams and
assisted in the drafting and review of the
PFAs. No Technical Advice or Chief
Counsel Advice Memoranda were issued
for issues addressed in the PFA process.
The executed PFAs covered the follow-
ing issues.
2
Section 6, Continuation of process after filing, coor-
dination with Accelerated Issue Resolution proce-
dures, and Appeals.

Phase I – Application Screening Process
Nineteen applications were received
for the PFA pilot program. The initial
phase was the screening process to deter-
mine if an application was appropriate for
inclusion in the PFA pilot program. This
screening process included obtaining
comments from various LMSB functions
and Chief Counsel, the review of these
comments, and the decision making
process on the acceptance/rejection of an
application by the Industry Director. The
average time from the date an application
was received by the IRS until the Industry
Director rendered a decision to accept or
reject an application was 37.2 days.
Phase II - PFA Evaluation Process
The second (and final) phase in the
PFA pilot program process was the evalu-
ation phase. This phase began when the
Industry Director accepted an application
into the PFA pilot program and ended
when a PFA was executed.
Program Evaluation
The PFA Program Manager conducted
process evaluations of all of the PFA pilot
program cases based on feedback from
LMSB employees and taxpayer partici-
pants. As a part of this program evalua-
tion, participants were asked to provide
an estimate of the direct examination time
expended to complete the PFA and an es-
timate of the direct examination time it
would have taken to resolve the issue in a
post-filing context.
2001–17 I.R.B.1141April 23, 2001
Average Time for PFAsNumberRangeAverage
Of(Elapsed Days)(Elapsed Days)
Cases
Phase I – Application Screening Process1919 – 8637.2
Phase II - PFA Evaluation Process791 – 186140.6
Total Time to Complete a PFA7110 – 228166.1
Cumulative HoursTaxpayerLMSB
(7 Completed PFAs)(Hours)(Hours)
Actual – PFA Process 1,1141,976
Projected (Issue resolved post-filing)3,3797,344
Estimated Savings2,2655,368
Estimated Savings Percentage (Average)67.0%73.1%
Estimated Savings Percentage (Range)34.6% - 96.0%12.9% - 90.4%
Pre-Filing Agreement Pilot Program
Summary
After evaluating the PFA pilot program
and receiving input from internal and exter-
nal participants, the IRS has concluded that
the PFA program does further LMSB’s
issue management strategy by assisting tax-
payers to resolve issues in a cost efficient
and cooperative environment. Accord-
ingly, the IRS issued Rev. Proc. 2001–22,
supra, dated February 26, 2001, which im-
plemented the PFA program on a continu-
ing and expanded basis.
The PFA program is now available to
all LMSB taxpayers, including taxpayers
that are not currently under examination.
While the PFA program will continue to
be limited to issues that involve settled
legal principles, the list of recommended
issues has been expanded, and will now
include certain international issues. Gen-
erally, the operational procedures used
during the PFA pilot program were
adopted and enhanced in the current PFA
program.
The principal author of this announce-
ment is Robert Kastl, in the Office of
LMSB Division Counsel. For further in-
formation regarding this announcement
contact Mr. Kastl at (202) 283-8620 (not a
toll-free call).
New Publication 584–B,
Business Casualty, Disaster, and
Theft Loss Workbook
Announcement 2001–39
New Publication 584–B, Business Casu-
alty, Disaster, and Theft Loss Workbook, is
available from the Internal Revenue Service.
This publication is a workbook that is
designed to help you figure your loss on
business and income-producing property in
the event of a disaster, casualty, or theft.
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.
This publication is also available on the
IRS Internet web site at www.irs.gov.
Generation-Skipping Transfer
Issues; Correction
Announcement 2001–40
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains a
correction to final regulations (T.D. 8912,
2001–5 I.R.B. 452) that were published in
theFederal Registeron Wednesday, De-
cember 20, 2000 (65 FR 79735) relating
to the generation-skipping transfer (GST)
tax imposed under chapter 13 of the Inter-
nal Revenue Code.
DATES: This correction is effective De-
cember 20, 2000.
FOR FURTHER INFORMATION CON-
TACT: James F. Hogan (202) 622-3090
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the sub-
ject of this correction are under section
2601 of the Internal Revenue Code.
Need for Correction
As published, the final regulations con-
tain an error that may prove to be mis-
leading and is in need of clarification.

Correction of Publication
Accordingly, the publication of the
final regulations (T.D. 8912), that were
the subject of FR Doc. 00–31757, is cor-
rected as follows:
§26.2601–1 [Corrected]
On page 79740, column 2, §26.2601–1,
paragraph (b)(4)(i)(E), Example 9., line 6,
the language “is to pass to the A’sissue,
per stirpes. Under” is corrected to read
“is to pass to A’sissue, per stirpes.
Under”.
LaNita Van Dyke,
Acting Chief, Regulations Unit,
Office of Special Counsel
(Modernization and Strategic Planning).
(Filed by the Office of the Federal Register on Feb-
ruary 21, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 22, 2001, 66
F.R. 11108)
April 23, 200111422001–17 I.R.B.

Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to 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
2001–17 I.R.B.iApril 23, 2001

April 23, 2001ii2001–17 I.R.B.
Numerical Finding List
1
Bulletins 2001–1 through 2001–16
Announcements:
2001–1, 2001–2 I.R.B. 277
2001–2, 2001–2 I.R.B. 277
2001–3, 2001–2 I.R.B. 278
2001–4, 2001–2 I.R.B. 286
2001–5, 2001–2 I.R.B. 286
2001–6, 2001–3 I.R.B. 357
2001–7, 2001–3 I.R.B. 357
2001–8, 2001–3 I.R.B. 357
2001–9, 2001–3 I.R.B. 357
2001–10, 2001–4 I.R.B. 431
2001–11, 2001–4 I.R.B. 432
2001–12, 2001–6 I.R.B. 526
2001–13, 2001–96 I.R.B. 752
2001–14, 2001–7 I.R.B. 648
2001–15, 2001–8 I.R.B. 715
2001–16, 2001–8 I.R.B. 715
2001–17, 2001–8 I.R.B. 716
2001–18, 2001–10 I.R.B. 791
2001–19, 2001–10 I.R.B. 791
2001–20, 2001–8 I.R.B. 716
2001–21, 2001–9 I.R.B. 752
2001–22, 2001–11 I.R.B. 895
2001–23, 2001–10 I.R.B. 791
2001–24, 2001–10 I.R.B. 793
2001–25, 2001–11 I.R.B. 895
2001–26, 2001–11 I.R.B. 896
2001–27, 2001–11 I.R.B. 897
2001–28, 2001–13 I.R.B. 975
2001–29, 2001–14 I.R.B. 1014
2001–30, 2001–15 I.R.B. 1065
2001–34, 2001–16 I.R.B. 1087
2001–35, 2001–16 I.R.B. 1087
2001–36, 2001–16 I.R.B. 1089
2001–37, 2001–16 I.R.B. 1090
Notices:
2001–1, 2001–2 I.R.B. 261
2001–2, 2001–2 I.R.B. 265
2001–3, 2001–2 I.R.B. 267
2001–4, 2001–2 I.R.B. 267
2001–5, 2001–3 I.R.B. 327
2001–6, 2001–3 I.R.B. 327
2001–7, 2001–4 I.R.B. 374
2001–8, 2001–4 I.R.B. 374
2001–9, 2001–4 I.R.B. 375
2001–10, 2001–5 I.R.B. 459
2001–11, 2001–5 I.R.B. 464
2001–12, 2001–3 I.R.B. 328
2001–13, 2001–6 I.R.B. 514
2001–14, 2001–6 I.R.B. 516
2001–15, 2001–7 I.R.B. 589
2001–16, 2001–9 I.R.B. 730
2001–17, 2001–9 I.R.B. 730
2001–18, 2001–9 I.R.B. 731
2001–19, 2001–10 I.R.B. 784
2001–20, 2001–11 I.R.B. 818
2001–21, 2001–11 I.R.B. 818
2001–22, 2001–12 I.R.B. 911
2001–23, 2001–12 I.R.B. 911
2001–24, 2001–12 I.R.B. 912
2001–25, 2001–13 I.R.B. 941
2001–26, 2001–13 I.R.B. 942
2001–27, 2001–13 I.R.B. 942
2001–28, 2001–13 I.R.B. 944
Notices:—Continued
2001–29, 2001–14 I.R.B. 989
2001–30, 2001–14 I.R.B. 989
Proposed Regulations:
LR–230–76, 2001–13 I.R.B. 945
REG–209461–79, 2001–8 I.R.B. 712
REG–246256–96, 2001–8 I.R.B. 713
REG–251701–96, 2001–4 I.R.B. 396
REG–101520–97, 2001–15 I.R.B. 1057
REG–106030–98, 2001–11 I.R.B. 820
REG–106446–98, 2001–13 I.R.B. 945
REG–106542–98, 2001–5 I.R.B. 473
REG–121928–98, 2001–6 I.R.B. 520
REG–109481–99, 2001–13 I.R.B. 961
REG–111835–99, 2001–11 I.R.B. 834
REG–114998–99, 2001–14 I.R.B. 992
REG–115560–99, 2001–14 I.R.B. 993
REG–101739–00, 2001–14 I.R.B. 996
REG–103320–00, 2001–8 I.R.B. 714
REG–104683–00, 2001–4 I.R.B. 407
REG–104876–00, 2001–14 I.R.B. 998
REG–105801–00, 2001–13 I.R.B. 965
REG–105946–00, 2001–16 I.R.B. 1069
REG–106513–00, 2001–16 I.R.B. 1076
REG–106702–00, 2001–4 I.R.B. 424
REG–106791–00, 2001–6 I.R.B. 521
REG–106892–00, 2001–15 I.R.B. 1060
REG–107047–00, 2001–14 I.R.B. 1002
REG–107101–00, 2001–16 I.R.B. 1083
REG–107175–00, 2001–13 I.R.B. 971
REG–107176–00, 2001–4 I.R.B. 428
REG–107186–00, 2001–13 I.R.B. 973
REG–107566–00, 2001–3 I.R.B. 346
REG–110374–00, 2001–12 I.R.B. 915
REG–110659–00, 2001–12 I.R.B. 917
REG–114082–00, 2001–7 I.R.B. 629
REG–114083–00, 2001–7 I.R.B. 630
REG–114084–00, 2001–7 I.R.B. 633
REG–116468–00, 2001–6 I.R.B. 522
REG–119352–00, 2001–6 I.R.B. 525
REG–121109–00, 2001–15 I.R.B. 1064
REG–125237–00, 2001–12 I.R.B. 919
REG–126100–00, 2001–11 I.R.B. 862
REG–129608–00, 2001–14 I.R.B. 1011
REG–130477–00, 2001–11 I.R.B. 865
REG–130481–00, 2001–11 I.R.B. 865
Railroad Retirement Quarterly Rates:
2001–2, I.R.B. 258
2001–15, I.R.B. 1054
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–9, 2001–3 I.R.B. 328
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–15, 2001–5 I.R.B. 465
2001–16, 2001–4 I.R.B. 376
2001–17, 2001–7 I.R.B. 589
Revenue Procedures—Continued:
2001–18, 2001–8 I.R.B. 708
2001–19, 2001–9 I.R.B. 732
2001–20, 2001–9 I.R.B. 738
2001–21, 2001–9 I.R.B. 742
2001–22, 2001–9 I.R.B. 745
2001–23, 2001–10 I.R.B. 784
2001–24, 2001–10 I.R.B. 788
2001–25, 2001–12 I.R.B. 913
Revenue Rulings:
2001–1, 2001–9 I.R.B. 726
2001–2, 2001–2 I.R.B. 255
2001–3, 2001–3 I.R.B. 319
2001–4, 2001–3 I.R.B. 295
2001–5, 2001–5 I.R.B. 451
2001–6, 2001–6 I.R.B. 491
2001–7, 2001–7 I.R.B. 541
2001–8, 2001–9 I.R.B. 726
2001–9, 2001–8 I.R.B. 652
2001–10, 2001–10 I.R.B. 755
2001–11, 2001–10 I.R.B. 780
2001–12, 2001–11 I.R.B. 811
2001–13, 2001–12 I.R.B. 898
2001–14, 2001–12 I.R.B. 898
2001–15, 2001–13 I.R.B. 922
2001–16, 2001–13 I.R.B. 936
2001–17, 2001–15 I.R.B. 1052
Treasury Decisions:
8910, 2001–2 I.R.B. 258
8911, 2001–3 I.R.B. 321
8912, 2001–5 I.R.B. 452
8913, 2001–3 I.R.B. 300
8914, 2001–8 I.R.B. 653
8915, 2001–4 I.R.B. 359
8916, 2001–4 I.R.B. 360
8917, 2001–7 I.R.B. 538
8918, 2001–4 I.R.B. 372
8919, 2001–6 I.R.B. 505
8920, 2001–8 I.R.B. 654
8921, 2001–7 I.R.B. 532
8922, 2001–6 I.R.B. 508
8923, 2001–6 I.R.B. 485
8924, 2001–6 I.R.B. 489
8925, 2001–6 I.R.B. 496
8926, 2001–6 I.R.B. 492
8927, 2001–11 I.R.B. 807
8928, 2001–8 I.R.B. 685
8929, 2001–10 I.R.B. 756
8930, 2001–5 I.R.B. 433
8931, 2001–7 I.R.B. 542
8932, 2001–11 I.R.B. 813
8933, 2001–11 I.R.B. 794
8934, 2001–12 I.R.B. 904
8935, 2001–8 I.R.B. 702
8937, 2001–11 I.R.B. 806
8938, 2001–13 I.R.B. 929
8939, 2001–12 I.R.B. 899
8940, 2001–15 I.R.B. 1016
8941, 2001–14 I.R.B. 977
8942, 2001–13 I.R.B. 929
8943, 2001–15 I.R.B. 1054
8944, 2001–16 I.R.B. 1067
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.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–16
Announcement:
98–99
Modified by
Ann. 2001–9, 2001–3 I.R.B. 357
99–79
Superseded by
Ann. 2001–3, 2001–2 I.R.B. 278
2000–78
Obsoleted by
T.D. 8933, 2001–11 I.R.B. 794
2000–97
Corrected by
Ann. 2001–7, 2001–3 I.R.B. 357
Cumulative Bulletin:
1998–2
Corrected by
Ann. 2001–5, 2001–2 I.R.B. 286
Notices:
94–3
Modified by
T.D. 8933, 2001–11 I.R.B. 794
98–39
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
98–40
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
99–53
Modified and superseded by
Notice 2001–7, 2001–4 I.R.B. 374
2000–21
Superseded by
Notice 2001–1, 2001–2 I.R.B. 261
2000–22
Modified and superseded by
Notice 2001–8, 2001–4 I.R.B. 374
2000–26
Modified by
Notice 2001–22, 2001–12 I.R.B. 911
2000–43
Extended by
Notice 2001–13, 2001–6 I.R.B. 514
Proposed Regulations:
EE–130–86
Partially withdrawn by
REG–209461–79, 2001–8 I.R.B. 712
REG–106030–98
Corrected by
Ann. 2001–30, 2001–15 I.R.B. 1065
REG–106542–98
Corrected by
Ann. 2001–24, 2001–13 I.R.B. 793
Proposed Regulations—Continued:
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
REG–116048–99
Withdrawn by
Ann. 2001–27, 2001–11 I.R.B. 897
REG–106702–00
Corrected by
Ann. 2001–28, 2001–13 I.R.B. 975
Revenue Procedures:
83–87
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
90–18
Amplified and superseded by
Rev. Proc. 2001–18, 2001–8 I.R.B. 708
92–19
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
96–15
Modified by
Ann. 2001–22, 2001–11 I.R.B. 895
96–17
Modified by
Rev. Proc. 2001–9, 2001–3 I.R.B. 328
99–18
Modified and superseded by
Rev. Proc. 2001–21, 2001–9 I.R.B. 742
99–47
Superseded by
Rev. Proc. 2001–16, 2001–4 I.R.B. 376
99–49
Modified and amplified by
Notice 2001–23, 2001–12 I.R.B. 911
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
Rev. Proc. 2001–23, 2001–10 I.R.B. 784
Rev. Proc. 2001–24, 2001–10 I.R.B. 788
Rev. Proc. 2001–25, 2001–12 I.R.B. 913
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
Revenue Procedures—Continued:
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
2000–16
Modified and superseded by
Rev. Proc. 2001–17, 2001–7 I.R.B. 589
2000–22
Modified and superseded by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2001–3
Corrected by
Ann. 2001–25, 2001–11 I.R.B. 895
2001–13
Clarified by
Notice 2001–12, 2001–3 I.R.B. 328
Revenue Rulings:
64–328
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
66–110
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
85–30
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
88–95
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
92–19
Supplemented in part by
Rev. Rul. 2001–11, 2001–10 I.R.B. 780
2000–56
Corrected by
Ann. 2001–19, 2001–10 I.R.B. 791
2001–4
Modified by
Notice 2001–23, 2001–12 I.R.B. 911
Treasury Decisions:
7530
Removed by
T.D. 8938, 2001–13 I.R.B. 929
8757
Revised by
T.D. 8941, 2001–14 I.R.B. 977
8889
Corrected by
Ann. 2001–14, 2001–2 I.R.B. 286
8913
Corrected by
Ann. 2001–26, 2001–11 I.R.B. 896
8931
Technically amended by
Ann. 2001–37, 2001–16 I.R.B. 1090
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.
2001–17 I.R.B.iiiApril 23, 2001

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