Internal Revenue Bulletin 2002-9 (PDF rendition): IRS Revenue Rulings

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HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2002–8, page 564.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through March
2002.This ruling announces the monthly bond factor amounts
to be used by taxpayers who dispose of qualified low-income
buildings or interests therein during the period January through
March 2002.
REG–209114–90, page 576.
Proposed regulations under section 280G of the Code provide
guidance about the denial of the deduction to a corporation for
any excess golden parachute payment to certain individuals.
Notice 2002–17, page 567.
This notice provides guidance, in a question and answer for-
mat, on the tax relief provided under Executive Order No.
13239 (2001–53 I.R.B. 632) for U.S. military and support per-
sonnel involved in the military operations in Afghanistan.
Rev. Proc. 2002–16, page 572.
Optional election to make monthly 706(a) computations.
This procedure allows certain partnerships that invest in assets
exempt from taxation under section 103 of the Code to make
an election that enables money market fund partners to take
into account monthly the inclusions required under sections
702 and 707(c).
EMPLOYEE PLANS
Notice 2002–16, page 567.
Weighted average interest rate update.The weighted aver-
age interest rate for February 2002 and the resulting permis-
sible range of interest rates used to calculate current liability
for purposes of the full funding limitation of section 412(c)(7) of
the Code are set forth.
Announcement 2002–24, page 606.
Catch-up contributions for individuals age 50 or over.
This document contains a change in the hearing date for REG–
142499–01 (2001–45 I.R.B. 476) from February 21, 2002, to
April 30, 2002. It also extends the time to submit written com-
ments and outlines of oral comments from January 31, 2002,
to April 15, 2002.
EXCISE TAX
T.D. 8983, page 565.
Final regulations under section 6071 of the Code relate to the
time for eligible air carriers to file a return for the third calendar
quarter of 2001.
REG–209114–90, page 576.
Proposed regulations under section 280G of the Code provide
guidance about the denial of the deduction to a corporation for
any excess golden parachute payment to certain individuals.
ADMINISTRATIVE
REG–125626–01, page 604.
Unit livestock price method.Proposed regulations under
section 471 of the Code provide rules relating to the annual
reevaluation of unit livestock prices and the depreciation of live-
stock raised for drafting, breeding, or dairy purposes. A public
hearing is scheduled for June 12, 2002.
Finding Lists begin on page ii.
Index for January and February begins on page iv.
Bulletin No. 2002–9
March 4, 2002

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, 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 Bulle-
tins, 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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 rev-
enue ruling. In those based on positions taken in rulings to tax-
payers 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 published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion 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 Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (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 semiannual
period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
March 4, 20022002–9 I.R.B.

Part. I Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period January through March
2002.This ruling announces the monthly
bond factor amounts to be used by tax-
payers who dispose of qualified low-
income buildings or interests therein dur-
ing the period January through March
2002.
Rev. Rul. 2002–8
In Rev. Rul. 90–60 (1990–2 C.B. 3),
the Internal Revenue Service provided
guidance to taxpayers concerning the
general methodology used by the Trea-
sury Department in computing the bond
factor amounts used in calculating the
amount of bond considered satisfactory
by the Secretary under § 42(j)(6) of the
Internal Revenue Code. It further
announced that the Secretary would pub-
lish in the Internal Revenue Bulletin a
table of “bond factor” amounts for dispo-
sitions occurring during each calendar
month.
Rev. Proc. 99–11 (1999–1 C.B. 275)
established a collateral program as an
alternative to providing a surety bond for
taxpayers to avoid or defer recapture of
low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculating
the amount of bond considered satisfac-
tory under § 42(j)(6) or the amount of
United States Treasury securities to
pledge in a Treasury Direct Account
under Rev. Proc. 99–11 for dispositions
of qualified low-income buildings or
interests therein during the period January
through March 2002.
Table 1
Rev. Rul. 2002–8
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19881989199019911992199319941995199619971998
Jan ’0217.7632.7345.4456.2465.4665.9266.4666.9967.6368.3569.24
Feb ’0217.7632.7345.4456.2465.4665.7566.2866.8067.4468.1669.05
Mar ’0217.7632.7345.4456.2465.4665.5766.1066.6267.2667.9868.86
2002–9 I.R.B.564March 4, 2002

Table 1 (cont’d)
Rev. Rul. 2002–8
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1999200020012002
Jan’0270.1370.9872.2872.55
Feb’0269.9270.7772.0572.55
Mar’0269.7370.5871.8472.55
For a list of bond factor amounts
applicable to dispositions occurring dur-
ing other calendar years, see: Rev. Rul.
98–3 (1998–1 C.B. 248); Rev. Rul.
2001–2 (2001–2 I.R.B. 255); and Rev.
Rul. 2001–53 (2001–46 I.R.B. 489).
DRAFTING INFORMATION
The principal author of this revenue
ruling is Gregory N. Doran of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Doran at (202) 622–3040 (not a
toll-free call).
Section 706—Taxable Years
of Partner and Partnership
26 CFR 1.103: Interest on state and local bonds.
26 CFR 1.702: Income and credits of partner.
26 CFR 1.706: Taxable year of partner and partner-
ships.
26 CFR 1.706–1(c): Closing of Partnership Year.
26 CFR 1.707: Transactions between partner and a
partnership.
26 CFR 1.851: Definition of regulated investment
company.
26 CFR 1.852: Taxation of regulated investment
companies and their shareholders.
May a money market fund partner in a partner-
ship that invests in bonds that are exempt from taxa-
tion under§103 make monthly allocations of part-
nership items under§706(a)? See Rev. Proc. 2002–
16, page 572.
Section 6071.—Time for
Filing Returns and Other
Documents
26 CFR 40.6071(a)–3: Time for an eligible air car-
rier to file a return for the third calendar quarter of
2001.
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 40
T.D. 8983
Time for Eligible Air Carriers
to File the Third Calendar
Quarter 2001 Form 720
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the time for
eligible air carriers reporting air transpor-
tation excise taxes to file Form 720,
“Quarterly Federal Excise Tax Return,”
for the third calendar quarter of 2001.
These regulations affect certain air carri-
ers.
DATES:Effective Date: These regula-
tions are effective February 6, 2002.
Applicability Date: For date of appli-
cability of these regulations, see
§40.6071(a)–3(c).
FOR FURTHER INFORMATION CON-
TACT: Susan Athy (202) 622–3130 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Subchapter C of chapter 33 of the
Internal Revenue Code (Code) imposes
tax on the amount paid for: taxable trans-
portation by air of any person (section
4261(a)); each domestic segment of tax-
able transportation (section 4261(b)); use
of international air travel facilities (sec-
tion 4261(c)); and taxable transportation
of property by air (section 4271(a)) (air
transportation excise taxes). Section 6071
generally provides that return filing dates
are prescribed by regulation. Under
§40.6071(a)–2, a return of air transporta-
tion taxes was due by the last day of the
second month following the quarter for
which it was made. On August 8, 2001,
the regulations were amended to remove
this provision but the provision remained
in effect for the third calendar quarter of
2001. Thus, the return of air transporta-
tion taxes for that quarter was due on
November 30, 2001.
Under section 6151, generally, tax
must be paid at the time the return is
March 4, 20025652002–9 I.R.B.

required to be filed. In general, under sec-
tion 6601, interest must be paid on any
amount of tax not paid by the last day for
payment. Accordingly, if the return due
date prescribed in§40.6071(a)–2 remains
in effect for the third calendar quarter of
2001, interest would be imposed on third-
quarter air transportation excise taxes not
paid by November 30, 2001.
Section 301(a) of the Air Transporta-
tion Safety and System Stabilization Act
(the Act), Public Law 107–42 (115 Stat.
236) provides relief to eligible air carriers
with respect to the semimonthly deposits
required for air transportation excise
taxes. The relief contained in the Act
applies to deposits only and does not
extend the return filing and associated
payment date. By extending the filing
date for eligible air carriers, these final
regulations will provide return filing, pay-
ment, and interest relief consistent with
the deposit relief provided for air trans-
portation excise taxes by section 301(a)
of the Act. Notice 2001–77 (2001–50
I.R.B. 576) provided that regulations
would change the third calendar quarter
2001 filing date.
Explanation of Provisions
These final regulations change the date
by which eligible air carriers reporting tax
that includes the air transportation excise
taxes imposed by subchapter C of chapter
33 must file excise tax returns for the
third quarter of 2001. The due date for
these returns is postponed from Novem-
ber 30, 2001, to January 15, 2002. For
these taxpayers, payment of their third-
quarter excise tax liability may also be
delayed until January 15, 2002.
Special Analyses
This Treasury decision is necessary to
provide immediate relief to the eligible
air carriers affected by the events of Sep-
tember 11, 2001. This Treasury decision
provides additional time for eligible air
carriers to file the third calendar quarter
2001 Form 720 and to pay certain taxes
due with the return. Therefore, it has been
determined that notice and public com-
ment are unnecessary and contrary to the
public interest and a delayed effective
date under section 553(d) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
is not required. Also, it has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act does not apply to
these regulations and, because these regu-
lations do not impose on small entities a
collection of information requirement, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. It also has been
determined that this Treasury decision is
not a significant regulatory action as
defined in Executive Order 12866. There-
fore, a regulatory assessment is not
required. Pursuant to section 7805(f) of
the Code, these final regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on
small business.
Drafting Information
The principal author of these regula-
tions is Susan Athy, Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 40 is
amended as follows:
PART 40—EXCISE TAX
PROCEDURAL REGULATIONS
Paragraph 1. The authority citation for
part 40 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 40.6071(a)–3 also issued
under 26 U.S.C. 6071(a).* * *
Par. 2. Section 40.6071(a)–3 is added
to read as follows:
§40.6071(a)–3 Time for an eligible air
carrier to file a return for the third
calendar quarter of 2001.
(a)In general. If, in the case of an eli-
gible air carrier, the quarterly return
required under§40.6011(a)–1(a) for the
third calendar quarter of 2001 includes
tax imposed by subchapter C of chapter
33—
(1)Therequirementsof
§40.6071(a)–2 as in effect on August 7,
2001, do not apply to the return; and
(2) The return must be filed by January
15, 2002.
(b)Definition of eligible air carrier.
Eligible air carrierhas the same meaning
as provided in section 301(a)(2) of the Air
Transportation Safety and System Stabili-
zation Act; that is, any domestic corpora-
tion engaged in the trade or business of
transporting (for hire) persons by air if
such transportation is available to the
general public.
(c)Effective date. This section is appli-
cable with respect to returns that relate to
the third calendar quarter of 2001.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved January 23, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 5, 2002, 8:45 a.m., and published in the issue
of the Federal Register for February 6, 2002, 67 F.R.
5471)
2002–9 I.R.B.566March 4, 2002

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest
Rate Update
Notice 2002–16
Notice 88–73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current
liability for the purpose of the full fund-
ing limitation of§412(c)(7) of the Inter-
nal Revenue Code as amended by the
Omnibus Budget Reconciliation Act of
1987 and as further amended by the Uru-
guay Round Agreements Act, Pub. L.
103–465 (GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for January
2002 is 5.45 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
MonthYear
Weighted
Average
90% to 105%
Permissible
Range
90% to 110%
Permissible
Range
February20025.705.13 to 5.985.13 to 6.27
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please call Mr. Newman at
(202) 283–9888 (not a toll-free number).
Tax Relief for Those Involved
in Operation Enduring
Freedom
Notice 2002–17
PURPOSE
This notice provides guidance in a
question and answer format on the tax
relief provided under Executive Order
No. 13239 (2001–53 I.R.B. 632), 66 Fed.
Reg. 241 (December 14, 2001), for U.S.
military and support personnel involved
in the military operations in Afghanistan.
BACKGROUND
The Executive Order, effective Sep-
tember 19, 2001, designates Afghanistan
(including the airspace above) as a com-
bat zone for purposes of section 112 of
the Internal Revenue Code.
The provisions of the Code affected by
the declaration of a combat zone include
the following:
(1) Section 2(a)(3) (relating to the spe-
cial rule where a deceased spouse was in
missing status);
(2) Section 112 (relating to the exclu-
sion from gross income of certain combat
pay received by members of the U.S.
Armed Forces);
(3) Section 692 (relating to income
taxes of members of the U.S. Armed
Forces on death);
(4) Section 2201 (relating to members
of the U.S. Armed Forces dying in a com-
bat zone or by reason of combat-zone-
incurred wounds, etc.);
(5) Section 3401(a)(1) (defining wages
relating to combat pay for members of the
U.S. Armed Forces);
(6) Section 4253(d) (relating to taxa-
tion of phone service originating from
members of the U.S. Armed Forces in a
combat zone);
(7) Section 6013(f)(1) (relating to a
joint return where an individual is in
missing status); and
(8) Section 7508 (relating to the time
for performing certain acts (including fil-
ing, paying, assessing, collecting, claim-
ing a refund, and litigating) postponed by
reason of service in a combat zone).
Under the Executive Order, the dead-
line extension provisions under§7508
apply to members of the U.S. Armed
Forces (and those serving in support of
the U.S. Armed Forces) in the combat
zone.
QUESTIONS AND ANSWERS
The following questions and answers
generally apply to members of the U.S.
Armed Forces on active duty and are pat-
terned after the questions and answers in
Notice 99–30 (1999–1 C.B. 1135) (Tax
Relief for Those Affected by Operation
Allied Force) and Notice 96–34 (1996–1
C.B. 379) (Tax Relief for Those Affected
by Operation Joint Endeavor). Taxpayers
covered by the relief provisions discussed
in this Notice should write“Enduring
Freedom”in red at the top of their
returns. Covered taxpayers who receive a
notice from the IRS regarding a collection
or examination matter should return the
notice to the IRS with the words“Endur-
ing Freedom”at the top of the notice and
on the envelope so the IRS can suspend
the action. For additional information on
the tax treatment of members of the U.S.
Armed Forces, including reservists, dece-
dents, or persons missing in action, con-
sult Publication 3,Armed Forces Tax
Guide.
PART 1—MILITARY PAY
EXCLUSION
Q-1: What geographic area is included in
the combat zone covered by this notice?
A-1: The geographic area included in the
combat zone is Afghanistan (including
the airspace above).
Q-2: I am a member of the U.S. Armed
Forces performing services in Afghani-
stan. Is any part of my 2001 military pay
for serving in this area excluded from
gross income?
A-2: Yes. Afghanistan comprises the
combat zone. If you serve in the combat
zone as an enlisted person or as a warrant
officer (including commissioned warrant
officers) for any part of a month, all your
March 4, 20025672002–9 I.R.B.

military pay received for military service
that month is excluded from gross
income. For commissioned officers, the
monthly exclusion is capped at the high-
est enlisted pay, plus any hostile fire or
imminent danger pay received. Therefore,
for 2001, the most an officer can earn tax-
free each month is $5,043 ($4,893, the
highest monthly enlisted pay, plus $150
hostile fire or imminent danger pay).
Although the Defense Authorization Bill
had not been signed when this publication
was written, we expect the officer exclu-
sion to increase to $5,532.90 in 2002
($5,382.90, the highest monthly enlisted
pay, plus $150 hostile fire or imminent
danger pay). Amounts excluded from
gross income are not subject to federal
income tax.
Q-3: My husband and I are both enlisted
personnel serving in the U.S. Armed
Forces in the combat zone. Are we both
entitled to the income tax exclusion for
military pay?
A-3: Yes. Each of you qualifies for the
income tax exclusion for your military
pay.
Q-4: I am a member of the U.S. Armed
Forces stationed on a ship in the Indian
Ocean. I fly missions over Afghanistan as
part of the military operations in the com-
bat zone. Is any part of my military pay
excluded from gross income?
A-4: Yes. The combat zone includes the
airspace over Afghanistan, so you are
serving in the combat zone. See Q & A 2
for a discussion of the amount of your
military pay that is excluded.
Q-5: If I am injured and hospitalized
while serving in the U.S. Armed Forces in
the combat zone, is any of my military
pay excluded from gross income?
A-5: Yes. Military pay received by
enlisted personnel who are hospitalized as
a result of injuries sustained while serving
in the combat zone is excluded from
gross income for the period of hospital-
ization, subject to the 2-year limitation
provided below. Commissioned officers
have a similar exclusion, but it is limited
to the maximum enlisted amount per
month. See Q & A 2. These exclusions
from gross income for hospitalized
enlisted personnel and commissioned
officers end 2 years after the date of ter-
mination of the combat zone.
Q-6: My wife is currently serving in the
U.S. Armed Forces in the combat zone
and will be eligible for discharge when
she returns home. If she is discharged
upon her return, will the payment for the
annual leave that she accrued during her
service in the combat zone be excluded
from gross income?
A-6: Yes. Annual leave payments to
enlisted members of the U.S. Armed
Forces upon discharge from the service
are excluded from gross income to the
extent the leave was accrued during any
month in any part of which the member
served in the combat zone. If your wife is
a commissioned officer, a portion of the
annual leave payment she receives for
leave accrued during any month in any
part of which she served in the combat
zone may be excluded. The leave pay-
ment cannot be excluded to the extent it
exceeds the maximum enlisted amount
(see Q & A 2) for the month of service to
which it relates less the amount of mili-
tary pay already excluded for that month.
Q-7: I am an enlisted person serving in a
combat zone. If I reenlist early while I am
in the combat zone and receive my reen-
listment bonus several months later when
I am stationed outside the combat zone, is
any part of my reenlistment bonus
excluded from gross income?
A-7: Yes. The reenlistment bonus is
excluded from gross income although
received in a month that you were outside
the combat zone, because you completed
the necessary action for entitlement to the
reenlistment bonus in a month during
which you served in the combat zone.
Q-8: My brother, who is a civilian in the
merchant marine, is on a ship that trans-
ports military supplies between the
United States and the combat zone. Is he
entitled to the combat zone military pay
exclusion?
A-8: No. Those serving in the merchant
marine are not members of the U.S.
Armed Forces. The combat zone military
pay exclusion applies only to members of
the U.S. Armed Forces. The U.S. Armed
Forces include all regular and reserve
components of the uniformed services
that are under the control of the Secretar-
ies of Defense, Army, Navy, and Air
Force, and the Secretary of Transportation
with respect to the Coast Guard.
Q-9: My husband is a member of the U.S.
Armed Forces performing services as part
of Operation Enduring Freedom in Turk-
menistan. He is not receiving hostile fire/
imminent danger pay. Is he entitled to the
military pay exclusion?
A-9: No. U.S. Armed Forces personnel
serving outside the combat zone are not
entitled to the military pay exclusion,
unless they are serving in direct support
of military operations in the combat zone
for which they receive hostile fire/
imminent danger pay. On December 14,
2001, the following countries were certi-
fied by the Department of Defense for
combat zone tax benefits due to their
direct support of military operations in
the Afghanistan combat zone: Pakistan,
Tajikistan, Jordan, Uzbekistan, and Kyr-
gyzstan. For a more detailed discussion of
the tax treatment of military personnel,
see Publication 3.
Q-10: How do I certify my entitlement to
the military pay exclusion?
A-10: Your service branch must certify
your entitlement on the Form W-2 it pro-
vides you. If you believe you are entitled
to the exclusion, but it is not reflected on
your Form W-2, ask your service branch
to issue a corrected Form W-2.
PART 2—EXTENSION OF
DEADLINES
Q-11: I have been serving in Afghanistan
since November 10, 2001. I understand
that the deadline for performing certain
actions required by the internal revenue
laws is extended as a result of my service.
On what date did these deadline exten-
sions begin?
A-11: The deadline extension provisions
apply to most tax actions required to be
performed on or after September 19,
2001, or the date you began serving in the
combat zone, whichever is later. In your
case, the date that the deadline extensions
began is November 10, 2001.
Q-12: My son is a member of the U.S.
Armed Forces who is now serving in the
2002–9 I.R.B.568March 4, 2002

combat zone. Is he entitled to an exten-
sion of time for filing and paying his fed-
eral income taxes? Are any assessment or
collection deadlines extended?
A-12: For both questions, the answer is
yes. In general, the deadlines for perform-
ing certain actions applicable to his fed-
eral taxes are extended for the period of
his service in the combat zone on or after
September 19, 2001, plus 180 days there-
after. During this extension period,
assessment and collection deadlines will
be extended, and interest and penalties
attributable to the extension period will
not be charged.
Q-13: Assuming the same facts as in
question 12, does the extension for filing
and paying his federal individual income
taxes apply to unearned income from my
son’s investments?
A-13: Yes. The extensions apply without
regard to the source of your son’s
income.
Q-14: Assuming the same facts as in
question 12, will the deadline extension
provisions continue to apply if my son is
hospitalized as a result of an injury sus-
tained in the combat zone?
A-14: Yes. The deadline extension provi-
sions will apply for the period that your
son is continuously hospitalized outside
of the United States as a result of injuries
sustained while serving in the combat
zone, including 180 days thereafter. For
hospitalization inside the United States,
the extension period cannot be more than
5 years.
Q-15: Do the deadline extension provi-
sions apply only to members of the U.S.
Armed Forces serving in the combat
zone?
A-15: No. The deadline extension provi-
sions also apply to individuals serving in
the combat zone in support of the U.S.
Armed Forces, such as Red Cross person-
nel, accredited correspondents, and civil-
ian personnel acting under the direction
of the U.S. Armed Forces in support of
those forces. In addition, members of the
U.S. Armed Forces who perform military
service in an area outside the combat
zone qualify for the suspension of time
provisions if their service is in direct sup-
port of military operations in the combat
zone, and they receive special pay for
duty subject to hostile fire or imminent
danger as certified by the Department of
Defense. See Q & A 9 for countries certi-
fied as of the date of this publication.
Q-16: My son is a civilian explosive spe-
cialist who is in the combat zone training
U.S. Armed Forces personnel serving in
the combat zone. Do the deadline exten-
sion provisions apply to my son?
A-16: Yes. The deadline extension provi-
sions apply to your son because he is
serving in the combat zone in support of
the U.S. Armed Forces.
Q-17: My husband is a private business-
man working in Afghanistan on nonmili-
tary projects. Do the deadline extension
provisions apply to my husband?
A-17: No. Other than military personnel,
the only individuals working in the com-
bat zone that are entitled to the deadline
extension provisions are those serving in
support of the U.S. Armed Forces.
Q-18: I am a member of the U.S. Armed
Forces serving in the combat zone. Do
the deadline extension provisions apply to
my husband who is in the United States?
A-18: Yes. The deadline extension provi-
sions apply not only to members serving
in the U.S. Armed Forces (or individuals
serving in support thereof) in the combat
zone, but to their spouses as well, with
two exceptions. First, if you are hospital-
ized in the United States as a result of
injuries received while serving in the
combat zone, the deadline extension pro-
visions would not apply to your husband.
Second, the deadline extension provisions
for your husband do not apply for any tax
year beginning more than 2 years after
the date of the termination of the combat
zone designation.
Q-19: Assuming the same facts as in
question 18, will my husband have to file
a joint tax return in order to benefit from
the deadline extension provisions?
A-19: No. The deadline extension provi-
sions apply to both spouses whether joint
or separate returns are filed. If your hus-
band chooses to file a separate return, he
will have the same extension of time to
file and pay his taxes that you have.
Q-20: My husband is serving in the U.S.
Armed Forces in the combat zone. In
2001, our son, who is 12 years old,
received $700 of interest income. Our
daughter, who is 17 years old, received
$2,000 of earned income from part-time
work and $900 of interest income. We
claim both children as dependents on our
federal individual income tax return. Are
federal individual income tax returns
required to be filed for our children while
my husband is in the combat zone?
A-20: No. Federal individual income tax
returns for your dependent children are
not required to be filed while your hus-
band is in the combat zone. Instead, these
returns will be considered timely if filed
on or before the deadline for filing your
federal individual income tax return
under the deadline extension provisions.
When your children’s 2001 federal
income tax returns are filed, you should
write“Enduring Freedom”at the top of
those returns. Because your older child
may be entitled to a refund of tax, she
may want to file her federal individual
income tax return and obtain her refund.
Q-21: I am a member of the U.S. Armed
Forces serving in the combat zone. My
spouse and our three children live in our
home in the United States. During 2001,
a child care provider took care of our
children in our home. We are required to
file a Schedule H,Household Employ-
ment Taxes, as an attachment to our fed-
eral individual income tax return to report
the federal employment taxes on wages
we paid to our child care provider. Do the
deadline extension provisions apply to the
filing of Schedule H as an attachment to
our federal individual income tax return?
A-21: Yes. The deadline extension provi-
sions apply to all schedules and forms
that are filed as attachments to the federal
individual income tax return.
Q-22: I am a member of the U.S. Armed
Forces who served in the combat zone
beginning on September 28, 2001. If I
serve in the combat zone until May 23,
2002, when will I be required to file my
federal individual income tax return for
2001?
A-22: You must file your 2001 federal
individual income tax return on or before
March 4, 2003, 285 days after you left the
March 4, 20025692002–9 I.R.B.

combat zone. The deadline extension
period consists of the sum of the follow-
ing:
(1) 180 days from the date you left the
area .................................................... 180
(2) The number of days remaining
(as of the date you entered the area) to
perform the required act (in your case,
filing your 2001 federal individual
income tax return, January 1, 2002 to
April 15, 2002) ...................................105
Total ...............................................285
See Publication 3,Armed Forces’Ta x
Guide, for additional extension examples.
Q-23: My wife is a member of the U.S.
Armed Forces serving in the combat
zone. Can she make a timely qualified
retirement contribution for 2001 to her
individual retirement account (IRA) after
April 15, 2002, and on or before the due
date of her 2001 federal individual
income tax return after applying the dead-
line extension provisions?
A-23: Yes. Your wife can make a timely
qualified retirement contribution for 2001
to her IRA on or before the extended
deadline for filing her 2001 income tax
return under the deadline extension provi-
sions.
Q-24: My brother, who began serving in
the U.S. Armed Forces in the combat
zone on November 18, 2001, did not
make his fourth estimated tax payment
for 2001 which was due January 15,
2002. Will my brother be liable for esti-
mated tax penalties?
A-24: No. Your brother is covered by the
deadline extension provisions and will
not be liable for any penalties if he files
and pays any tax due by his extended fil-
ing due date. When your brother files his
2001 federal income tax return, he should
write“Enduring Freedom”at the top of
that return.
Q-25: My son, who is a member of the
U.S. Armed Forces, was on an installment
payment plan with the IRS for back
income taxes before he was assigned to
the combat zone. What should be done
now that he is in the combat zone?
A-25: The IRS office where your son was
making payments should be contacted.
Because your son is serving in the combat
zone, he will not have to make payments
on his past due taxes for his period of
service in the combat zone plus 180 days.
No additional penalties or interest will be
charged during the deadline extension
period.
Q-26: My son, who is a member of the
U.S. Armed Forces serving in the combat
zone, will file his federal individual
income tax return for 2001 after April 15,
2002, but on or before the end of the
deadline extension for filing that return.
He expects to receive a refund. Will the
IRS pay interest on the refund?
A-26: Yes. The IRS will pay interest from
April 15, 2002, on a refund issued to your
son if he files his 2001 federal individual
income tax return on or before the due
date of that return after applying the
deadline extension provisions. When your
son files his 2001 federal income tax
return, he should write“Enduring Free-
dom”at the top of that return. If his 2001
return is not timely filed on or before the
due date after applying the deadline
extension provisions, no interest will be
paid on the refund except as provided
under the normal refund rules. Even
though the deadline is extended, your son
may file a return earlier to receive any
refund due.
Q-27: Do the deadline extension provi-
sions apply to federal tax returns other
than the federal individual income tax
return?
A-27: Yes. The deadline extension provi-
sions also apply to federal estate and gift
tax returns. However, the deadline exten-
sion provisions do not apply to other fed-
eral tax and information returns, such as
those for corporate income tax or employ-
ment taxes.
Q-28: My husband and I are civilian
employees of defense contractors. I work
in the United States and my husband tem-
porarily works in Germany. Our jobs
involve the production of equipment used
by the U.S. Armed Forces for Operation
Enduring Freedom. Do the deadline
extension provisions apply to either of
us?
A-28: No. The deadline extension provi-
sions do not apply to civilian employees
of defense contractors unless they are
serving in the combat zone in support of
the U.S. Armed Forces.
PART 3—MISCELLANEOUS
PROVISIONS
Q-29: My daughter is a member of the
U.S. Armed Forces serving in the combat
zone. She makes calls to me here in the
United States. Are these calls exempt
from the federal excise tax on toll tele-
phone service?
A-29: Yes. Telephone calls that originate
within the combat zone and that are made
by members of the U.S. Armed Forces
serving there are exempt from the federal
excise tax on toll telephone service, pro-
vided a properly executed certificate of
exemption is furnished to the telephone
service provider receiving payment for
the call. The exemption certificate should
be in substantially the following form:
2002–9 I.R.B.570March 4, 2002

EXEMPTION CERTIFICATE
(Overseas Telephone Calls)
(Date)
20
I certify that the toll charges of $are for telephone or radio telephone messages originating
at
(Point of origin) within a combat zone from(Name) a member of
the Armed Forces of the United States performing service in such combat zone; that the transmission facilities were furnished
by
(Name of carrier); and that the charges are exempt from tax under section 4253(d) of the Inter-
nal Revenue Code.
(Signature of Subscriber)
(Address)
Note: Penalty for fraudulent use: fine or imprisonment or both.
Q-30: If the federal excise tax has already
been paid on the toll telephone service in
Q & A 29, can a refund be obtained?
A-30: Yes. If the federal excise tax has
already been paid on that toll telephone
service, a refund may be obtained either
from the telephone service provider that
collected the tax, or from the IRS by fil-
ing Form 8849,Claim for Refund of
Excise Taxes.
Q-31: How will my military pay for
active service in the U.S. Armed Forces
in the combat zone be reported on my
2001 Form W-2,Wage and Tax State-
ment?
A-31: Military pay attributable to your
active service in the combat zone that is
excluded from gross income will not be
reported on your 2001 Form W-2 in the
box marked“Wages, tips, other compen-
sation.”However, military pay for such
service is subject to social security and
medicare taxes and will be reported on
your 2001 Form W-2 in the boxes marked
“Social security wages”and“Medicare
wages and tips.”If you believe you are
entitled to the exclusion, but it is not
reflected on your W-2, ask your service to
issue a corrected Form W-2.
Q-32: I’m an officer who served in the
Desert Storm combat zone from Decem-
ber 2000 to September 2001 and Endur-
ing Freedom combat zone from October
2001 to January 2002. I have made
monthly contributions to an individual
retirement account (IRA) for 2001. In
view of the military pay exclusion for my
service in the combat zone, I may have
little or no taxable compensation for 2001
and may not be eligible to make an IRA
contribution for 2001. If my taxable com-
pensation is less than $2000, should I
withdraw the portion of my contributions
that exceeds my taxable compensation?
A-32: Yes. In general, any amount con-
tributed to your IRA that is more than the
smaller of (1) your taxable compensation;
or (2) $2000, is an excess contribution
and must be withdrawn to avoid a 6 per-
cent excise tax. If you are married and
file a joint return, you may still be eli-
gible to make an IRA contribution, see
Publication 590 for more information on
spousal contribution limits. Once you are
sure that your taxable compensation will
be less than $2000, you should withdraw
the portion of your contributions that
exceeds your taxable compensation. You
will not be taxed on the distributed
amount if you receive the distribution on
or before the deadline for filing your
2001 federal individual income tax return
after applying the deadline extension pro-
visions. You may not take a deduction
with respect to these distributed contribu-
tions. You must also withdraw the amount
of net income attributable to the distrib-
uted contributions while they were assets
of the IRA. That portion of the net
income is includible in your gross income
for 2001. For further information, see
Publication 590,Individual Retirement
Arrangements (IRAs).
Q-33: Assuming the same facts as ques-
tion 32, how will the financial institution
that distributes my 2001 IRA contribu-
tions to me report this distribution?
A-33: The financial institution will report
the entire amount of the distribution
(2001 distributed contributions and attrib-
utable net income) on Form 1099–R,Dis-
tributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc. However, it
should report only the amount of any net
income attributable to the distributed con-
tributions as the“Taxable amount”on
Form 1099–R.
PART 4—INQUIRIES
Taxpayers within the United States
may seek assistance by calling the IRS at
1–800–829–1040. Taxpayers outside the
United States may call the IRS in Phila-
delphia, PA, at (215) 516–2000 or via fax
at (215) 516–2555 (these are not toll-free
numbers).
The IRS offices in Italy, Germany,
France, England, Singapore, and Japan
can also assist you with your federal
income tax questions. You may contact
the Rome office by calling [39] (06)
4674–2560, or via fax at [39] (06) 4674–
2223; the Berlin office at [49] (30) 8305–
March 4, 20025712002–9 I.R.B.

1140, or via fax at [49] (30) 8305–1145;
the Paris office at [33] (1) 4312–2555, or
via fax at [33] (1) 4312–4758; the Lon-
don office at [44] (207) 408–8077, or via
fax at [44] (207) 495–4224; the Singapore
office at [65] 476–9413, or via fax at [65]
476–9030; and the Tokyo office at [81]
(3) 3224–5466, or via fax at [81] (3)
3224–5274.
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I,§§103, 702, 706, 707, 851, 852;
1.706–1.)
Rev. Proc. 2002–16
SECTION 1. PURPOSE
This revenue procedure allows certain
partnerships that invest in assets exempt
from taxation under§103 of the Internal
Revenue Code to make an election that
enables money market fund partners to
take into account monthly the inclusions
required under§§702 and 707(c).
SECTION 2. BACKGROUND
Certain money market funds seek
investments with a yield that reflects cur-
rent short-term exempt interest rates and
that is treated for federal income tax pur-
poses as being composed of interest
exempt from tax under§103. For pur-
poses of this revenue procedure, a money
market fund is a fund described in the
Securities and Exchange Commission’s
Rule 2a–7 (Rule 2a–7), 17 CFR 270.2a–7,
issued under the Investment Company
Act of 1940, 15 U.S.C. 80a–1et seq. One
investment that offers these advantages is
an instrument that might be described as
a synthetic tax-exempt variable-rate bond.
To create such an instrument, a sponsor or
an affiliate (the Sponsor) purchases
(either at original issue or on the second-
ary market) an obligation the interest
income on which is excluded under§103
(§103 obligation) and transfers the§103
obligation to an entity that qualifies as a
partnership for federal tax purposes (tax-
exempt bond partnership). The tax-
exempt bond partnership issues two
classes of equity interests: a preferred
interest that is entitled to a variable return
on its capital contribution (preferred inter-
est), and a second class of ownership
interest that is entitled to all of the
remaining income of the partnership
(residual interest). The variable return on
the preferred interest tracks current short-
term exempt yields.
Under§702(b), if a partnership
receives income that is exempt from tax
under§103, the income retains its char-
acter when the partnership allocates it to
a partner. Under§706(a), a partner
includes in taxable income for a taxable
year the partner’s allocable share of items
of partnership income, gain, loss, deduc-
tion, and credit for the partnership’s tax-
able year ending within or with the part-
ner’s taxable year.
Section 852(a) provides generally that
a regulated investment company (RIC),
including a RIC that is a money market
fund, must distribute each taxable year at
least 90 percent of its net interest income
that is excludible from gross income
under§103(a). Section 852(b)(5) pro-
vides that if, at the close of each quarter
of the RIC’s taxable year, at least 50 per-
cent of the value (as defined in
§851(c)(4)) of the total assets of the RIC
consists of obligations described in
§103(a), the RIC is qualified to pay
exempt-interest dividends (as defined in
§852(b)(5)(A)) to its shareholders. Under
§852(b)(5)(A), an exempt-interest divi-
dend means any dividend or part thereof
paid by a RIC and designated by the RIC
as an exempt-interest dividend in a writ-
ten notice mailed to its shareholders not
later than 60 days after the close of the
RIC’s taxable year.
To maintain a constant net asset value
for each share of stock, as is described in
Rule 2a–7, money market funds com-
monly declare dividends daily and pay
dividends monthly. (In this paragraph and
the next, the word“dividend”refers to a
distribution that is treated as a dividend
for purposes of state corporate law and
federal securities law, whether or not the
distribution is also treated as a dividend
for purposes of the Code.) In the case of
a money market fund that intends to pay
exempt interest dividends, substantially
all of the fund’s income typically will be
exempt from tax under§103. If, how-
ever, such a money market fund has a
taxable year that differs from that of a
tax-exempt bond partnership in which it
holds an interest, there may be a mis-
match between the money market fund’s
monthly distribution of income and the
money market fund’s inclusion of its dis-
tributive share of partnership income
under§706(a). As a result, the money
market fund’s distribution of tax-exempt
income may be treated as a return of capi-
tal. Alternatively, the money market fund
may distribute less than its entire distribu-
tive share of partnership income for the
taxable year.
For example, assume that on January
2, 2002, a money market fund with a tax-
able year ending June 30 acquires a pre-
ferred interest in a tax-exempt bond part-
nership with a taxable year ending
December 31. Under§706(a), the money
market fund’s distributive share of the
tax-exempt bond partnership’s income for
the money market fund’s taxable year
ending June 30, 2002, is zero. If the
money market fund’s daily dividends do
not reflect its portion of the interest that
the partnership earns between January 2
and June 30, the fund will be unable to
maintain a constant net asset value for
each share of its stock. (Whether or not
the tax-exempt bond partnership distrib-
utes the exempt interest to the money
market fund as that interest is earned, the
per share net asset value of the fund will
rise if the fund does not make continual
distributions to its shareholders to reflect
those partnership earnings.) On the other
hand, if the money market fund’s daily
dividends are based in part on the income
earned by the partnership between Janu-
ary 2, 2002, and June 30, 2002, the distri-
butions made by the money market fund
during its taxable year ending June 30,
2002, will exceed the includible tax-
exempt income for the year, causing all or
a portion of those distributions to be char-
acterized as a return of capital.
The Treasury Department and the
Internal Revenue Service have deter-
mined that it is in the best interest of
sound tax administration to allow certain
money market funds to take into account
on a monthly basis their distributive
shares of partnership items if the partner-
ship makes a proper election under this
revenue procedure.
2002–9 I.R.B.572March 4, 2002

SECTION 3. SCOPE
This revenue procedure applies to eli-
gible partnerships (described in section
3.01 of this revenue procedure) that elect
to close their books monthly (the Monthly
Closing Election) and to eligible partners
(described in section 3.02 of this revenue
procedure) that consent to take into
account their distributive shares of part-
nership income on a monthly basis (the
Monthly Closing Consent).
.01Eligible Partnership.
(1)Generally. An entity is an eli-
gible partnership if all of the following
conditions are met as of the test date:
(a) The entity is a partnership for
federal tax purposes;
(b) All allocations of income,
gain, loss, deduction, and credit of the
partnership have substantial economic
effect; and
(c) At least 95 percent of the part-
nership’s income for the test period was
(or is reasonably expected to be) income
that is exempt from tax under§103.
(i) If, on the test date, the part-
nership has been in existence for at least
6 full calendar months, then the test
period is the 6 full calendar months pre-
ceding the test date; and
(ii) If, on the test date, the part-
nership has not been in existence for at
least 6 full calendar months, then the test
period is the first 6 full calendar months
of the partnership’s existence.
(2)Test Date. The test date is the
first day of the month for which the
Monthly Closing Election is effective.
.02Eligible Partner. A partner is an
eligible partner if it is a RIC, as defined
in§851, that is entitled to hold itself out
as a money market fund, or the equivalent
of a money market fund, in accordance
with the provisions of Rule 2a–7(b).
SECTION 4. MONTHLY CLOSING
ELECTION AND CONSENT
.01Effect of Election and Consent. If,
at the end of any calendar month, an eli-
gible partnership has a Monthly Closing
Election in effect and one or more eli-
gible partners of the partnership has a
Monthly Closing Consent in effect, then,
with respect to each such partner, the
partnership must close its books as
described in§1.706 1(c)(2) of the
Income Tax Regulations as if the partner
had sold its entire interest in the partner-
ship on the last day of that month. The
partner must include in its taxable income
for that month the partner’s distributive
share of items described in§702(a)
earned by the partnership since the last
closing of the books with respect to that
partner and any guaranteed payments
under§707(c) to the partner that are
deductible by the partnership since the
last closing of the books with respect to
that partner. If the partner is on a 52–53
week taxable year, then the provisions of
§1.441–2T(e) apply as if the last day of
the month was the last day of the partner-
ship’s taxable year.
.02Reporting Requirements. In con-
nection with this monthly closing of the
books, the partnership must provide each
consenting eligible partner information
with respect to the partner’s distributive
share of items described in§702(a) and
any guaranteed payments under§707(c).
To satisfy this requirement, the partner-
ship may use a Schedule K-1 (Form
1065),Partner’s Share of Income, Cred-
its, Deductions, etc., or any other docu-
ment or electronic communication that
provides substantially equivalent informa-
tion (monthly statements). The partner-
ship and each consenting eligible partner
must maintain the monthly statements but
should not file them with the Service. At
the end of its taxable year the partnership
must provide a single Schedule K-1
(Form 1065) to each of its partners (both
the consenting and the nonconsenting
partners). In the case of a consenting eli-
gible partner, this single annual Schedule
K-1 must include all amounts shown on
the monthly statements issued to the part-
ner.
SECTION 5. MONTHLY CLOSING
ELECTION
.01Manner of Partnership Making the
Election. An eligible partnership may
make a Monthly Closing Election by fil-
ing a statement with the appropriate ser-
vice center. The statement must be titled
“ELECTION UNDER REVENUE PRO-
CEDURE 2002–16,”and must include:
(1) Identification of the partnership
by name, address, and EIN, and the name
and phone number of a contact person for
the partnership;
(2) A statement that the partnership
elects a monthly closing of the books for
all present and future consenting eligible
partners;
(3) The signature of a person with
authority to sign the partnership’s Form
1065,U.S. Return of Partnership Income;
and
(4) The effective month of the elec-
tion. The election is effective for the cal-
endar month in which the election is
filed, unless the partnership requests the
election to be effective for either of the
two immediately preceding calendar
months. For example, if a calendar year
partnership states that the monthly clos-
ing system is to begin for June, the part-
nership will close its books June 30. Con-
senting eligible partners must include
their shares of partnership items and guar-
anteed payments for the period from the
last closing of the books (generally
December 31 of the prior year) through
June 30. There will be a closing of the
books and a monthly inclusion of the
partner’s share of these items and guaran-
teed payments at the end of each future
month.
.02Time for Making the Election. The
partnership’s Monthly Closing Election
may be made at any time. See, however,
section 6.03 of this revenue procedure for
limitations on the time for a partner to
effect a Monthly Closing Consent.
SECTION 6. MONTHLY CLOSING
CONSENT
.01Manner of Partner Effecting the
Consent.
(1) An eligible partner effects a
Monthly Closing Consent by providing a
statement of consent to the custodian or
manager of the partnership. The statement
of consent should also be attached to the
partner’s Form 1120RIC,U.S. Income
Tax Return for Regulated Investment
Companies, for the first taxable year in
which the consent is effective. Failure to
attach the partner’s statement of consent
to the partner’s Form 1120RIC does not
invalidate the partner’s consent, however.
(2) The statement of consent must
be titled“STATEMENT OF CONSENT
TO ELECTION UNDER REVENUE
PROCEDURE 2002–16”and must
include:
(a) Identification of both the con-
senting partner and the partnership by
March 4, 20025732002–9 I.R.B.

name, address, and EIN, and the name
and phone number of a contact person for
each;
(b) A statement that the partner
consents to the partnership’s election to a
monthly closing of the books and that the
partner will include in its taxable income
its distributive share of partnership items
described in§702(a) and any guaranteed
payments under§707(c) in a manner that
is consistent with the election;
(c) The signature of an officer of
the partner who is authorized to act on
behalf of the partner; and
(d) The effective month of the
consent. The consent is effective for the
calendar month in which the partner
acquires the partnership interest, unless
the partner requests that the consent be
effective for either of the two immedi-
ately following calendar months.
.02Additional Requirements for Mak-
ing a Valid Monthly Closing Consent.An
eligible partner does not qualify for the
treatment described in section 4 of this
revenue procedure unless:
(1) The partner provides the state-
ment of consent described in section 6.01
of this revenue procedure to the custodian
or manager of the partnership no later
than the last day of the second calendar
month after the calendar month in which
the partner acquires the partnership inter-
est; and
(2) The partnership’s Monthly
Closing Election is effective no later than
the second calendar month after the cal-
endar month in which the partner acquires
the partnership interest.
SECTION 7. TERMINATION OF
MONTHLY CLOSING ELECTION OR
MONTHLY CLOSING CONSENT
.01 A Monthly Closing Election or
Monthly Closing Consent may be
revoked only with the consent of the
Commissioner.
.02 Each month after the first calendar
quarter in which a partnership’s Monthly
Closing Election is effective, the defini-
tion of eligible partnership in section 3.01
of this revenue procedure is reapplied to
the partnership, using the last day of the
month as the test date and that month and
the preceding 2 months as the test period.
If for any month the partnership fails to
satisfy the test mandated by the preceding
sentence, then the partnership’s Monthly
Closing Election is terminated as of first
day of the month. Even if the partnership
subsequently qualifies as an eligible part-
nership, it may not make another Monthly
Closing Election without the Commis-
sioner’s consent.
.03 If a consenting partner’s status as
an eligible partner (as defined in section
3.02 of this revenue procedure) changes
at any time, the partner’s Monthly Clos-
ing Consent is ineffective on any day
when that definition is not satisfied and is
effective on any day when it is. There-
fore, no new Monthly Closing Consent is
required when a consenting partner sells
one interest in an electing partnership and
acquires another interest in the same part-
nership at a time when the partnership
continues to have its Monthly Closing
Election in effect.
SECTION 8. TRANSITION RULES
FOR SOME ELECTIONS AND
CONSENTS THAT ARE REQUESTED
TO BECOME EFFECTIVE DURING
2002
.01Certain Monthly Closing Elections
Filed During 2002. If, using March 1,
2002, as the test date, a partnership is an
eligible partnership, or is an existing but
ineligible partnership, and, at any time
during 2002, the partnership files the
statement described in section 5.01 of this
revenue procedure, then, in addition to
the permissible effective dates described
in section 5.01(4) of this revenue proce-
dure, the partnership may request that the
Monthly Closing Election become effec-
tive for any month in 2002 in which the
partnership is an eligible partnership.
.02Certain Monthly Closing Consents
Provided to an Eligible Partnership Dur-
ing 2002. In the case of any eligible part-
nership that is described in section 8.01
of this revenue procedure and that files its
Monthly Closing Election during 2002,
any RIC that is an eligible partner of that
partnership at any time during 2002 may
effect a Monthly Closing Consent by
either:
(1) Complying with the procedures
set forth in section 6 of this revenue pro-
cedure; or
(2) Satisfying section 6.01 of this
revenue procedure at any time during
2002. In this case, the consent is effective
for the month in which the partner pro-
vides the statement of consent to the cus-
todian or manager of the partnership,
unless the partner requests that the con-
sent be effective for any other calendar
month of 2002.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective on
January 1, 2002. However, for the period
prior to January 1, 2003, the Service will
not challenge a money market fund’s
monthly inclusion of its distributive share
of partnership items described in§702(a)
and guaranteed payments described in
§707(c) in a manner similar to that
described in section 4 of this revenue pro-
cedure, provided that, had this revenue
procedure been in effect at the time of the
inclusion, (1) the partnership to which the
items and payments are attributable
would have been an eligible partnership,
and (2) the partner would have been an
eligible partner.
SECTION 10. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1768. An agency may not conduct
or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
The collection of information is in sec-
tions 4, 5, and 6 of this revenue proce-
dure. This information is required to
inform the Service which partners and
partnerships are making the designated
election and to report income appropri-
ately. The collection of information is
required to obtain a benefit. The likely
respondents are businesses.
The estimated total annual reporting
and recordkeeping burden is 12000 hours.
The estimated annual burden per
respondent/recordkeeper is 12 hours. The
estimated number of respondents and
recordkeepers is 1000.
The estimated annual frequency of
responses (used for reporting require-
ments only) is once.
Books or records relating to a collec-
tion of information must be retained as
2002–9 I.R.B.574March 4, 2002

long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
SECTION 11. DRAFTING
INFORMATION
The principal author of this revenue
procedure is David A. Shulman of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact David A. Shulman at
202-622-3080 (not a toll-free call).
March 4, 20025752002–9 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Golden Parachute Payments
REG–209114–90
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to golden
parachute payments to provide guidance
to taxpayers who must comply with sec-
tion 280G. Proposed regulations under
section 280G (PS–217–84, 1989–1 C.B.
1038) were previously published in the
Federal Registeron May 5, 1989, and
corrected in 54 FR 25879 (June 20, 1989)
and 54 FR 29061 (July 11, 1989) (the
1989 proposed regulations). These pro-
posed regulations are proposed to apply
to any payments that are contingent on a
change in ownership or control that
occurs on or after January 1, 2004. Tax-
payers may rely on these proposed regu-
lations until the effective date of the final
regulations. Alternatively, taxpayers may
rely on the 1989 regulations for any pay-
ment contingent on a change in owner-
ship or control that occurs prior to Janu-
ary 1, 2004.
DATES: Written or electronic comments
must be received by June 5, 2002.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for June 26, 2002, must be
received by June 5, 2002.
ADDRESSES: Send submissions to
CC:ITA:RU (REG–209114–90), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (REG–209114–90), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, DC or sent electronically, via the IRS
Internet sitewww.irs.gov/regs. The public
hearing will be held in the IRS Audito-
rium, Internal Revenue Building,1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Erinn
Madden at (202) 622–6060 (not a toll-
free number). To be placed on the atten-
dance list for the hearing, please contact
LaNita M. Vandyke at (202) 622–7180.
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 280G of the Internal Revenue Code
(Code). Sections 280G and 4999 of the
Code were added to the Code by sec. 67
of the Deficit Reduction Act, Public Law
98–369 (98 Stat. 585). Section 280G was
amended by sec. 1804(j) of the Tax
Reform Act of 1986, Public Law 99–514
(100 Stat. 2807), sec. 1018(d) of the
Technical and Miscellaneous Revenue
Act of 1988, Public Law 100–647 (102
Stat. 3581) and sec. 1421 of the Small
Business Job Protection Act of 1996,
Public Law 104–188 (110 Stat. 1755).
Section 280G denies a deduction to a
corporation for any excess parachute pay-
ment. Section 4999 imposes a 20-percent
excise tax on the recipient of any excess
parachute payment. Related provisions
include section 275(a)(6), which denies
the recipient a deduction for the section
4999 excise tax, and section 3121(v)
(2)(A), which relates to the Federal Insur-
ance Contributions Act. Proposed regula-
tions (PS–217–84) under section 280G
were previously published in theFederal
Registerat 54 FR 19390 on May 5, 1989,
and corrected in 54 FR 25879 (June 20,
1989) and 54 FR 29061 (July 11, 1989)
(the 1989 proposed regulations).
Explanation of Provisions
Overview
Section 280G denies a deduction to a
corporation for any excess parachute pay-
ment. Section 4999 imposes a 20-percent
excise tax on the recipient of any excess
parachute payment. The disallowance of
the deduction under section 280G is not
contingent on the imposition of the excise
tax under section 4999, and the imposi-
tion of the excise tax under section 4999
is not contingent on the disallowance of
the deduction under section 280G. For
example, an individual may be subject to
the 20-percent excise tax under section
4999 even though the payor is a foreign
corporation not subject to United States
income tax.
Section 280G(b)(2)(A) defines apara-
chute paymentas any payment that meets
all of the following four conditions: (a)
the payment is in the nature of compensa-
tion; (b) the payment is to, or for the ben-
efit of, a disqualified individual; (c) the
payment is contingent on a change in the
ownership of a corporation, the effective
control of a corporation, or the ownership
of a substantial portion of the assets of a
corporation (a change in ownership or
control); and (d) the payment has
(together with other payments described
in (a), (b), and (c) of this paragraph with
respect to the same individual) an aggre-
gate present value of at least 3 times the
individual’s base amount. Section
280G(b)(2)(B) provides that the term
parachute paymentalso includes any pay-
ment in the nature of compensation to, or
for the benefit of, a disqualified indi-
vidual if the payment is pursuant to an
agreement that violates any generally
enforced securities laws or regulations
(securities violation parachute payment).
Section 280G(b)(1) defines the term
excess parachute paymentas an amount
equal to the excess of any parachute pay-
ment over the portion of the disqualified
individual’s base amount that is allocated
to such payment. For this purpose, the
portion of the base amount allocated to a
parachute payment is the amount that
bears the same ratio to the base amount as
the present value of the parachute pay-
ment bears to the aggregate present value
of all such payments to the same disquali-
fied individual.
Generally, excess parachute payments
may be reduced by certain amounts of
reasonable compensation. Section
280G(b)(4)(B) provides that, except in
the case of securities violation parachute
payments, the amount of an excess para-
chute payment is reduced by any portion
2002–9 I.R.B.576March 4, 2002

of the payment that the taxpayer estab-
lishes by clear and convincing evidence is
reasonable compensation for personal ser-
vices actually rendered by the disquali-
fied individual before the date of change
in ownership or control. Such reasonable
compensation is first offset against the
portion of the base amount allocated to
the payment.
The 1989 proposed regulations pro-
vided guidance regarding the application
of section 280G to corporations and indi-
viduals. Although many aspects of the
1989 proposed regulations were well-
received, the IRS has received numerous
comments requesting modification and
clarification of the 1989 proposed regula-
tions. In response, these proposed regula-
tions clarify and revise, as described
below, the 1989 proposed regulations.
Many aspects of the 1989 proposed regu-
lations are preserved, and these proposed
regulations retain the same organizational
structure as the 1989 proposed regula-
tions. Major modifications to the 1989
proposed regulations are described below.
Disqualified Individuals
A payment constitutes a parachute
payment only if the payment is made to
(or for the benefit of) a disqualified indi-
vidual. Section 280G(c) defines the term
disqualified individualto include any
individual who (a) is an employee or
independent contractor who performs per-
sonal services for a corporation, and (b) is
an officer, shareholder, or highly-
compensated individual.
The determination of whether an indi-
vidual is a disqualified individual under
these proposed regulations is substantially
the same as under the 1989 proposed
regulations, with three significant
changes. First, Q/A-17 of the 1989 regu-
lations provides ade minimisrule for pur-
poses of identifying which shareholders
of a corporation are disqualified individu-
als. Under the 1989 proposed regulations,
an individual is a shareholder for pur-
poses of section 280G if the individual, at
any time during the disqualified indi-
vidual determination period, owns stock
of a corporation with a fair market value
exceeding the lesser of $1 million or 1
percent of the total fair market value of
the outstanding shares of all classes of the
corporation’s stock. Since the issuance of
the 1989 proposed regulations, it has
become apparent that this rule may
include individuals who do not possess
significant influence over the corporation.
Therefore, under Q/A-17 of these pro-
posed regulations, the $1 million test is
eliminated. Under these proposed regula-
tions, an individual is a shareholder only
if, during the disqualified individual
determination period, the individual owns
stock of a corporation with a fair market
value that exceeds 1 percent of the total
fair market value of the outstanding
shares of all classes of the corporation’s
stock. The constructive ownership rules
of section 318(a) continue to apply for
purposes of determining the amount of
stock owned by the individual. Under
these rules, for example, to determine the
amount of stock owned by an individual,
the stock underlying vested stock options
is considered constructively owned by
that individual.
Second, these proposed regulations
modify the annualized compensation
method for determining who is a highly-
compensated individual under Q/A-19.
Under the 1989 proposed regulations, no
individual whose annualized compensa-
tion during the disqualified individual
determination period is less than $75,000
is treated as a highly-compensated indi-
vidual, even if the individual otherwise
satisfies the definition of a highly-
compensated individual. Q/A-19 is modi-
fied to provide that an individual must
have annualized compensation equal to at
least the amount described in section
414(q)(1)(B)(i). This amount for 2002 is
$90,000 and is adjusted periodically for
cost-of-living increases. This modifica-
tion both updates the amount provided in
the 1989 proposed regulations and pro-
vides a mechanism to update this amount
periodically without further amendment
of these regulations.
Finally, these proposed regulations
change the disqualified individual deter-
mination period under Q/A-20. Under the
1989 proposed regulations, the disquali-
fied individual determination period is the
portion of the year of the corporation end-
ing on the date of the change in owner-
ship or control and the immediately pre-
ceding twelve months (with an option to
use the calendar year or the corporation’s
fiscal year). Q/A-20 of these proposed
regulations is modified to change this
period to the twelve months prior to and
ending on the date of the change in own-
ership or control of the corporation.
Under this rule, the disqualified indi-
vidual determination period is the same
length for any change in ownership or
control and is not affected by the date of
the change in ownership or control.
Payment in the Nature of Compensation
A payment may be a parachute pay-
ment only if it is a payment in the nature
of compensation. All payments, in what-
ever form, are payments in the nature of
compensation if the payments arise out of
the employment relationship or are asso-
ciated with the performance of services.
In Q/A-11, these proposed regulations
clarify that payments in the nature of
compensation include cash, the right to
receive cash, or a transfer of property.
Q/A-13 of the 1989 proposed regula-
tions provides that the transfer of a non-
statutory option is treated as a payment in
the nature of compensation (even if the
option does not have a readily ascertain-
able fair market value within the meaning
of§1.83–7(b)). The 1989 proposed regu-
lations reserve the issue of the treatment
of statutory options (i.e., options to which
section 421 applies). These proposed
regulations revise Q/A-13 to address the
treatment of statutory stock options to
provide that nonstatutory stock options
and statutory stock options are treated the
same. Because both the transfer of a
statutory option and the transfer of a non-
statutory stock option are payments in the
nature of compensation, there is no basis
for distinguishing between these two
types of options for purposes of section
280G.
In addition, these proposed regulations
revise Q/A-13 with respect to the valua-
tion of both statutory and nonstatutory
stock options. Under the 1989 proposed
regulations, the value of an option with
an ascertainable fair market value is
determined under all the facts and cir-
cumstances, including the difference
between the option’s exercise price and
the value of the property at the time of
vesting, the probability of an increase or
decrease in the value of such property,
and the length of the option exercise
period.
Since the issuance of the 1989 pro-
posed regulations, commentators have
indicated that Q/A-13 does not provide
March 4, 20025772002–9 I.R.B.

sufficient guidance about the determina-
tion of the value of a stock option. In par-
ticular, commentators question whether
the intrinsic value of the option (the dif-
ference between the exercise price and
the value of the property, or spread) deter-
mined at the time of the change in own-
ership or control, or a value determined
under a valuation model such as Black-
Scholes, should be used for purposes of
section 280G. Using the factors listed in
the 1989 proposed regulations results in a
value different from the value obtained
from using only the difference between
the exercise price and the value of the
property. Commentators have also noted
that valuation methods other than spread
are often complicated and difficult to
apply in some circumstances, particularly
when the stock underlying the option is
not publicly traded.
These proposed regulations continue
to provide for the use of the factors
described in the 1989 proposed regula-
tions. To provide further guidance on
acceptable and administrable methods for
valuing stock options, these proposed
regulations delegate authority to the
Commissioner to provide methods for
valuation of stock options through pub-
lished guidance. Rev. Proc. 2002–13
(2002–8 I.R.B. 549) (February 25, 2002)
published in conjunction with these pro-
posed regulations, provides several valua-
tion methods. One of the methods permit-
ted under this revenue procedure is a
simplified safe harbor approach modeled
after the Black-Scholes valuation method.
The safe harbor allows a corporation to
establish a value for stock options based
on spread at the time of the change in
ownership or control, the remaining term
of the option, and a basic assumption
regarding the volatility of the underlying
stock. Other factors relevant to the Black-
Scholes valuation model, including a risk-
free rate of return and dividend yield, are
addressed in the table contained in the
revenue procedure. The safe harbor valu-
ation method provided in the revenue pro-
cedure may be used without regard to
whether the underlying stock is publicly
traded.
Contingent on Change
To be a parachute payment, a payment
in the nature of compensation to a dis-
qualified individual must be contingent
on a change in ownership or control.
Q/A-22 of the 1989 proposed regulations
provides guidance on when a payment is
contingent on a change in ownership or
control. Generally, a payment is treated as
contingent on a change in ownership or
control if the payment would not in fact
have been made had no change in owner-
ship or control occurred. A payment gen-
erally is treated as one which would not
in fact have been made in the absence of
a change in ownership or control unless it
is substantially certain, at the time of the
change, that the payment would have
been made whether or not the change in
ownership or control occurred.
These proposed regulations clarify in
Q/A-22 that a payment is contingent on a
change in ownership or control if the pay-
ment would not have been made absent
the change in ownership or control, even
if the payment is also contingent on a sec-
ond event, such as termination of employ-
ment within a period following the
change in ownership or control. In addi-
tion, as under the 1989 proposed regula-
tions, a payment generally is treated as
contingent on a change in ownership or
control if (a) the payment is contingent on
an event that is closely associated with
such a change, (b) a change in ownership
or control actually occurs, and (c) the
event is materially related to the change
in ownership or control. The fact that a
payment that is contingent on an event
closely associated with a change in own-
ership or control is also conditioned on
the occurrence of a second event does not
affect the determination that the payment
is contingent on a change in ownership or
control as the result of the occurrence of
the first event.
Under Q/A-24 of the 1989 proposed
regulations, the entire amount of a pay-
ment is generally treated as contingent on
a change in ownership or control. These
proposed regulations clarify that the gen-
eral rule of Q/A-24(a) (and not the special
rules in either Q/A-24(b) or (c), discussed
below) applies to the payment of amounts
due under an employment agreement on a
termination of employment or change in
ownership or control that, without regard
to the change, would have been paid for
the performance of services after the ter-
mination of employment or change in
ownership or control, as applicable. Also,
the general rules of Q/A-24(a) apply to
the accelerated payment of an amount
that is otherwise payable only on the
attainment of a performance goal or con-
tingent on an event or condition other
than the continued performance of ser-
vices for a specified period of time. In
situations governed by Q/A-24(a), the
determination of whether a portion of the
payment is reasonable compensation for
services rendered before, on, or after the
change in ownership or control is deter-
mined under Q/As-38 through 44. With
respect to amounts due under an employ-
ment agreement, however, in most situa-
tions, a reduction for reasonable compen-
sation for services rendered before the
change in ownership or control is inap-
propriate, given the general expectation
that an individual is not under-
compensated for services rendered before
a change in ownership or control. See
Conf. Rep. No. 98–861, at 852 (1984).
Q/A-24(b) and (c) provide an objective
method for determining the portion of a
payment that is treated as contingent on a
change in ownership or control for certain
types of payments. These rules are not
appropriate in situations such as the
acceleration of salary payments under an
employment agreement, when the peri-
odic nature of the payments for services
means that there is no issue in determin-
ing the amount of the payment that is
accelerated, or in situations where a pay-
ment is conditioned on achievement of a
performance goal or other event.
As under the 1989 proposed regula-
tions, these proposed regulations provide
that a payment is treated as contingent on
a change in ownership or control if the
change accelerates the time at which the
payment is made or accelerates the vest-
ing of a payment. Q/A-24(b) and (c) pro-
vide rules for determining the portion of
such payment that is treated as contingent
on the change in ownership or control.
These proposed regulations clarify when
Q/A-24(b) and (c) apply to a contingent
payment.
These proposed regulations clarify that
Q/A-24(b) applies if a payment is vested,
without regard to the change in ownership
or control, and is treated as contingent on
a change in ownership or control because
the change accelerates the time the pay-
ment is made. For example, if an indi-
vidual has a vested right to a payment at
2002–9 I.R.B.578March 4, 2002

normal retirement age under a nonquali-
fied deferred compensation plan, but
instead that payment is made immediately
following a change in ownership or con-
trol, Q/A-24(b) applies to determine the
portion, if any, of the payment that is
treated as contingent on the change in
ownership or control.
These regulations clarify that Q/A-
24(c) applies to a payment that becomes
vested as a result of a change in owner-
ship or control to the extent that (i) with-
out regard to the change, the payment
was contingent only on the performance
of services for the corporation for a speci-
fied period of time and (ii) the payment is
attributable, at least in part, to the perfor-
mance of services before the date the pay-
ment is made or becomes certain to be
made. For example, if an individual will
receive a bonus if employed at the end of
a 3-year period, but the bonus is paid
immediately on the date of the change of
control, Q/A-24(c) applies to determine
the portion of the payment that is treated
as contingent on the change in ownership
or control.
Q/A-24(b) provides that, when a pay-
ment is accelerated, the portion of the
payment that is contingent on the change
is the amount by which the accelerated
payment exceeds the present value of the
payment absent acceleration. Q/A-24(b)
further provides that if the amount of a
payment without acceleration is not rea-
sonably ascertainable, and the accelera-
tion does not significantly increase the
value of the payment, then the present
value of the payment absent the accelera-
tion is equal to the amount of the acceler-
ated payment. As a result, the value of the
accelerated payment is equal to the value
of the payment absent acceleration and no
portion of the payment is treated as con-
tingent on a change in control. If the
value of a payment absent acceleration is
not reasonably ascertainable and the
acceleration significantly increases the
value of the payment, the future value of
the payment is equal to the amount of the
accelerated payment. When the future
value (as opposed to the present value) of
the payment is deemed to be the amount
of the accelerated payment, then there is
an excess and, therefore, a portion of the
payment is treated as contingent on the
change.
Q/A-24(c) provides that the portion of
the payment treated as contingent on the
change when both vesting and payment
are accelerated is the lesser of (1) the
payment or (2) the amount determined
under Q/A-24(b) plus an additional
amount to reflect the lapse of the obliga-
tion to perform additional services. Q/A-
24(c) provides that for purposes of deter-
mining the amount under paragraph (b),
the acceleration of the vesting of a stock
option or the lapse of a restriction on
restricted stock is considered to increase
significantly the value of the payment.
Because Q/A-24(b) and (c) operate to
provide an objective basis for determin-
ing the portion of a payment that is
earned as of the date of a change in own-
ership or control, and therefore, not con-
tingent on a change in ownership or con-
trol, these proposed regulations clarify
that the rules in Q/As-38 through 44
(which provide rules related to reasonable
compensation for services rendered), are
inapplicable if the special rules in Q/A-
24(b) or (c) apply to a payment.
Change in Ownership or Control
These proposed regulations follow the
same approach as the 1989 proposed
regulations for determining when a
change in ownership or control occurs.
However, these proposed regulations
clarify that, for purposes of determining
whether two or more persons acting as a
group are considered to own more than
50 percent of the total fair market value
or total voting power of the stock of a
corporation on the date of a merger,
acquisition, or similar transaction involv-
ing that corporation, a person who owns
stock in both corporations involved in the
transaction is treated as acting as a group
with respect to the other shareholders in a
corporation only to the extent of such per-
son’s ownership of stock in that corpora-
tion prior to the transaction, and not with
respect to his or her ownership in the
other corporation. For example, assume
individual A owns stock in both Corpora-
tions X and Y when Corporation X
acquires stock in Y in exchange for X
stock. In determining whether Corpora-
tion Y has undergone a change in owner-
ship or control, individual A is considered
to be acting as a group with other share-
holders in Corporation Y only to the
extent of A’s holdings in Corporation Y
prior to the transaction, and not with
respect to A’s ownership in X. In deter-
mining whether Corporation X has under-
gone a change in ownership or control,
individual A is considered to be acting as
a group with other shareholders in Corpo-
ration X only to the extent of individual
A’s holdings in Corporation X prior to the
transaction, and not with respect to indi-
vidual A’s ownership interest in Corpora-
tion Y. This rule applies without regard to
the type of shareholder involved (i.e.,
whether the shareholder is an individual
or an institutional shareholder, such as a
corporation, mutual fund, or trust).
Comments are requested with respect
to whether the change in ownership or
control rules in these proposed regula-
tions should be further revised. Com-
ments are also requested with respect to
whether additional guidance is necessary
regarding the application of the change in
ownership or control provisions, and
these proposed regulations in general, in
the context of specific business situations
such as bankruptcy.
Shareholder Approval Requirements
Section 280G specifically exempts
from the definition of the termparachute
paymentseveral types of payments that
would otherwise constitute parachute
payments. Deductions for payments
exempt from the definition ofparachute
paymentare not disallowed by section
280G, and such exempt payments are not
subject to the 20-percent excise tax of
section 4999. In addition, such exempt
payments are not taken into account in
applying the 3-times-base-amount test of
section 280G(b)(2)(A)(ii).
The most significant revisions made
by these proposed regulations with
respect to exempt payments are clarifica-
tions to the shareholder approval require-
ments which must be met for payments
with respect to a corporation in which no
stock is readily tradeable on an estab-
lished securities market or otherwise
immediately before the change in owner-
ship or control.
Section 280G(b)(5)(B) provides that
the shareholder approval requirements are
met if two conditions are satisfied. First,
the payment is approved by a vote of the
persons who owned, immediately before
the change in ownership or control, more
March 4, 20025792002–9 I.R.B.

than 75% of the voting power of all out-
standing stock of the corporation. Second,
there is adequate disclosure to sharehold-
ers of all material facts concerning all
payments which (but for this rule) would
be parachute payments with respect to a
disqualified individual. Since the issuance
of the 1989 proposed regulations, com-
mentators have indicated that the 1989
proposed regulations do not fully explain
how the shareholder approval require-
ments operate or accurately reflect busi-
ness practices connected with a change in
ownership or control.
The proposed regulations clarify the
process of obtaining shareholder approval
within the structure provided by section
280G(b)(5)(B). Under this section, a
shareholder approval vote is valid only if
(1) it is a vote of more than 75% of the
shareholders entitled to vote based on
ownership in the corporation immediately
before the change in ownership or con-
trol, and (2) disclosure is made with
respect to all payments that would other-
wise be parachute payments for an indi-
vidual.
The first step in obtaining shareholder
approval is to identify the shareholders
entitled to vote. Q/A-7 is revised to
clarify that stock held by a disqualified
individual (or by certain entity sharehold-
ers) is not entitled to vote with respect to
a payment to be made to any disqualified
individual and that this stock is disre-
garded in determining whether the more
than 75% approval requirement has been
met. Once the stock entitled to vote is
determined, more than 75% of the voting
power of such stock must approve the
payment. Q/A-7 also includes a rule of
administrative convenience providing that
a vote to approve the payment does not
fail to be a vote of the shareholders who
own stock immediately before the change
in ownership or control if eligibility to
vote is based on the shareholders of
record at the time of any vote taken in
connection with a transaction or event
giving rise to the change in ownership or
control within the three-month period
ending on the date of the change in own-
ership or control. This rule only applies if
the disclosure requirements are also met.
These proposed regulations further
clarify that not all parachute payments
must be subject to a shareholder vote to
satisfy the shareholder approval require-
ments with respect to a payment. It is per-
missible for only a portion of the pay-
ments that would otherwise be made to a
disqualified individual to be subject to
vote. For example, assume that a disquali-
fied individual with a base amount of
$150,000 would receive payments that
(but for the exemption for a corporation
with no readily tradeable stock) would be
parachute payments including (i) a bonus
payment of $200,000, (ii) vesting in stock
options with a fair market value of
$500,000, $200,000 of which is contin-
gent on the change in ownership or con-
trol, and (iii) severance payments of
$100,000. In this situation, assuming all
of the payments are disclosed, the corpo-
ration may submit to the shareholders for
approval (1) all of the payments, (2) any
one of the three payments, or (3) $50,001
of any one of the payments (e.g., options
with a value of $50,001). The issue sub-
mitted to a shareholder vote must be
whether the payment will be made to the
disqualified individual, not whether the
corporation will be able to deduct the
payment. In addition, the vote must be a
separate vote of the shareholders. There-
fore, the merger, acquisition, or other
transaction cannot be conditioned on the
shareholders’approval of the payment.
These proposed regulations also
clarify that the shareholder approval
requirements are met by a single vote on
all payments submitted to the vote,
including payments to more than one dis-
qualified individual (assuming the disclo-
sure requirements, described below, are
also met).
The shareholder approval requirements
also require adequate disclosure of all
material facts concerning the amount of
all parachute payments. For this purpose,
the proposed regulations clarify that the
amount of all parachute payments to be
made to each disqualified individual, and
not just the amount of the payments sub-
ject to vote, is a material fact. These pro-
posed regulations also clarify that share-
holders should be provided with basic
information about the type of payments
involved (e.g., vesting of stock options or
severance payments). This disclosure of
information must be made to all share-
holders entitled to vote, not just to share-
holders with 75% of the voting power
entitled to vote.
Reasonable Compensation
The determination of whether amounts
are reasonable compensation is relevant
for two purposes. First, an excess para-
chute payment is reduced by any portion
of the payment that constitutes reasonable
compensation for services actually ren-
dered before a change in ownership or
control. Second, amounts that are reason-
able compensation for services to be ren-
dered after a change in ownership or con-
trol are exempt from the definition of
parachute payment. In both situations,
reasonable compensation for services
must be demonstrated by clear and con-
vincing evidence.
These proposed regulations clarify two
issues with respect to reasonable compen-
sation for services performed after a
change in ownership or control. The pro-
posed regulations clarify that clear and
convincing evidence that a payment is
reasonable compensation for services ren-
dered after a change in ownership or con-
trol exists if the individual’s annual com-
pensation after the change in ownership
or control (apart from normal increases)
is not significantly greater then the indi-
vidual’s annual compensation before the
change in ownership or control, provided
that the individual’s duties and responsi-
bilities are substantially the same after the
change in ownership or control as they
were before the change in ownership or
control. If the individual’s duties and
responsibilities have changed, then the
clear and convincing evidence must dem-
onstrate that the individual’s annual com-
pensation after the change in ownership
or control is not significantly greater than
the compensation customarily paid by the
employer, or by comparable employers,
to persons performing comparable ser-
vices.
Payments to an individual under an
agreement that requires the individual to
refrain from providing services (such as
under a covenant not to compete) may
also constitute reasonable compensation
for services to be rendered on or after the
date of the change in ownership or con-
trol. Under Q/A-42 of these proposed
regulations, an agreement is treated as an
2002–9 I.R.B.580March 4, 2002

agreement to refrain from services (rather
than an agreement for severance pay) if it
is demonstrated with clear and convinc-
ing evidence that the agreement substan-
tially constrains the individual’s ability to
perform services and there is a reasonable
likelihood that the agreement will be
enforced against the individual. If, under
the facts and circumstances, the agree-
ment does not satisfy these criteria, the
payments under the agreement are instead
treated as severance payments under
Q/A-44. If the agreement does satisfy
these criteria, then the agreement is
treated as an agreement for the perfor-
mance of services, and the payments are
exempt from the definition ofparachute
paymentto the extent the payments are
shown to be reasonable compensation
under Q/A-42(a)(2).
Application to Tax-Exempt Organizations
Commentators have asked whether a
payment with respect to a tax-exempt
entity is exempt from the definition of the
termparachute payment. These proposed
regulations clarify that a payment with
respect to a tax-exempt entity that would
otherwise constitute a parachute payment
is exempt from the definition of the term
parachute paymentif the following two
conditions are satisfied.
First, the payment must be made by a
corporation undergoing a change in own-
ership or control that is atax-exempt
organization, as defined in these pro-
posed regulations. Atax-exempt organiza-
tionis defined as any organization
described in section 501(c) that is subject
to an express statutory prohibition against
inurement of net earnings to the benefit of
any private shareholder or individual, an
organization described in subsections
501(c)(1) or 501(c)(21), any religious or
apostolic organization described in sec-
tion 501(d), or any qualified tuition pro-
gram described in section 529.
Second, the organization must meet
the definition oftax-exempt organization,
as defined in these regulations, both
immediately before and immediately after
the change in ownership or control. If this
second condition is not met, a payment
made by atax-exempt organizationis not
exempt from the definition ofparachute
payment.
As noted above, the termtax-exempt
organizationincludes organizations that
are described in section 501(c) that
already are subject to express statutory
rules that prohibit the inurement of the
net earnings of such organizations to the
benefit of“any private shareholder or
individual.”Organizations described in
the following subsections of 501(c) are
tax-exempt organizations under applica-
tion of this rule: 501(c)(3) (including any
organization described in subsections
501(e), (f), or (k)), 501(c)(4), 501(c)(6),
501(c)(9), 501(c)(11), 501(c)(13) (but
only with respect to those organizations
subject to the express anti-inurement pro-
vision), 501(c)(19), and 501(c)(26). In
light of the existing restrictions on these
organizations, the Service and the Trea-
sury Department believe the additional
protections of section 280G are unneces-
sary. In addition, the termtax-exempt
organizationin the proposed regulations
includes federal instrumentalities orga-
nized under Act of Congress (described in
section 501(c)(1)), black lung trusts
(described in section 501(c)(21)), certain
religious and apostolic organizations
(described in section 501(d)) and quali-
fied tuition programs (described in sec-
tion 529). The Service and the Treasury
Department recognize that it may be
appropriate to exempt payments made by
other types of tax-exempt organizations.
Comments are requested on whether any
additional categories of organizations
should be included in the definition of
tax-exempt organizationfor purposes of
section 280G.
Definition of Corporation
Under the 1989 proposed regulations,
corporationis defined by reference to
section 7701(a)(3) of the Code. These
proposed regulations clarify that the term
corporation, for purposes of section 280G
and the regulations thereunder, includes
any entity described in§301.7701–2(b)
such as, for example, a real estate invest-
ment trust under section 856(a), a corpo-
ration that has mutual or cooperative
(rather than stock) ownership, such as a
mutual insurance company, a mutual sav-
ings bank, or a cooperative bank (as
defined in section 7701(a)(32)), and a for-
eign corporation (as defined in section
7701(a)(5)).
Accordingly, the termcorporationalso
includes any entity described in
§301.7701–3(c)(1)(v)(A). That regula-
tion provides, in general, that an entity
that claims to be, or is determined to be,
an entity that is exempt from taxation
under section 501(a) is treated as an asso-
ciation for purposes of the Code. Because
the definition ofcorporationincludes an
association, any entity described in
§301.7701–3(c)(1)(v)(A) is a corporation
for purposes of sections 7701 and 280G.
Determination of Excess Parachute
Payments
Once all parachute payments are iden-
tified, the determination of what portion,
if any, of each parachute payment is an
excess parachute payment is made. This
determination is based on the aggregate
present value of all parachute payments.
These proposed regulations modify the
method described in Q/A-33 of the 1989
proposed regulations for determining the
present value of a payment contingent on
an uncertain future event or condition.
Under Q/A-33 of these proposed regula-
tions, if there is at least a 50-percent
probability that the payment will be
made, the entire present value of a contin-
gent payment should be included for pur-
poses of determining if there are excess
parachute payments. If there is less than a
50-percent probability, then the present
value of the contingent payment is not
included. Once it is certain whether or not
the payment will be made, the 3-times-
base amount test in Q/A-30 is reapplied if
the initial determination as to whether to
include the payment was incorrect. If the
inclusion or exclusion of the payment for
purposes of Q/A-30 at the time of the
change in ownership or control was cor-
rect, there is no need to reapply the
3-times-base-amount test. In addition, if it
is reasonably estimated that there is a less
than 50-percent probability that the pay-
ment will be made and the payment is not
included in the 3-times-base-amount test,
but the payment is later made, the
3-times-base-amount test is not reapplied
if the test without regard to the contingent
payment resulted in a determination that
the individual received (or would receive)
excess parachute payments and no base
amount is allocated to the contingent pay-
ment.
Finally, Q/A-31 provides guidance on
determining the present value of an obli-
gation to provide health care over a
period of years. Under these proposed
March 4, 20025812002–9 I.R.B.

regulations, the determination of the
present value of this obligation should be
calculated in accordance with generally
accepted accounting principles. For pur-
poses of Q/A-31, it is permissible for the
obligation to provide health care to be
measured by projecting the cost of premi-
ums for purchased health care insurance,
even if no health care insurance is actu-
ally purchased. If the obligation to pro-
vide health care is made in coordination
with a health care plan that the corpora-
tion makes available to a group, then the
premiums used for this purpose may be
group premiums. This method only
applies for purposes of determining
present value. Premiums for health care
insurance can be used for purposes of
determining a corporation’s loss of
deduction or the excise tax obligation for
a disqualified individual only to the
extent such premiums are actually paid
for health care insurance used to satisfy
the corporation’s obligation to provide
health care.
Timing of the Payment of Tax under
Section 4999
In general, the excise tax under section
4999 is due at the time that the payment
is considered made under Q/A-11 through
13. Q/A-11(b) of these proposed regula-
tions clarifies that, except as provided in
Q/A-12 or 13, a payment is considered
made in the taxable year that it is includ-
ible in the disqualified individual’s gross
income, or for benefits excludible from
income, in the year the benefit is receiv-
ed. Q/A-11(c) of these proposed regula-
tions permits a disqualified individual, for
purposes of section 4999, to treat certain
payments as made in the year of the
change in ownership or control (or the
first year for which a payment contingent
on a change in ownership or control is
certain to be made), even though the pay-
ment is not yet includible in income (or
otherwise received). This treatment is not
available, however, for a payment if the
present value is not reasonably ascertain-
able within the meaning of section 3121
(v) and§31.3121(v)(2)–1(e)(4) or for a
payment related to health benefits or cov-
erage. These proposed regulations indi-
cate in Q/A-11(c) that the Commissioner
may provide through published guidance
that Q/A-11(c) is or is not available with
respect to other types of payments.
According to Q/A-11(c) of these pro-
posed regulations, the payment of the
excise tax under section 4999 must be
made based on the amount calculated for
purposes of determining excess parachute
payments. Therefore, to the extent that
the determination of whether there is an
excess parachute payment is based on an
incorrect valuation of the payment, the
excise tax payment under this provision is
also incorrect.
Proposed Effective Date
These regulations are proposed to
apply to any payments that are contingent
on a change in ownership or control that
occurs on or after January 1, 2004. Tax-
payers may rely on these proposed regu-
lations until the effective date of the final
regulations. Alternatively, taxpayers may
rely on the 1989 proposed regulations for
any payment contingent on a change in
ownership or control that occurs prior to
January 1, 2004.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because the regu-
lations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f), this notice of proposed rulemak-
ing will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for June 26, 2002, beginning at 10 a.m. in
the IRS Auditorium of the Internal Rev-
enue Building,1111Constitution Avenue,
NW, Washington, DC. All visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 15
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the“FOR FUR-
THER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
June 5, 2002. A period of 10 minutes will
be allotted to each person for making
comments. An agenda showing the sched-
ule of speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Erinn Madden, Office of
the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
The proposed amendments to 26 CFR
part 1 are as follows:
PART I—INCOME TAX; TAXABLE
YEARS BEGINNING AFTER
DECEMBER 31, 1986.
Paragraph 1. The authority citation for
part 1 is amended by adding the follow-
ing entry in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805***
Section 1.280G–1 also issued under 26
U.S.C. 280G (b) and (e).***
Par. 2. Section 1.280G–1 is added to
read as follows:
2002–9 I.R.B.582March 4, 2002

§1.280G–1 Golden parachute payments.
The following questions and answers
relate to the treatment of golden para-
chute payments under section 280G of the
Internal Revenue Code of 1986, as added
by section 67 of the Tax Reform Act of
1984 (Public Law No. 98–369; 98 Stat.
585) and amended by section 1804(j) of
the Tax Reform Act of 1986 (Public Law
No. 99–514; 100 Stat. 2807), section
1018(d) (6)-(8) of the Technical and Mis-
cellaneous Revenue Act of 1988 (Public
Law No. 100–647; 102 Stat. 3581), and
section 1421 of the Small Business Job
Protection Act of 1996 (Public Law No.
104–188, 110 Stat. 1755). The following
is a table of contents for this section:
Overview
Effect of section 280G ................................................................................................................................................................... Q/A-1
Meaning of“parachute payment”................................................................................................................................................. Q/A-2
Meaning of“excess parachute payment”...................................................................................................................................... Q/A-3
Effective date of section 280G ...................................................................................................................................................... Q/A-4
Exempt Payments
Exempt payments generally .......................................................................................................................................................... Q/A-5
Exempt payments with respect to certain corporations ................................................................................................................ Q/A-6
Shareholder approval requirements ............................................................................................................................................... Q/A-7
Exempt payments under a qualified plan ..................................................................................................................................... Q/A-8
Exempt payments of reasonable compensation ............................................................................................................................ Q/A-9
Payor of Parachute Payments......................................................................................................................................................Q/A-10
Payments in the Nature of Compensation
The nature of compensation ........................................................................................................................................................ Q/A-11
Property transfers ......................................................................................................................................................................... Q/A-12
Stock options ................................................................................................................................................................................ Q/A-13
Reduction of amount of payment by consideration paid ........................................................................................................... Q/A-14
Disqualified Individuals
Meaning of“disqualified individual”.......................................................................................................................................... Q/A-15
Personal service corporation treated as individual ..................................................................................................................... Q/A-16
Meaning of“shareholder”........................................................................................................................................................... Q/A-17
Meaning of“officer”................................................................................................................................................................... Q/A-18
Meaning of“highly-compensated individual”............................................................................................................................ Q/A-19
Meaning of“disqualified individual determination period”....................................................................................................... Q/A-20
Meaning of“compensation”........................................................................................................................................................ Q/A-21
Contingent on Change in Ownership or Control
General rules for determining payments contingent on change ................................................................................................. Q/A-22
Payments under agreement entered into after change ................................................................................................................ Q/A-23
Amount of payment contingent on change ................................................................................................................................. Q/A-24
Presumption that payment is contingent on change ............................................................................................................. Q/A-25, 26
Change in ownership or control ..................................................................................................................................... Q/A-27, 28, 29
Three-Times-Base-Amount Test for Parachute Payments
Three-times-base-amount test ...................................................................................................................................................... Q/A-30
Determination of present value ....................................................................................................................................... Q/A-31, 32, 33
Meaning of“base amount”.......................................................................................................................................................... Q/A-34
Meaning of“base period”........................................................................................................................................................... Q/A-35
Special rule for determining base amount .................................................................................................................................. Q/A-36
Securities Violation Parachute Payments................................................................................................................................... Q/A-37
Computation and Reduction of Excess Parachute Payments
Computation of excess parachute payments ............................................................................................................................... Q/A-38
Reduction by reasonable compensation ...................................................................................................................................... Q/A-39
Determination of Reasonable Compensation
General criteria for determining reasonable compensation ........................................................................................................ Q/A-40
Types of payments generally considered reasonable compensation ............................................................................. Q/A-41, 42, 43
Treatment of severance payments ............................................................................................................................................... Q/A-44
March 4, 20025832002–9 I.R.B.

Miscellaneous rules
Definition of corporation ............................................................................................................................................................. Q/A-45
Treatment of affiliated group as one corporation ....................................................................................................................... Q/A-46
Effective date
General effective date of section 280G ...................................................................................................................................... Q/A-47
Effective date of regulations ....................................................................................................................................................... Q/A-48
Overview
Q-1: What is the effect of Internal
Revenue Code section 280G?
A-1: (a) Section 280G disallows a
deduction for any excess parachute pay-
ment paid or accrued. For rules relating to
the imposition of a nondeductible
20-percent excise tax on the recipient of
any excess parachute payment, see Inter-
nal Revenue Code sections 4999,
275(a)(6), and 3121(v)(2)(A).
(b) The disallowance of a deduction
under section 280G is not contingent on
the imposition of the excise tax under
section 4999. The imposition of the
excise tax under section 4999 is not con-
tingent on the disallowance of a deduc-
tion under section 280G. Thus, for
example, because the imposition of the
excise tax under section 4999 is not con-
tingent on the disallowance of a deduc-
tion under section 280G, a payee may be
subject to the 20-percent excise tax under
section 4999 even though the disallow-
ance of the deduction for the excess para-
chute payment may not directly affect the
federal taxable income of the payor.
Q-2: What is a parachute payment for
purposes of section 280G?
A-2: (a) The termparachute payment
means any payment (other than an
exempt payment described in Q/A-5)
that—
(1) Is in the nature of compensation;
(2) Is made or is to be made to (or for
the benefit of) a disqualified individual;
(3) Is contingent on a change—
(i) In the ownership of a corporation;
(ii) In the effective control of a corpo-
ration; or
(iii) In the ownership of a substantial
portion of the assets of a corporation; and
(4) Has (together with other payments
described in paragraphs (a)(1), (2), and
(3) of this A-2 with respect to the same
disqualified individual) an aggregate
present value of at least 3 times the indi-
vidual’s base amount.
(b) Hereinafter, a change referred to in
paragraph (a)(3) of this A-2 is referred to
as a change in ownership or control. For
a discussion of the application of para-
graph (a)(1), see Q/A-11 through Q/A-14;
paragraph (a)(2), Q/A-15 through Q/A-
21; paragraph (a)(3), Q/A-22 through
Q/A-29; and paragraph (a)(4), Q/A-30
through Q/A-36.
(c) The termparachute paymentalso
includes any payment in the nature of
compensation to (or for the benefit of) a
disqualified individual that is pursuant to
an agreement that violates a generally
enforced securities law or regulation. This
type of parachute payment is referred to
in this section as a securities violation
parachute payment. See Q/A-37 for the
definition and treatment of securities vio-
lation parachute payments.
Q-3: What is an excess parachute pay-
ment for purposes of section 280G?
A-3: The termexcess parachute pay-
mentmeans an amount equal to the
excess of any parachute payment over the
portion of the base amount allocated to
such payment. Subject to certain excep-
tions and limitations, an excess parachute
payment is reduced by any portion of the
payment which the taxpayer establishes
by clear and convincing evidence is rea-
sonable compensation for personal ser-
vices actually rendered by the disquali-
fied individual before the date of the
change in ownership or control. For a dis-
cussion of the nonreduction of a securities
violation parachute payment by reason-
able compensation, see Q/A-37. For a dis-
cussion of the computation of excess
parachute payments and their reduction
by reasonable compensation, see Q/A-38
through Q/A-44.
Q-4: What is the effective date of sec-
tion 280G and this section?
A-4: In general, section 280G applies
to payments under agreements entered
into or renewed after June 14, 1984. Sec-
tion 280G also applies to certain pay-
ments under agreements entered into on
or before June 14, 1984, and amended or
supplemented in significant relevant
respect after that date. This section
applies to any payment contingent on a
change in ownership or control which
occurs on or after January 1, 2004. For a
discussion of the application of the effec-
tive date, see Q/A-47 and Q/A-48.
Exempt Payments
Q-5: Are some types of payments
exempt from the definition of the term
parachute payment?
A-5: (a) Yes, the following five types
of payments are exempt from the defini-
tion ofparachute payment—
(1) Payments with respect to a small
business corporation (described in Q/A-6
of this section);
(2) Certain payments with respect to a
corporation no stock in which is readily
tradeable on an established securities
market (or otherwise) (described in
Q/A-6 of this section);
(3) Payments to or from a qualified
plan (described in Q/A-8 of this section);
(4) Certain payments made by a corpo-
ration undergoing a change in ownership
or control that is described in any of the
following sections of the Internal Rev-
enue Code: section 501(c) (but only if
such organization is subject to an express
statutory prohibition against inurement of
net earnings to the benefit of any private
shareholder or individual, or if the organi-
zation is described in section 501(c)(1) or
section 501(c)(21)), section 501(d), or
section 529, collectively referred to as
tax-exempt organizations(described in
Q/A-6 of this section); and
(5) Certain payments of reasonable
compensation for services to be rendered
on or after the change in ownership or
control (described in Q/A-9 of this sec-
tion).
(b) Deductions for payments exempt
from the definition ofparachute payment
are not disallowed by section 280G, and
such exempt payments are not subject to
the 20-percent excise tax of section 4999.
In addition, such exempt payments are
not taken into account in applying the
3-times-base-amount test of Q/A-30 of
this section.
2002–9 I.R.B.584March 4, 2002

Q-6: Which payments with respect to a
corporation referred to in paragraph
(a)(1), (a)(2), or (a)(4) of Q/A-5 of this
section are exempt from the definition of
parachute payment?
A-6: (a) The termparachute payment
does not include—
(1) Any payment to a disqualified indi-
vidual with respect to a corporation which
(immediately before the change in owner-
ship or control) was a small business cor-
poration (as defined in section 1361(b)
butwithoutregardtosection
1361(b)(1)(C) thereof),
(2) Any payment to a disqualified indi-
vidual with respect to a corporation (other
than a small business corporation
described in paragraph (a)(1) of this A-6)
if—
(i) Immediately before the change in
ownership or control, no stock in such
corporation was readily tradeable on an
established securities market or other-
wise; and
(ii) The shareholder approval require-
ments described in Q/A-7 of this section
are met with respect to such payment; or
(3) Any payment to a disqualified indi-
vidual made by a corporation which is a
tax-exempt organization (as defined in
paragraph (a)(4) of Q/A-5 of this section),
but only if the corporation meets the defi-
nition of a tax-exempt organization both
immediately before and immediately after
the change in ownership or control.
(b) For purposes of paragraph (a)(1) of
this A-6, the members of an affiliated
group are not treated as one corporation.
(c) The requirements of paragraph
(a)(2)(i) of this A-6 are not met if a sub-
stantial portion of the assets of a corpora-
tion undergoing a change in ownership or
control consists (directly or indirectly) of
stock in another entity (or any ownership
interest in such entity) and stock of such
entity (or any ownership interest in such
entity) is readily tradeable on an estab-
lished securities market or otherwise. For
this purpose, such stock constitutes a sub-
stantial portion of the assets of an entity if
the total fair market value of the stock is
equal to or exceeds one third of the total
gross fair market value of all of the assets
of the entity. If a corporation is a member
of an affiliated group (which group is
treated as one corporation under A-46 of
this section), the requirements of para-
graph (a)(2)(i) of this A-6 are not met if
any stock in any member of such group is
readily tradeable on an established securi-
ties market or otherwise.
(d) For purposes of paragraph (a)(2)(i)
of this A-6, the termstockdoes not
include stock described in section
1504(a)(4) if the payment does not
adversely affect the redemption and liqui-
dation rights of any shareholder owning
such stock.
(e) For purposes of paragraph (a)(2)(i)
of this A-6, stock is treated as readily
tradeable if it is regularly quoted by bro-
kers or dealers making a market in such
stock.
(f) For purposes of paragraph (a)(2)(i)
of this A-6, the termestablished securi-
ties marketmeans an established securi-
ties market as defined in§1.897–1(m).
(g) The following examples illustrate
the application of this exemption:
Example 1. A small business corporation (within
the meaning of paragraph (a)(1) of this A-6) oper-
ates two businesses. The corporation sells the assets
of one of its businesses, and these assets represent a
substantial portion of the assets of the corporation.
Because of the sale, the corporation terminates its
employment relationship with persons employed in
the business the assets of which are sold. Several of
these employees are highly-compensated individuals
to whom the owners of the corporation make sever-
ance payments in excess of 3 times each employee’s
base amount. Since the corporation is a small busi-
ness corporation immediately before the change in
ownership or control, the payments are not para-
chute payments.
Example 2. Assume the same facts as in
Example 1, except that the corporation is not a small
business corporation within the meaning of para-
graph (a)(1) of this A-6. If no stock in the corpora-
tion is readily tradeable on an established securities
market (or otherwise) immediately before the
change in ownership or control and the shareholder
approval requirements described in Q/A-7 of this
section are met, the payments are not parachute pay-
ments.
Example 3. Stock of Corporation S is wholly
owned by Corporation P, stock in which is readily
tradeable on an established securities market. The
Corporation S stock equals or exceeds one third of
the total gross fair market value of Corporation P,
and thus, represents a substantial portion of the
assets of Corporation P. Corporation S makes sever-
ance payments to several of its highly-compensated
individuals that are parachute payments under sec-
tion 280G and Q/A-2 of this section. Because stock
in Corporation P is readily tradeable on an estab-
lished securities market, the payments are not
exempt from the definition ofparachute payments
under this A-6.
Example 4. A is a corporation described in sec-
tion 501(c)(3), and accordingly, its net earnings are
prohibited from inuring to the benefit of any private
shareholder or individual. A transfers substantially
all of its assets to another corporation resulting in a
change in ownership or control. Contingent on the
change in ownership or control, A makes a payment
that, but for the potential application of the exemp-
tion described in A-5(a)(4), would constitute apara-
chute payment. However, one or more aspects of the
transaction that constitutes the change in ownership
or control causes A to fail to be described in section
501(c)(3). Accordingly, A fails to meet the definition
of atax-exempt organizationboth immediately
before and immediately after the change in owner-
ship or control, as required by this A-6. As a result,
the payment made by A that was contingent on the
change in ownership or control is not exempt from
the definition ofparachute paymentunder this A-6.
Example 5. B is a corporation described in sec-
tion 501(c)(15). B does not meet the definition of a
tax-exempt organizationbecause section 501(c)(15)
does not expressly prohibit inurement of B’s net
earnings to the benefit of any private shareholder or
individual. Accordingly, if B has a change in own-
ership or control and makes a payment that would
otherwise meet the definition of aparachute pay-
ment, such payment is not exempt from the defini-
tion of the termparachute paymentfor purposes of
this A-6.
Q-7: How are the shareholder approval
requirements referred to in paragraph
(a)(2)(ii) of Q/A-6 of this section met?
A-7: (a)General rule. The shareholder
approval requirements referred to in para-
graph (a)(2)(ii) of Q/A-6 of this section
are met with respect to any payment if—
(1) Such payment was approved by
more than 75 percent of the voting power
of all outstanding stock of the corporation
entitled to vote (as described in this A-7)
immediately before the change in owner-
ship or control; and
(2) There was adequate disclosure to
all persons entitled to vote (as described
in this A-7) of all material facts concern-
ing all material payments which (but for
Q/A-6 of this section) would be parachute
payments with respect to a disqualified
individual.
(b)Voting requirements—(1)General
rule. The vote described in paragraph
(a)(1) of this A-7 must determine the right
of the disqualified individual to receive
the payment, or, in the case of a payment
made before the vote, the right of the dis-
qualified individual to retain the payment.
For purposes of this A-7, the vote can be
on less than the full amount of the pay-
ment(s) to be made. The total payment(s)
submitted for shareholder approval must
be separately approved by the sharehold-
ers. Shareholder approval can be a single
vote on all payments submitted to vote,
including payments to more than one dis-
qualified individual. The requirements of
this paragraph (b)(1) are not satisfied if
approval of the change in ownership or
March 4, 20025852002–9 I.R.B.

control is contingent on the approval of
any payment that would be a parachute
payment but for Q/A-6 of this section to
a disqualified individual.
(2)Special rule for vote within 3
months before change. A vote to approve
the payment does not fail to be a vote of
the outstanding stock of the corporation
entitled to vote immediately before the
change in ownership or control merely
because the determination of the share-
holders entitled to vote on the payment is
based on the shareholders of record at the
time of any shareholder vote taken in
connection with a transaction or event
giving rise to such change in ownership
or control and within the three-month
period ending on date of the change in
ownership or control, provided the disclo-
sure requirements described in paragraph
(c) of this A-7 are met.
(3)Entity shareholder. Approval of a
payment by any shareholder that is not an
individual (an entity shareholder) gener-
ally must be made by the person autho-
rized by the entity shareholder to approve
the payment. However, if a substantial
portion of the assets of an entity share-
holder consists (directly or indirectly) of
stock in the corporation undergoing the
change in ownership or control, approval
of the payment by that entity shareholder
must be made by a separate vote of the
persons who hold, immediately before the
change in ownership or control, more
than 75 percent of the voting power of the
entity shareholder. The preceding sen-
tence does not apply if the value of the
stock of the corporation owned, directly
or indirectly, by or for the entity share-
holder does not exceed 1 percent of the
total value of the outstanding stock of the
corporation. Where approval of a pay-
ment by an entity shareholder must be
made by a separate vote of the owners of
the entity shareholder, the normal voting
rights of the entity shareholder determine
which owners shall vote. For purposes of
this A-7, stock represents a substantial
portion of the assets of an entity share-
holder if the total fair market value of the
stock held by the entity shareholder in the
corporation undergoing the change in
ownership or control is equal to or
exceeds one third of the total fair market
value of all of the assets of the entity
shareholder.
(4)Attribution of stock ownership.In
determining the persons who comprise
the“more than 75 percent”group referred
to in paragraph (a)(1) or (b)(3) of this
A-7, stock is not counted as outstanding
stock if the stock is actually owned or
constructively owned under section
318(a) by or for a disqualified individual
who receives (or is to receive) payments
that would be parachute payments if the
shareholder approval requirements
described in paragraph (a) of this A-7
were not met. Likewise, stock is not
counted as outstanding stock if the owner
is considered under section 318(a) to own
any part of the stock owned directly or
indirectly by or for a disqualified indi-
vidual described in the preceding sen-
tence. In addition, if a partner authorized
by a partnership to approve a payment is
a disqualified individual with respect to
the corporation undergoing a change in
ownership or control, none of the stock
held by the partnership is considered out-
standing stock. However, if all persons
who hold voting power in the corporation
are disqualified individuals or related per-
sons described in either of the two pre-
ceding sentences, then stock owned by
such persons is counted as outstanding
stock.
(5)Disqualified individuals. To satisfy
the approval requirements of paragraph
(a) of this A-7, the vote of a disqualified
individual who receives (or is to receive)
a payment that would be a parachute pay-
ment if the shareholder approval require-
ments described in paragraph (a) of this
A-7 were not met is not considered in
determining whether the more than 75
percent vote has been obtained for pur-
poses of any vote under paragraph (a) of
this A-7. However, if all persons who
hold voting power in the corporation are
disqualified individuals or related per-
sons, then votes by such persons are con-
sidered in determining whether the more
than 75% vote has been obtained.
(c)Adequate disclosure.Tobe
adequate disclosure for purposes of para-
graph (a)(2) of this A-7, disclosure must
be full and truthful disclosure of the
material facts and such additional infor-
mation as is necessary to make the disclo-
sure not materially misleading at the time
the disclosure was made. Disclosure of
such information must be made to every
shareholder of the corporation entitled to
vote under this A-7. For each disqualified
individual, material facts that must be dis-
closed include the total amount of the
payments that would be parachute pay-
ments if the shareholder approval require-
ments described in paragraph (a) of this
A-7 were not met and a brief description
of each payment (e.g., accelerated vesting
of options, bonus, or salary). An omitted
fact is considered a material fact if there
is a substantial likelihood that a reason-
able shareholder would consider it impor-
tant.
(d)Corporation without shareholders.
If a corporation does not have sharehold-
ers, the exemption described in Q/A-
6(a)(2) of this section and the shareholder
approval requirements described in this
A-7 do not apply. For purposes of this
paragraph (d), a shareholder does not
include a member in an association, joint
stock company, or insurance company.
(e)Examples. The following examples
illustrate the application of this A-7:
Example 1. Corporation S has two shareholders
—Corporation P, which owns 76 percent of the
stock of Corporation S, and A, a disqualified indi-
vidual. No stock of Corporation P or S is readily
tradeable on an established securities market (or
otherwise). Stock of Corporation S equals or
exceeds one third of the assets of Corporation P, and
thus, represents a substantial portion of the assets of
Corporation P. All of the stock of Corporation S is
sold to Corporation M. Contingent on the change in
ownership of Corporation S, severance payments are
made to the officers of Corporation S in excess of 3
times each officer’s base amount. If the payments
are approved by a separate vote of the persons who
hold, immediately before the sale, more than 75 per-
cent of the voting power of the outstanding stock of
Corporation P and the disclosure rules of paragraph
(a)(2) of this A-7 are complied with, the shareholder
approval requirements of this A-7 are met, and the
payments are exempt from the definition ofpara-
chute paymentpursuant to A-6 of this section.
Example 2. Corporation M is wholly owned by
Partnership P. No interest in either M or P is readily
tradeable on an established securities market (or
otherwise). Stock of Corporation M equals or
exceeds one third of the assets of Partnership P, and
thus, represents a substantial portion of the assets of
Partnership P. Corporation M undergoes a change in
ownership or control. Partnership P has one general
partner and 200 limited partners. None of the lim-
ited partners are entitled to vote on issues involving
the management of the partnership investments. If
the payments that would be parachute payments if
the shareholder approval requirements of this A-7
are not met are approved by the general partner and
the disclosure rules of paragraph (a)(2) of this A-7
are complied with, the shareholder approval require-
ments of this A-7 are met, and the payments are
exempt from the definition ofparachute payment
pursuant to A-6 of this section.
2002–9 I.R.B.586March 4, 2002

Example 3. Corporation A has several sharehold-
ers including X and Y, who are disqualified indi-
viduals with respect to Corporation A. No stock of
Corporation A is readily tradeable on an established
securities market (or otherwise). Corporation A
undergoes a change in ownership or control. Contin-
gent on the change, severance payments are payable
to X and Y that are in excess of 3 times each indi-
vidual’s base amount. To determine whether the
approval requirements of paragraph (a)(1) of this
A-7 are satisfied regarding the payments to X and Y,
the stock of X and Y is not considered outstanding,
and X and Y are not eligible to vote.
Example 4. Assume the same facts as in
Example 3except that after adequate disclosure
(within the meaning of paragraph (a)(2) of this A-7)
to all shareholders entitled to vote, 60 percent of the
shareholders who are entitled to vote approve the
payments to X and Y. Because more than 75 percent
of the shareholders did not approve the payments to
X and Y, the shareholder approval requirements of
paragraph (a)(1) of this A-7 are not satisfied, and the
payments are not made to X and Y.
Example 5. Assume the same facts as in
Example 3except that disclosure of all the material
facts regarding the payments to X and Y is made to
two of Corporation A’s shareholders, who collec-
tively own 80 percent of Corporation A’s stock
entitled to vote and approve the payment. Assume
further that no disclosure of the material facts
regarding the payments to X and Y is made to other
Corporation A shareholders who are entitled to vote
within the meaning of this A-7. Because disclosure
regarding the payments to X and Y is not made to
all of Corporation A’s shareholders who were
entitled to vote, the disclosure requirements of para-
graph (a)(2) of this A-7 are not met, and the pay-
ments are not exempt from the definition ofpara-
chute paymentpursuant to Q/A-6.
Example 6. Corporation C has three sharehold-
ersPartnership, which owns 20 percent of the
stock of Corporation C; A, an individual who owns
60 percent of the stock of Corporation C; and B, an
individual who owns 20 percent of Corporation C.
Stock of Corporation C does not represent a sub-
stantial portion of the assets of Partnership. No
interest in either Partnership or Corporation C is
readily tradeable on an established securities market
(or otherwise). P, a one-third partner in Partnership,
is a disqualified individual with respect to Corpora-
tion C. Corporation C undergoes a change in own-
ership or control. Contingent on the change, a sev-
erance payment is payable to P in excess of 3 times
P’s base amount. To determine the persons who
comprise the“more than 75 percent group”referred
to in paragraph (a)(1) of this A-7 who must approve
the payment to P, one third of the stock held by
Partnership is not considered outstanding stock. If,
however, P is the person authorized by Partnership
to approve the payment, none of the shares of Part-
nership are considered outstanding stock.
Example 7. X, an employee of Corporation E, is
a disqualified individual with respect to Corporation
E. No stock in Corporation E is readily tradeable on
an established securities market (or otherwise). X, Y,
and Z are all employees and disqualified individuals
with respect to Corporation E. Each individual has a
base amount of $100,000. Corporation E undergoes
a change in ownership or control. Contingent on the
change, a severance payment of $400,000 is payable
to X; $600,000 is payable to Y; and $1,000,000 is
payable to Z. Corporation E provides a ballot to
each Corporation E shareholder entitled to vote
under paragraph(a)(1) of this A-7 listing the pay-
ments of $400,000 to X; $600,000 to Y; and
$1,000,000 to Z. Next to each name and correspond-
ing amount on the ballot, Corporation E requests
approval (with a“yes”and“no”box) of each total
payment to be made to each individual and states
that if the payment is not approved, the payment
will not be made. Adequate disclosure, within the
meaning of this A-7 is made to each shareholder
entitled to vote under this A-7. More than 75 percent
of the Corporation E shareholders who are entitled
to vote under paragraph (a)(1) of this A-7, approve
each payment to each individual. The shareholder
approval requirements of this A-7 are met, and the
payments are exempt from the definition ofpara-
chute paymentpursuant to A-6 of this section.
Example 8. Assume the same facts as in
Example 7except that the ballot does not request
approval of each total payment to each individual
separately. Instead, the ballot states that $2,000,000
in payments will be made to X, Y, and Z and
requests approval of all of the $2,000,000 payments.
Assuming the nature of the payments to X, Y, and Z
are separately described to the shareholders entitled
to vote under this A-7, the shareholder approval
requirements of paragraph (a)(1) of this A-7 are met,
and the payments are exempt from the definition of
parachute paymentpursuant to A-6 of this section.
Example 9. B, an employee of Corporation X, is
a disqualified individual with respect to Corporation
X. Stock of Corporation X is not readily tradeable
on an established securities market (or otherwise).
Corporation X undergoes a change in ownership or
control. B’s base amount is $205,000. Under B’s
employment agreement with Corporation X, in the
event of a change in ownership or control, B’s stock
options will vest and B will receive a severance and
bonus payment. Contingent on the change, B’s stock
options immediately vest with a fair market value of
$500,000, $200,000 of which is contingent on the
change, and B will receive a $200,000 bonus pay-
ment and a $400,000 severance payment. Corpora-
tion X distributes a ballot to every shareholder of
Corporation X who immediately before the change
is entitled to vote. The ballot lists the following pay-
ments to be made to B: the contingent payment of
$200,000 attributable to options, a $200,000 bonus
payment, and a $400,000 severance payment. The
ballot requests shareholder approval of the $200,000
bonus payment to B and states that whether or not
the $200,000 bonus payment is approved, B will
receive $200,000 attributable to options and a
$400,000 severance payment. More than 75 percent
of the shareholders entitled to vote approve the
$200,000 bonus payment to B. The shareholder
approval requirements of this A-7 are met, and the
$200,000 payment is exempt from the definition of
parachute paymentpursuant to A-6 of this section.
Q-8: Which payments under a quali-
fied plan are exempt from the definition
ofparachute payment?
A-8: The termparachute payment
does not include any payment to or
from—
(a) A plan described in section 401(a)
which includes a trust exempt from tax
under section 501(a);
(b) An annuity plan described in sec-
tion 403(a);
(c) A simplified employee pension (as
defined in section 408(k)); or
(d) A simple retirement account (as
defined in section 408(p)).
Q-9: Which payments of reasonable
compensation are exempt from the defini-
tion ofparachute payment?
A-9: Except in the case of securities
violation parachute payments, the term
parachute paymentdoes not include any
payment (or portion thereof) which the
taxpayer establishes by clear and con-
vincing evidence is reasonable compensa-
tion for personal services to be rendered
by the disqualified individual on or after
the date of the change in ownership or
control. See Q/A-37 of this section for the
definition and treatment of securities vio-
lation parachute payments. See Q/A-38
through Q/A-44 of this section for rules
on determining amounts of reasonable
compensation.
Payor of Parachute Payments
Q-10: Who may be the payor of para-
chute payments?
A-10: Parachute payments within the
meaning of Q/A-2 of this section may be
paid, directly or indirectly, by—
(i) The corporation referred to in para-
graph (a)(3) of Q/A-2 of this section:
(ii) A person acquiring ownership or
effective control of that corporation or
ownership of a substantial portion of that
corporation’s assets; or
(iii) Any person whose relationship to
such corporation or other person is such
as to require attribution of stock owner-
ship between the parties under section
318(a).
Payments in the Nature of Compensation
Q-11: What types of payments are in
the nature of compensation?
A-11: (a)General rule. For purposes
of this section, all payments—in what-
ever form—are payments in the nature
of compensation if they arise out of an
employment relationship or are associated
with the performance of services. For this
purpose, the performance of services
includes holding oneself out as available
March 4, 20025872002–9 I.R.B.

to perform services and refraining from
performing services (such as under a cov-
enant not to compete or similar arrange-
ment). Payments in the nature of compen-
sation include (but are not limited to)
wages and salary, bonuses, severance pay,
fringe benefits, and pension benefits and
other deferred compensation (including
any amount characterized by the parties
as interest thereon). A payment in the
nature of compensation also includes cash
when paid, the value of the right to
receive cash, or a transfer of property.
However, payments in the nature of com-
pensation do not include attorney’s fees
or court costs paid or incurred in connec-
tion with the payment of any amount
described in paragraphs (a)(1), (2), and
(3) of Q/A-2 of this section or a reason-
able rate of interest accrued on any
amount during the period the parties con-
test whether a payment will be made.
(b)When payment is considered to be
made. Except as otherwise provided in
A-11 through Q/A-13 of this section, a
payment in the nature of compensation is
considered made (and is subject to the
excise tax under section 4999) in the tax-
able year in which it is includible in the
disqualified individual’s gross income or,
in the case of fringe benefits and other
benefits excludible from income, in the
taxable year the benefits are received.
(c)Pre-payment rule. Notwithstanding
the general rule described in paragraph
(b) of this A-11, for purposes of section
4999, a disqualified individual is permit-
ted to treat a payment as received in the
year of the change in ownership or con-
trol or, if later, the first year in which the
payment (or payments) is certain to be
made without regard to the year in which
the payment (or payments) is includible
in income (or otherwise received). The
payment of the excise tax for purposes of
section 4999 must be based on the
amount calculated for purposes of deter-
mining any excess parachute payments.
However, a disqualified individual may
not apply this paragraph (c) of this A-11
to a payment to be made in cash if the
present value of the payment would be
considered not reasonably ascertainable
under section 3121(v) and§31.3121
(v)(2)–1(e)(4) or a payment related to
health benefits or coverage. The Commis-
sioner is permitted to provide that this
paragraph (c) is or is not available for
certain types of payments.
(d)Transfers of property. Transfers of
property are treated as payments for pur-
poses of this A-11. See Q/A-12 of this
section for rules on determining when
such payments are considered made and
the amount of such payments. See
Q/A-13 of this section for special rules on
transfers of statutory and nonstatutory
stock options.
Q-12: If a property transfer to a dis-
qualified individual is a payment in the
nature of compensation, when is the pay-
ment considered made (or to be made),
and how is the amount of the payment
determined?
A-12: (a) Except as provided in this
A-12 and Q/A-13 of this section, a trans-
fer of property is considered a payment
made (or to be made) in the taxable year
in which the property transferred is
includible in the gross income of the dis-
qualified individual under section 83 and
the regulations thereunder. Thus, in gen-
eral, such a payment is considered made
(or to be made) when the property is
transferred (as defined in§1.83–3(a)) to
the disqualified individual and becomes
substantially vested (as defined in§1.83–
3(b) and (j)) in such individual. In such
case, the amount of the payment is deter-
mined under section 83 and the regula-
tions thereunder. Thus, in general, the
amount of the payment is equal to the
excess of the fair market value of the
transferred property (determined without
regard to any lapse restriction, as defined
in§1.83–3(i)) at the time that the prop-
erty becomes substantially vested, over
the amount (if any) paid for the property.
(b) An election made by a disqualified
individual under section 83(b) with
respect to transferred property will not
apply for purposes of this A-12. Thus,
even if such an election is made with
respect to a property transfer that is a
payment in the nature of compensation,
the payment is generally considered made
(or to be made) when the property is
transferred to and becomes substantially
vested in such individual.
(c) See Q/A-13 of this section for rules
on applying this A-12 to transfers of stock
options.
(d) The following example illustrates
the principles of this A-12:
Example. On January 1, 2006, Corporation M
gives to A, a disqualified individual, a bonus of 100
shares of Corporation M stock in connection with
the performance of services to Corporation M.
Under the terms of the bonus arrangement, A is obli-
gated to return the Corporation M stock to Corpora-
tion M unless the earnings of Corporation M double
by January 1, 2009, or there is a change in owner-
ship or control of Corporation M before that date.
A’s rights in the stock are treated as substantially
nonvested (within the meaning of§1.83–3(b)) dur-
ing that period because A’s rights in the stock are
subject to a substantial risk of forfeiture (within the
meaning of§1.83–3(c)) and are nontransferable
(within the meaning of§1.83–3(d)). On January 1,
2008, a change in ownership or control of Corpora-
tion M occurs. On that day, the fair market value of
the Corporation M stock is $250 per share. Because
A’s rights in the Corporation M stock become sub-
stantially vested (within the meaning of§1.83–3(b))
on that day, the payment is considered made on that
day, and the amount of the payment for purposes of
this section is equal to $25,000 (100 x $250). See
Q/A-38 through 41 for rules relating to the reduction
of the excess parachute payment by the portion of
the payment which is established to be reasonable
compensation for personal services actually ren-
dered before the date of a change in ownership or
control.
Q-13: How are transfers of statutory
and nonstatutory stock options treated?
A-13: (a) For purposes of this section,
an option (including an option to which
section 421 applies) is treated as property
that is transferred not later than the time
at which the option becomes substantially
vested (whether or not the option has a
readily ascertainable fair market value as
defined in§1.83–7(b)). Thus, for pur-
poses of this section, the vesting of such
an option is treated as a payment in the
nature of compensation. The value of an
option with an ascertainable fair market
value at the time the option vests is deter-
mined under all the facts and circum-
stances in the particular case. Factors rel-
evant to such a determination include, but
are not limited to: the difference between
the option’s exercise price and the value
of the property subject to the option at the
time of vesting; the probability of the
value of such property increasing or
decreasing; and the length of the period
during which the option can be exercised.
Valuation may be determined by any
method prescribed by the Commissioner
in published guidance for purposes of this
A-13. See Q/A-33 of this section for the
treatment of options the granting or vest-
ing of which is contingent on a change in
ownership or control and that do not have
an ascertainable fair market value at the
time of granting or vesting.
(b) Any money or other property trans-
ferred to the disqualified individual on the
2002–9 I.R.B.588March 4, 2002

exercise, or as consideration on the sale
or other disposition, of an option
described in paragraph (a) of this A-13
after the time such option vests is not
treated as a payment in the nature of com-
pensation to the disqualified individual
under Q/A-11 of this section. Nonethe-
less, the amount of the otherwise allow-
able deduction under section 162 or 212
with respect to such transfer is reduced by
the amount of the payment described in
paragraph (a) of this A-13 treated as an
excess parachute payment.
Q-14: Are payments in the nature of
compensation reduced by consideration
paid by the disqualified individual?
A-14: Yes, to the extent not otherwise
taken into account under Q/A-12 and
Q/A-13 of this section, the amount of any
payment in the nature of compensation is
reduced by the amount of any money or
the fair market value of any property
(owned by the disqualified individual
without restriction) that is (or will be)
transferred by the disqualified individual
in exchange for the payment. For pur-
poses of the preceding sentence, the fair
market value of property is determined as
of the date the property is transferred by
the disqualified individual.
Disqualified Individuals
Q-15: Who is a disqualified indi-
vidual?
A-15: (a) For purposes of this section,
an individual is a disqualified individual
with respect to a corporation if, at any
time during thedisqualified individual
determination period(as defined in
Q/A-20 of this section), the individual is
an employee or independent contractor of
the corporation and is, with respect to the
corporation—
(1) A shareholder (but see Q/A-17 of
this section);
(2) An officer (see Q/A-18 of this sec-
tion); or
(3) A highly-compensated individual
(see Q/A-19 of this section).
(b) A director is a disqualified indi-
vidual with respect to a corporation if, at
any time during thedisqualified indi-
vidual determination period(as defined
in Q/A-20 of this section), the director is
an employee or independent contractor
and is, with respect to the corporation,
either a shareholder (see Q/A-17 of this
section) or a highly-compensated indi-
vidual (see Q/A-19 of this section).
Q-16: Is a personal service corporation
treated as an individual?
A-16: (a) Yes. For purposes of this
section, a personal service corporation (as
defined in section 269A(b)(1)), or a non-
corporate entity that would be a personal
service corporation if it were a corpora-
tion, is treated as an individual.
(b) The following example illustrates
the principles of this A-16:
Example. Corporation N, a personal service cor-
poration (as defined in section 269A(b)(1)), has a
single individual as its sole shareholder and
employee. Corporation N performs personal ser-
vices for Corporation M. The compensation paid to
Corporation N by Corporation M puts Corporation
N within the group of the highly-compensated indi-
viduals of Corporation M as determined under A-19
of this section. Thus, Corporation N is treated as a
highly-compensated individual with respect to Cor-
poration M.
Q-17: Are all shareholders of a corpo-
ration considered shareholders for pur-
poses of paragraph (a)(1) of Q/A-15 of
this section?
A-17: (a) No, only an individual who
owns stock of a corporation with a fair
market value that exceeds 1 percent of the
fair market value of the outstanding
shares of all classes of the corporation’s
stock is treated as a disqualified indi-
vidual with respect to the corporation by
reason of stock ownership. An individual
who owns a lesser amount of stock may,
however, be a disqualified individual with
respect to the corporation if such indi-
vidual is an officer or highly-
compensated individual with respect to
the corporation. For purposes of deter-
mining the amount of stock owned by an
individual, the constructive ownership
rules of section 318(a) apply.
(b) The following examples illustrates
the principles of this A-17:
Example 1. E, an employee of Corporation A,
received options under Corporation A’s Stock
Option Plan. E’s stock options vest three years after
the date of grant. E is not an officer or highly com-
pensated individual during the disqualified indi-
vidual determination period and does not own any
other Corporation A stock. Two years after the
options are granted to E, all of Corporation A’s stock
is acquired by Corporation B. Under Corporation
A’s Stock Option Plan, E’s options are converted to
Corporation B options and the vesting schedule
remains the same. To determine whether E is a dis-
qualified individual based on E’s stock ownership,
the stock underlying the unvested options held by E
on the date of the change in ownership or control is
not considered constructively owned by E under
section 318(a). Because E does not own, or con-
structively own, Corporation A stock with a fair
market value exceeding 1 percent of the total fair
market value of all of the outstanding shares of all
classes of Corporation A and E is not an officer or
highly-compensated individual during the disquali-
fied individual determination period, E is not a dis-
qualified individual within the meaning of A-15 of
this section with respect to Corporation A.
Example 2. Assume the same facts as in
Example 1except that Corporation A’s Stock Option
Plan provides that all unvested options will vest
immediately on a change in ownership or control.
To determine whether E is a disqualified individual
based on E’s stock ownership, the stock underlying
the options that vest on the change in ownership or
control is considered constructively owned by E
under section 318(a). If the stock constructively held
by E exceeds 1 percent of the total fair market value
of all of the outstanding shares of all classes of Cor-
poration A stock, E is a disqualified individual
within the meaning of this A-15 of this section with
respect to Corporation A.
Example 3. Assume the same facts as in
Example 1except that E received nonstatutory stock
options that are exercisable for stock subject to a
substantial risk of forfeiture under section 83.
Assume further that under Corporation A’s Stock
Option Plan, the nonstatutory options will vest on a
change in ownership or control. To determine
whether E is a disqualified individual based on E’s
stock ownership, the stock underlying the options
that vest on the change in ownership or control is
not considered constructively owned by E under
section 318(a) because the options are exercisable
for stock subject to a substantial risk of forfeiture
within the meaning of section 83. Because E does
not own, or constructively own, Corporation A stock
with a fair market value exceeding 1 percent of the
total fair market value of all of the outstanding
shares of all classes of Corporation A stock and E is
not an officer or highly compensated individual dur-
ing the disqualified individual determination period,
E is not a disqualified individual within the meaning
of A-15 of this section with respect to Corporation
A.
Q-18: Who is an officer?
A-18: (a) For purposes of this section,
whether an individual is an officer with
respect to a corporation is determined on
the basis of all the facts and circum-
stances in the particular case (such as the
source of the individual’s authority, the
term for which the individual is elected or
appointed, and the nature and extent of
the individual’s duties). Generally, the
termofficermeans an administrative
executive who is in regular and continued
service. The termofficerimplies continu-
ity of service and excludes those
employed for a special and single transac-
tion. An individual who merely has the
title of officer but not the authority of an
officer is not considered an officer for
purposes of this section. Similarly, an
individual who does not have the title of
March 4, 20025892002–9 I.R.B.

officer but has the authority of an officer
is considered an officer for purposes of
this section.
(b) An individual who is an officer
with respect to any member of an affili-
ated group that is treated as one corpora-
tion pursuant to Q/A-46 of this section is
treated as an officer of such one corpora-
tion.
(c) No more than 50 employees (or, if
less, the greater of 3 employees, or 10
percent of the employees (rounded up to
the nearest integer)) of the corporation (in
the case of an affiliated group treated as
one corporation, each member of the
affiliated group) are treated as disquali-
fied individuals with respect to a corpora-
tion by reason of being an officer of the
corporation. For purposes of the preced-
ing sentence, the number of employees of
the corporation is the greatest number of
employees the corporation has during the
disqualified individual determination
period (as defined in Q/A-20 of this sec-
tion). If the number of officers of the cor-
poration exceeds the number of employ-
ees who may be treated as officers under
the first sentence of this paragraph (c),
then the employees who are treated as
officers for purposes of this section are
the highest paid 50 employees (or, if less,
the greater of 3 employees, or 10 percent
of the employees (rounded up to the near-
est integer)) of the corporation when
ranked on the basis of compensation (as
determined under Q/A-21 of this section)
paid during the disqualified individual
determination period.
Q-19: Who is a highly-compensated
individual?
A-19: (a) For purposes of this section,
a highly-compensated individual with
respect to a corporation is any individual
who is, or would be if the individual were
an employee, a member of the group con-
sisting of the lesser of the highest paid 1
percent of the employees of the corpora-
tion (rounded up to the nearest integer),
or the highest paid 250 employees of the
corporation, when ranked on the basis of
compensation (as determined under
Q/A-21 of this section) earned during the
disqualified individual determination
period (as defined in Q/A-20 of this sec-
tion). For purposes of the preceding sen-
tence, the number of employees of the
corporation is the greatest number of
employees the corporation has during the
disqualified individual determination
period (as defined in Q/A-20 of this sec-
tion). However, no individual whose
annualized compensation during the dis-
qualified individual determination period
is less than the amount described in sec-
tion 414(q)(1)(B)(i) for the year in which
the change in ownership or control occurs
will be treated as a highly-compensated
individual.
(b) An individual who is not an
employee of the corporation is not treated
as a highly-compensated individual with
respect to the corporation on account of
compensation received for performing
services (such as brokerage, legal, or
investment banking services) in connec-
tion with a change in ownership or con-
trol of the corporation, if the services are
performed in the ordinary course of the
individual’s trade or business and the
individual performs similar services for a
significant number of clients unrelated to
the corporation.
(c) In determining the total number of
employees of a corporation for purposes
of this A-19, employees are not counted if
they normally work less than 17½hours
per week (as defined in section
414(q)(5)(B) and the regulations thereun-
der) or if they normally work during not
more than 6 months during any year (as
defined in section 414(q)(5)(C) and the
regulations thereunder). However, an
employee who is not counted for pur-
poses of the preceding sentence may still
be a highly-compensated individual.
Q-20: What is the disqualified indi-
vidual determination period?
A-20: The disqualified individual
determination period is the twelve-month
period prior to and ending on the date of
the change in ownership or control of the
corporation.
Q-21: How iscompensationdefined
for purposes of determining who is a dis-
qualified individual?
A-21: (a) For purposes of determining
who is a disqualified individual, the term
compensationis the compensation which
was earned by the individual for services
performed for the corporation with
respect to which the change in ownership
or control occurs (changed corporation),
for a predecessor entity, or for a related
entity. Such compensation is determined
without regard to sections 125, 132(f)(4),
402(e)(3), and 402(h)(1)(B). Thus, for
example, compensation includes elective
or salary reduction contributions to a caf-
eteria plan, cash or deferred arrangement
or tax-sheltered annuity and amounts
credited under a nonqualified deferred
compensation plan.
(b) For purposes of this A-21, a prede-
cessor entity is any entity which, as a
result of a merger, consolidation, pur-
chase or acquisition of property or stock,
corporate separation, or other similar
business transaction transfers some or all
of its employees to the changed corpora-
tion or to a related entity or to a predeces-
sor entity of the changed corporation. The
termrelated entityinclude—
(1) All members of a controlled group
of corporations (as defined in section
414(b)) that includes the changed corpo-
ration or a predecessor entity;
(2) All trades or business (whether or
not incorporated) that are under common
control (as defined in section 414(c)) if
such group includes the changed corpora-
tion or a predecessor entity;
(3) All members of an affiliated ser-
vice group (as defined in section 414(m))
that includes the changed corporation or a
predecessor entity; and
(4) Any other entities required to be
aggregated with the changed corporation
or a predecessor entity pursuant to section
414(o) and the regulations thereunder
(except leasing organizations as defined
in section 414(n)).
(c) For purposes of Q/A-18 and
Q/A-19 of this section, compensation that
was contingent on the change in owner-
ship or control and that was payable in
the year of the change is not treated as
compensation.
Contingent on Change in Ownership or
Control
Q-22: When is a payment contingent
on a change in ownership or control?
A-22: (a) In general, a payment is
treated as contingent on a change in own-
ership or control if the payment would
not, in fact, have been made had no
change in ownership or control occurred,
even if the payment is also conditioned
on the occurrence of another event. A
payment generally is treated as one which
would not, in fact, have been made in the
absence of a change in ownership or con-
trol unless it is substantially certain, at the
time of the change, that the payment
2002–9 I.R.B.590March 4, 2002

would have been made whether or not the
change occurred. (But see Q/A-23 of this
section regarding payments under agree-
ments entered into after a change in own-
ership or control.) A payment that
becomes vested as a result of a change in
ownership or control is not treated as a
payment which was substantially certain
to have been made whether or not the
change occurred. For purposes of this
A-22,vestedmeans the payment is sub-
stantially vested within the meaning of
§1.83–3(b) and (j) or the right to the pay-
ment is not otherwise subject to a sub-
stantial risk of forfeiture.
(b)(1) For purposes of paragraph (a), a
payment is treated as contingent on a
change in ownership or control if—
(i) The payment is contingent on an
event that is closely associated with a
change in ownership or control;
(ii) A change in ownership or control
actually occurs; and
(iii) The event is materially related to
the change in ownership or control.
(2) For purposes of paragraph (b)(1)(i)
of this A-22, a payment is treated as con-
tingent on an event that is closely associ-
ated with a change in ownership or con-
trol unless it is substantially certain, at the
time of the event, that the payment would
have been made whether or not the event
occurred. An event is considered closely
associated with a change in ownership or
control if the event is of a type often pre-
liminary or subsequent to, or otherwise
closely associated with, a change in own-
ership or control. For example, the fol-
lowing events are considered closely
associated with a change in the ownership
or control of a corporation: The onset of
a tender offer with respect to the corpora-
tion; a substantial increase in the market
price of the corporation’s stock that
occurs within a short period (but only if
such increase occurs prior to a change in
ownership or control); the cessation of the
listing of the corporation’s stock on an
established securities market; the acquisi-
tion of more than 5 percent of the corpo-
ration’s stock by a person (or more than
one person acting as a group) not in con-
trol of the corporation; the voluntary or
involuntary termination of the disquali-
fied individual’s employment; a signifi-
cant reduction in the disqualified indi-
vidual’s job responsibilities; and a change
in ownership or control as defined in the
disqualified individual’s employment
agreement (or elsewhere) that does not
meet the definition of a change in owner-
ship or control described in Q/A-27, 28,
or 29 of this section. Whether other
events are treated as closely associated
with a change in ownership or control is
based on all the facts and circumstances
of the particular case.
(3) For purposes of determining
whether an event (as described in para-
graph (b)(2) of this A-22) is materially
related to a change in ownership or con-
trol, the event is presumed to be materi-
ally related to a change in ownership or
control if such event occurs within the
period beginning one year before and
ending one year after the date of change
in ownership or control. If such event
occurs outside of the period beginning
one year before and ending one year after
the date of change in ownership or con-
trol, the event is presumed not materially
related to the change in ownership or con-
trol. A payment does not fail to be contin-
gent on a change in ownership or control
merely because it is also contingent on
the occurrence of a second event (without
regard to whether the second event is
closely associated with or materially
related to a change in ownership or con-
trol). Similarly, a payment that is treated
as contingent on a change because it is
contingent on a closely associated event
does not fail to be treated as contingent
on a change in ownership or control
merely because it is also contingent on
the occurrence of a second event (without
regard to whether the second event is
closely associated with or materially
related to a change in ownership or con-
trol).
(c) A payment that would in fact have
been made had no change in ownership or
control occurred is treated as contingent
on a change in ownership or control if the
change in ownership or control (or the
occurrence of an event that is closely
associated and materially related to a
change in ownership or control within the
meaning of paragraph (b)(1) of this
A-22), accelerates the time at which the
payment is made. Thus, for example, if a
change in ownership or control acceler-
ates the time of payment of deferred com-
pensation that is vested without regard to
the change in ownership or control, the
payment may be treated as contingent on
the change. See Q/A-24 of this section
regarding the portion of a payment that is
so treated. See also Q/A-8 of this section
regarding the exemption for certain pay-
ments under qualified plans and Q/A-40
of this section regarding the treatment of
a payment as reasonable compensation.
(d) A payment is treated as contingent
on a change in ownership or control even
if the employment or independent con-
tractor relationship of the disqualified
individual is not terminated (voluntarily
or involuntarily) as a result of the change.
(e) The following examples illustrate
the principles of this A-22:
Example 1.A corporation grants a stock appre-
ciation right to a disqualified individual, A, more
than one year before a change in ownership or con-
trol. After the stock appreciation right vests and
becomes exercisable, a change in ownership or con-
trol of the corporation occurs, and A exercises the
right. Assuming neither the granting nor the vesting
of the stock appreciation right is contingent on a
change in ownership or control, the payment made
on exercise is not contingent on the change in own-
ership or control.
Example 2. A contract between a corporation
and B, a disqualified individual, provides that a pay-
ment will be made to B if the corporation undergoes
a change in ownership or control and B’s employ-
ment with the corporation is terminated at any time
over the succeeding 5 years. Eighteen months later,
a change in the ownership of the corporation occurs.
Two years after the change in ownership, B’s
employment is terminated and the payment is made
to B. Because it was not substantially certain that
the corporation would have made the payment to B
on B’s termination of employment if there had not
been a change in ownership, the payment is treated
as contingent on the change in ownership under
paragraph (a) of this A-22. This is true even though
B’s termination of employment is presumed not to
be, and in fact may not be, materially related to the
change in ownership or control.
Example 3. A contract between a corporation
and C, a disqualified individual, provides that a pay-
ment will be made to C if C’s employment is termi-
nated at any time over the succeeding 3 years (with-
out regard to whether or not there is a change in
ownership or control). Eighteen months after the
contract is entered into, a change in the ownership
of the corporation occurs. Six months after the
change in ownership, C’s employment is terminated
and the payment is made to C. Termination of
employment is considered an event closely associ-
ated with a change in ownership or control. Because
the termination occurred within one year after the
date of the change in ownership, the termination of
C’s employment is presumed to be materially
related to the change in ownership under paragraph
(b)(3) of this A-22. If this presumption is not suc-
cessfully rebutted, the payment will be treated as
contingent on the change in ownership under para-
graph (b) of this A-22.
Example 4. A contract between a corporation
and a disqualified individual, D, provides that a pay-
ment will be made to D upon the onset of a tender
March 4, 20025912002–9 I.R.B.

offer for shares of the corporation’s stock. A tender
offer is made on December 1, 2008, and the pay-
ment is made to D. Although the tender offer is
unsuccessful, it leads to a negotiated merger with
another entity on June 1, 2009, which results in a
change in the ownership of the corporation. It was
not substantially certain, at the time of the onset of
the tender offer, that the payment would have been
made had no tender offer taken place. The onset of
a tender offer is considered closely associated with
a change in ownership or control. Because the ten-
der offer occurred within one year before the date of
the change in ownership of the corporation, the
onset of the tender offer is presumed to be materi-
ally related to the change in ownership. If this pre-
sumption is not rebutted, the payment will be treated
as contingent on the change in ownership. If no
change in ownership or control had occurred, the
payment would not be treated as contingent on a
change in ownership or control; however, the pay-
ment still could be a parachute payment under
Q/A-37 of this section if the contract violated a gen-
erally enforced securities law or regulation.
Example 5. A contract between a corporation
and a disqualified individual, E, provides that a pay-
ment will be made to E if the corporation’s level of
product sales or profits reaches a specified level. At
the time the contract was entered into, the parties
had no reason to believe that such an increase in the
corporation’s level of product sales or profits would
be preliminary or subsequent to, or otherwise
closely associated with, a change in ownership or
control of the corporation. Eighteen months later, a
change in the ownership of the corporation occurs
and within one year after the date of the change, the
corporation’s level of product sales or profits
reaches the specified level. Under these facts and
circumstances (and in the absence of contradictory
evidence), the increase in product sales or profits of
the corporation is not an event closely associated
with the change in ownership or control of the cor-
poration. Accordingly, even if the increase is mate-
rially related to the change, the payment will not be
treated as contingent on a change in ownership or
control.
Q-23: May a payment be treated as
contingent on a change in ownership or
control if the payment is made under an
agreement entered into after the change?
A-23: (a) No, payments are not treated
as contingent on a change in ownership or
control if they are made (or to be made)
pursuant to an agreement entered into
after the change (a post-change agree-
ment). For this purpose, an agreement
that is executed after a change in owner-
ship or control pursuant to a legally
enforceable agreement that was entered
into before the change is considered to
have been entered into before the change.
(See Q/A-9 of this section regarding the
exemption for reasonable compensation
for services rendered on or after a change
in ownership or control.) If an individual
has a right to receive a parachute payment
under an agreement entered into prior to a
change in ownership or control (pre-
change agreement) and gives up that right
as bargained-for consideration for ben-
efits under a post-change agreement, the
agreement is treated as a post-change
agreement only to the extent the value of
the payments under the agreement exceed
the value of the payments under the pre-
change agreement. To the extent pay-
ments under the agreement have the same
value as the parachute payments under
the pre-change agreement, such payments
retain their character as parachute pay-
ments subject to this section.
(b) The following examples illustrate
the principles of this A-23:
Example 1. Assume that a disqualified indi-
vidual is an employee of a corporation. A change in
ownership or control of the corporation occurs, and
thereafter the individual enters into an employment
agreement with the acquiring company. Because the
agreement is entered into after the change in owner-
ship or control occurs, payments to be made under
the agreement are not treated as contingent on the
change.
Example 2. Assume the same facts as in
Example 1, except that the agreement between the
disqualified individual and the acquiring company is
executed after the change in ownership or control,
pursuant to a legally enforceable agreement entered
into before the change. Payments to be made under
the agreement may be treated as contingent on the
change in ownership or control pursuant to Q/A-22
of this section. However, see Q/A-9 of this section
regarding the exemption from the definition of para-
chute payment for certain amounts of reasonable
compensation.
Example 3. Assume the same facts as in
Example 1except that prior to the change in owner-
ship or control, the individual and corporation enter
into an agreement under which the individual will
receive parachute payments in the event of a change
in ownership or control of the corporation. After the
change, the individual agrees to give up the right to
parachute payments under the pre-change agreement
in exchange for compensation under a new agree-
ment with the acquiring corporation. Because the
individual gave up the right to parachute payments
under the pre-change agreement in exchange for
other payments under the post-change agreement,
payments in an amount equal to the parachute pay-
ments under the pre-change agreement are treated as
contingent on the change in ownership or control
under this A-23. Because the post-change agreement
was entered into after the change, payments in
excess of this amount are not treated as parachute
payments.
Q-24: If a payment is treated as con-
tingent on a change in ownership or con-
trol, is the full amount of the payment so
treated?
A-24: (a)(1)General rule. Yes, if the
payment is a transfer of property, the
amount of the payment is determined
under Q/A-12 or Q/A-13 of this section.
For all other payments, the amount of the
payment is determined under Q/A-11 of
this section. However, in certain circum-
stances, described in paragraphs (b) and
(c) of this A-24, only a portion of the
payment is treated as contingent on the
change. Paragraph (b) of this A-24
applies to a payment that is vested, with-
out regard to the change in ownership or
control, and is treated as contingent on
the change in ownership or control
because the change accelerates the time at
which the payment is made. Paragraph (c)
of this A-24 applies to a payment that
becomes vested as a result of the change
in ownership or control if, without regard
to the change in ownership or control, the
payment was contingent only on the con-
tinued performance of services for the
corporation for a specified period of time
and if the payment is attributable, at least
in part, to services performed before the
date the payment becomes vested. For
purposes of this A-24, for the definition
of vested see Q/A-22(a).
(2)Reduction by reasonable compen-
sation. The amount of a payment under
paragraph (a)(1) of this A-24 is reduced
by any portion of such payment that the
taxpayer establishes by clear and con-
vincing evidence is reasonable compensa-
tion for personal services rendered by the
disqualified individual on or after the date
of the change of control. See Q/A-9 and
Q/A-38 through 44 of this section for
rules concerning reasonable compensa-
tion. The portion of an amount treated as
contingent under paragraph (b) or (c) of
this A-24 may not be reduced by reason-
able compensation.
(b)Vested payments. This paragraph
(b) applies if a payment is vested, without
regard to the change in ownership or con-
trol, and is treated as contingent on the
change in ownership or control because
the change accelerates the time at which
the payment is made. In such case, the
portion of the payment, if any, that is
treated as contingent on the change in
ownership or control is the amount by
which the amount of the accelerated pay-
ment exceeds the present value of the
payment absent the acceleration. If the
value of such a payment absent the accel-
eration is not reasonably ascertainable,
and the acceleration of the payment does
not significantly increase the present
2002–9 I.R.B.592March 4, 2002

value of the payment absent the accelera-
tion, the present value of the payment
absent the acceleration is treated as equal
to the amount of the accelerated payment.
If the value of the payment absent the
acceleration is not reasonably ascertain-
able, but the acceleration significantly
increases the present value of the pay-
ment, the future value of such payment is
treated as equal to the amount of the
accelerated payment. For rules on deter-
mining present value, see paragraph (e) of
this A-24, Q/A-32, and Q/A-33 of this
section.
(c)(1)Nonvested payments. This para-
graph (c) applies to a payment that
becomes vested as a result of the change
in ownership or control to the extent
that—
(i) Without regard to the change in
ownership or control, the payment was
contingent only on the continued perfor-
mance of services for the corporation for
a specified period of time; and
(ii) The payment is attributable, at
least in part, to the performance of ser-
vices before the date the payment is made
or becomes certain to be made.
(2) The portion of the payment subject
to paragraph (c) of this A-24 that is
treated as contingent on the change in
ownership or control is the lesser of—
(i) The amount of the accelerated pay-
ment; or
(ii) The amount described in paragraph
(b) of this A-24, plus an amount, as deter-
mined in paragraph (c)(4) of this A-24, to
reflect the lapse of the obligation to con-
tinue to perform services.
(3) For purposes of paragraph (c) of
this A-24, the acceleration of the vesting
of a stock option or the lapse of a restric-
tion on restricted stock is considered to
significantly increase the value of a pay-
ment.
(4) The amount reflecting the lapse of
the obligation to continue to perform ser-
vices (described in paragraph (c)(2)(ii) of
this A-24) is 1 percent of the amount of
the accelerated payment multiplied by the
number of full months between the date
that the individual’s right to receive the
payment is vested and the date that,
absent the acceleration, the payment
would have been vested. This paragraph
(c)(4) applies to the accelerated vesting of
a payment in the nature of compensation
even if the time at which the payment is
made is not accelerated.
(d)Application of this A-24 to certain
payments.—(1)Benefits under a non-
qualified deferred compensation plan.In
the case of a payment of benefits under a
nonqualified deferred compensation plan,
paragraph (b) of this A-24 applies to the
extent benefits under the plan are vested
without regard to the change in ownership
or control. Paragraph (c) of this A-24
applies to the extent benefits under the
plan become vested as a result of the
change in ownership or control and are
attributable, at least in part, to the perfor-
mance of services prior to vesting. Any
other payment of benefits under a non-
qualified deferred compensation plan is a
payment in the nature of compensation
subject to the general rule of paragraph
(a) of this A-24 and the rules in Q/A-11
of this section.
(2)Employment agreements. The gen-
eral rule of paragraph (a) of this A-24
applies to the payment of amounts due
under an employment agreement on a ter-
mination of employment or a change in
ownership or control that otherwise
would be attributable to the performance
of services (or refraining from the perfor-
mance of services) during any period that
begins after the date of termination of
employment or change in ownership or
control, as applicable. For purposes of
this paragraph (d)(2) of this A-24, an
employment agreement means an agree-
ment between an employee or indepen-
dent contractor and employer or service
recipient which describes, among other
things, the amount of compensation or
remuneration payable to the employee or
independent contractor. See Q/A-42(b)
and 44 of this section for the treatment of
the remaining amounts of salary under an
employment agreement.
(3)Vesting due to an event other than
services. Neither paragraph (b) nor (c) of
this A-24 applies to a payment if (without
regard to the change in ownership or con-
trol) vesting of the payment depends on
an event other than the performance of
services, such as the attainment of a per-
formance goal, and the event does not
occur prior to the change in ownership or
control. In such circumstances, the full
amount of the accelerated payment is
treated as contingent on the change in
ownership or control under paragraph (a)
of this A-24. However, see Q/A-39 of this
section for rules relating to the reduction
of the excess parachute payment by the
portion of the payment which is estab-
lished to be reasonable compensation for
personal services actually rendered before
the date of a change in ownership or con-
trol.
(e)Present value. For purposes of this
A-24, the present value of a payment is
determined as of the date on which the
accelerated payment is made.
(f)Examples. The following examples
illustrate the principles of this A-24:
Example 1. (i) Corporation maintains a qualified
plan and a nonqualified supplemental retirement
plan (SERP) for its executives. Benefits under the
SERP are not paid to participants until retirement. E,
a disqualified individual with respect to Corpora-
tion, has a vested account balance of $500,000
under the SERP. A change in ownership or control
of Corporation occurs. The SERP provides that in
the event of a change in ownership or control, all
vested accounts will be paid to SERP participants.
(ii) Because E was vested in $500,000 of ben-
efits under the SERP prior to the change in owner-
ship or control and the change merely accelerated
the time at which the payment was made to E, only
a portion of the payment, as determined under para-
graph (b) of this A-24, is treated as contingent on
the change. Thus, the portion of the payment that is
treated as contingent on the change is the amount by
which the amount of the accelerated payment
($500,000) exceeds the present value of the payment
absent the acceleration.
(iii) Assume that instead of having a vested
account balance of $500,000 on the date of the
change in ownership or control, E will vest in E’s
account balance of $500,000 in 2 years if E contin-
ues to perform services for the next 2 years. Assume
further that the SERP provides that all unvested
SERP benefits vest immediately on a change in
ownership or control and are paid to the partici-
pants. Because the vesting of the SERP payment,
without regard to the change, depends only on the
performance of services for a specified period of
time and the payment is attributable, in part, to the
performance of services before the change in own-
ership or control, only a portion of the $500,000
payment, as determined under paragraph (c) of this
A-24, is treated as contingent on the change. The
portion of the payment that is treated as contingent
on the change is the lesser of the amount of the
accelerated payment or the amount by which the
accelerated payment exceeds the present value of
the payment absent the acceleration, plus an amount
to reflect the lapse of the obligation to continue to
perform services.
(iv) Assume further that under the SERP E’s
vested account balance of $500,000 will be paid to
E on the change in ownership or control and an
additional $70,000 will be credited to E’s account.
Because the $500,000 was vested without regard to
the change in ownership or control, paragraph (b) of
this A-24 applies to the $500,000 payment. Because
the $70,000 is not vested, without regard to the
change, and is not attributable to the performance of
March 4, 20025932002–9 I.R.B.

services prior to the change, the entire $70,000 pay-
ment is contingent on the change in ownership or
control under paragraph (a) of this A-24.
Example 2. As a result of a change in the effec-
tive control of a corporation, a disqualified indi-
vidual with respect to the corporation, D, receives
accelerated payment of D’s vested account balance
in a nonqualified deferred compensation account
plan. Actual interest and other earnings on the plan
assets are credited to each account as earned before
distribution. Investment of the plan assets is not
restricted in such a manner as would prevent the
earning of a market rate of return on the plan assets.
The date on which D would have received D’s
vested account balance absent the change in owner-
ship or control is uncertain, and the rate of earnings
on the plan assets is not fixed. Thus, the amount of
the payment absent the acceleration is not reason-
ably ascertainable. Under these facts, acceleration of
the payment does not significantly increase the
present value of the payment absent the accelera-
tion, and the present value of the payment absent the
acceleration is treated as equal to the amount of the
accelerated payment. Accordingly, no portion of the
payment is treated as contingent on the change.
Example 3. (i) On January 15, 2006, a corpora-
tion and a disqualified individual, F, enter into a
contract providing for a retention bonus of $500,000
to be paid to F on January 15, 2011. The payment
of the bonus will be forfeited by F if F does not
remain employed by the corporation for the entire
5-year period. However, the contract provides that
the full amount of the payment will be made imme-
diately on a change in ownership or control of the
corporation during the 5-year period. On January
15, 2009, a change in ownership or control of the
corporation occurs and the full amount of the pay-
ment ($500,000) is made on that date to F. Under
these facts, the payment of $500,000 was contingent
only on F’s performance of services for a specified
period and is attributable, in part, to the performance
of services before the change in ownership or con-
trol Therefore, only a portion of the payment is
treated as contingent on the change. The portion of
the payment that is treated as contingent on the
change is the amount by which the amount of the
accelerated payment (i.e.$500,000, the amount paid
to the individual because of the change in owner-
ship) exceeds the present value of the payment that
was expected to have been made absent the accel-
eration (i.e.$406,838, the present value on January
15, 2009, of a $500,000 payment on January 15,
2011), plus $115,000 (1% x 23 months x $500,000)
which is the amount reflecting the lapse of the obli-
gation to continue to perform services. Accordingly,
the amount of the payment treated as contingent on
the change in ownership or control is $208,162, the
sum of $93,162 ($500,000 - $406,838) + $115,000).
This result is not changed if F actually remains
employed until the end of the 5-year period.
(ii) Assume that the contract provides that the
retention bonus will vest on a change in ownership
or control, but will not be paid until January 15,
2011 (the original date in the contract). Because the
payment of $500,000 was contingent only on F’s
performance of services for a specified period and is
attributable, in part, to the performance of services
before the change in ownership or control, only a
portion of the $500,000 payment is treated as con-
tingent on the change. Because there is no acceler-
ated payment, the portion of the payment treated as
contingent on the change is an amount reflecting the
lapse of the obligation to continue to perform ser-
vices which is $115,000 (1% x 23 months x
$500,000).
Example 4. (i) On January 15, 2006, a corpora-
tion gives to a disqualified individual, in connection
with her performance of services to the corporation,
a bonus of 1,000 shares of the corporation’s stock.
Under the terms of the bonus arrangement, the indi-
vidual is obligated to return the stock to the corpo-
ration if she terminates her employment for any rea-
son prior to January 15, 2011. However, if there is a
change in the ownership or effective control of the
corporation prior to January 15, 2011, she ceases to
be obligated to return the stock. The individual’s
rights in the stock are treated as substantially non-
vested (within the meaning of§1.83–3(b) and (j))
during that period. On January 15, 2008, a change in
the ownership of the corporation occurs. On that
day, the fair market value of the stock is $500,000.
(ii) Under these facts, the payment was contin-
gent only on performance of services for a specified
period and is attributable, in part, to the performance
of services before the change in ownership or con-
trol. Thus, only a portion of the payment is treated
as contingent on the change in ownership or control.
The portion of the payment that is treated as contin-
gent on the change is the amount by which the
present value of the accelerated payment on January
15, 2009 ($500,000), exceeds the present value of
the payment that was expected to have been made
on January 15, 2011, plus an amount reflecting the
lapse of the obligation to continue to perform ser-
vices. At the time of the change, it cannot be reason-
ably ascertained what the value of the stock would
have been on January 15, 2011. The acceleration of
the lapse of a restriction on stock is treated as sig-
nificantly increasing the value of the payment.
Therefore, the value of such stock on January 15,
2011, is deemed to be $500,000, the amount of the
accelerated payment. The present value on January
15, 2009, of a $500,000 payment to be made on
January 15, 2011, is $406,838. Thus, the portion of
the payment treated as contingent on the change is
$208,162, the sum of $93,162 ($500,000 -
$406,838), plus $115,000 [1% x 23 months x
$500,000], the amount reflecting the lapse of the
obligation to continue to perform services.
Example 5. (i) On January 15, 2006, a corpora-
tion grants to a disqualified individual nonqualified
stock options to purchase 30,000 shares of the cor-
poration’s stock. The options do not have a readily
ascertainable fair market value at the time of grant.
The options will be forfeited by the individual if he
fails to perform personal services for the corporation
until January 15, 2009. The options will, however,
vest in the individual at an earlier date if there is a
change in ownership or control of the corporation.
On January 16, 2008, a change in the ownership of
the corporation occurs and the options become
vested in the individual. On January 16, 2008, the
options have an ascertainable fair market value of
$600,000.
(ii) The payment of the options to purchase
30,000 shares was contingent only on performance
of services for the corporation until January 15,
2009, and is attributable, in part, to the performance
of services before the change in ownership or con-
trol. Therefore, only a portion of the payment is
treated as contingent on the change. The portion of
the payment that is treated as contingent on the
change is the amount by which the accelerated pay-
ment on January 16, 2008 ($600,000) exceeds the
present value on January 16, 2008, of the payment
that was expected to have been made on January 15,
2009, absent the acceleration, plus an amount
reflecting the lapse of the obligation to continue to
perform services. At the time of the change, it can-
not be reasonably ascertained what the value of the
options would have been on January 15, 2009. The
acceleration of vesting in the options is treated as
significantly increasing the value of the payment.
Therefore, the value of such options on January 15,
2009, is deemed to be $600,000, the amount of the
accelerated payment. The present value on January
16, 2008, of a $600,000 payment to be made on
January 15, 2009, is $549,964.13. Thus, the portion
of the payment treated as contingent on the change
is $116,035.87, the sum of $50,035.87 ($600,000 -
$549,964.13), plus an amount reflecting the lapse of
the obligation to continue to perform services which
is $66,000 (1% x 11 months x $600,000).
Example 6. (i) The facts are the same as in
Example 5, except that the options become vested
periodically (absent a change in ownership of con-
trol), with one-third of the options vesting on Janu-
ary 15, 2007, 2008, and 2009, respectively. Thus,
options to purchase 20,000 shares vest indepen-
dently of the January 16, 2008, change in ownership
and the options to purchase the remaining 10,000
shares vest as a result of the change.
(ii) The payment of the options to purchase
10,000 shares was contingent only on performance
of services for the corporation until January 15,
2009, and is attributable, in part, to the performance
of services before the change in ownership or con-
trol. Therefore, only a portion of the payment is
treated as contingent on the change. The portion of
the payment that is treated as contingent on the
change is the amount by which the accelerated pay-
ment on January 16, 2008 ($200,000), exceeds the
present value on January 16, 2008, of the payment
that was expected to have been made on January 15,
2009, absent the acceleration, plus an amount
reflecting the lapse of the obligation to perform ser-
vices. At the time of the change, it cannot be reason-
ably ascertained what the value of the options would
have been on January 15, 2009. The acceleration of
vesting in the options is treated as significantly
increasing the value of the payment. Therefore, the
value of such options on January 15, 2009, is
deemed to be $200,000, the amount of the acceler-
ated payment. The present value on January 16,
2008, of a $200,000 payment to be made on Janu-
ary 15, 2009, is $183,328.38. Thus, the portion of
the payment treated as contingent on the change is
$38,671.62, the sum of $16,671.62 ($200,000 -
$183,328.38), plus an amount reflecting the lapse of
the obligation to continue to perform services which
is $22,000 (1% x 11 months x $200,000).
Example 7. Assume the same facts as in
Example 5, except that the option agreement pro-
vides that the options will vest either on the corpo-
ration’s level of profits reaching a specified level, or
if earlier, on the date on which there is a change in
ownership or control of the corporation. The corpo-
ration’s level of profits do not reach the specified
level prior to January 16, 2008. In such case, the full
2002–9 I.R.B.594March 4, 2002

amount of the payment, $600,000, is treated as con-
tingent on the change because it was not contingent
only on performance of services for the corporation
for a specified period. See Q/A-39 of this section for
rules relating to the reduction of the excess para-
chute payment by the portion of the payment which
is established to be reasonable compensation for
personal services actually rendered before the date
of a change in ownership or control.
Example 8. On January 1, 2002, E, a disqualified
individual with respect to Corporation X, enters into
an employment agreement with Corporation X
under which E will be paid wages of $200,000 each
year during the 5-year employment agreement. The
employment agreement provides that if a change in
ownership or control of Corporation X occurs, E
will be paid the present value of the remaining sal-
ary under the employment agreement. On January 1,
2003, a change in ownership or control of Corpora-
tion X occurs, E is terminated, and E receives a
payment of the present value of $200,000 for each
of the 4 years remaining under the employment
agreement. Because the payment represents future
salary under an employment agreement (i.e.,
amounts otherwise attributable to the performance
of services for periods that begin after the termina-
tion of employment), the general rule of paragraph
(a) of this A-24 applies to the payment. See Q/A-
42(c) and 44 of this section for the treatment of the
remaining payments under an employment agree-
ment.
Presumption That Payment Is Contingent
on Change
Q-25: Is there a presumption that cer-
tain payments are contingent on a change
in ownership or control?
A-25: Yes, for purposes of this section,
any payment is presumed to be contingent
on such change unless the contrary is
established by clear and convincing evi-
dence if the payment is made pursuant
to—
(a) An agreement entered into within
one year before the date of a change in
ownership or control; or
(b) An amendment that modifies a pre-
vious agreement in any significant
respect, if the amendment is made within
one year before the date of a change in
ownership or control. In the case of an
amendment described in paragraph (b) of
this A-25, only the portion of any pay-
ment that exceeds the amount of such
payment that would have been made in
the absence of the amendment is pre-
sumed, by reason of the amendment, to
be contingent on the change in ownership
or control.
Q-26: How may the presumption
described in Q/A-25 of this section be
rebutted?
A-26: (a) To rebut the presumption
described in Q/A-25 of this section, the
taxpayer must establish by clear and con-
vincing evidence that the payment is not
contingent on the change in ownership or
control. Whether the payment is contin-
gent on such change is determined on the
basis of all the facts and circumstances of
the particular case. Factors relevant to
such a determination include, but are not
limited to the content of the agreement or
amendment and the circumstances sur-
rounding the execution of the agreement
or amendment, such as whether it was
entered into at a time when a takeover
attempt had commenced and the degree
of likelihood that a change in ownership
or control would actually occur. However,
even if the presumption is rebutted with
respect to an agreement, some or all of
the payments under the agreement may
still be contingent on the change in own-
ership or control pursuant to Q/A-22 of
this section.
(b) In the case of an agreement
described in paragraph (a) of Q/A-25 of
this section, clear and convincing evi-
dence that the agreement is one of the
three following types will generally rebut
the presumption that payments under the
agreement are contingent on the change
in ownership or control—
(1) Anondiscriminatory employee
plan or programas defined in paragraph
(c) of this A-26;
(2) A contract between a corporation
and an individual that replaces a prior
contract entered into by the same parties
more than one year before the change in
ownership or control, if the new contract
does not provide for increased payments
(apart from normal increases attributable
to increased responsibilities or cost of liv-
ing adjustments), accelerate the payment
of amounts due at a future time, or
modify (to the individual’s benefit) the
terms or conditions under which pay-
ments will be made; or
(3) A contract between a corporation
and an individual who did not perform
services for the corporation prior to the
one year period before the change in
ownership or control occurs, if the con-
tract does not provide for payments that
are significantly different in amount, tim-
ing, terms, or conditions from those pro-
vided under contracts entered into by the
corporation (other than contracts that
themselves were entered into within one
year before the change in ownership or
control and in contemplation of the
change) with individuals performing
comparable services.
(c) For purposes of this section, the
termnondiscriminatory employee plan or
programmeans: a group term life insur-
ance plan that meets the requirements of
section 79(d); a self insured medical
reimbursement plan that meets the
requirements of section 105(h); a cafete-
ria plan (within the meaning of section
125); an educational assistance program
(within the meaning of section 127); a
dependent care assistance program
(within the meaning of section 129); or a
no-additional-cost service (within the
meaning of section 132(b)) or qualified
employee discount (within the meaning
of section 132(c)); and an adoption assis-
tance program (within the meaning of
section 137). Payments under certain
other plans are exempt from the definition
ofparachute paymentunder Q/A-8 of this
section.
(d) The following examples illustrate
the application of the presumption:
Example 1. A corporation and a disqualified
individual who is an employee of the corporation
enter into an employment contract. The contract
replaces a prior contract entered into by the same
parties more than one year before the change and
the new contract does not provide for any increased
payments other than a cost of living adjustment,
does not accelerate the payment of amounts due at a
future time, and does not modify (to the individual’s
benefit) the terms or conditions under which pay-
ments will be made. Clear and convincing evidence
of these facts rebuts the presumption described in
A-25 of this section. However, payments under the
contract still may be contingent on the change in
ownership or control pursuant to Q/A-22 of this sec-
tion.
Example 2. Assume the same facts as in
Example 1, except that the contract is entered into
after a tender offer for the corporation’s stock had
commenced and it was likely that a change in own-
ership would occur and the contract provides for a
substantial bonus payment to the individual upon his
signing the contract. The individual has performed
services for the corporation for many years, but pre-
vious employment contracts between the corpora-
tion and the individual did not provide for a similar
signing bonus. One month after the contract is
entered into, a change in the ownership of the cor-
poration occurs. All payments under the contract are
presumed to be contingent on the change in owner-
ship even though the bonus payment would have
been legally required even if no change had
occurred. Clear and convincing evidence of these
facts rebuts the presumption described in A-25 of
this section with respect to all of the payments under
March 4, 20025952002–9 I.R.B.

the contract with the exception of the bonus pay-
ment (which is treated as contingent on the change).
However, payments other than the bonus under the
contract still may be contingent on the change in
ownership or control pursuant to Q/A-22 of this sec-
tion.
Example 3. A corporation and a disqualified
individual, who is an employee of the corporation,
enter into an employment contract within one year
of a change in ownership of the corporation. Under
the contract, in the event of a change in ownership
or control and subsequent termination of employ-
ment, certain payments will be made to the indi-
vidual. A change in ownership occurs, but the indi-
vidual is not terminated until 2 years after the
change. If clear and convincing evidence does not
rebut the presumption described in A-25 of this sec-
tion, because the payment is made pursuant to an
agreement entered into within one year of the date
of the change in ownership, the payment is pre-
sumed contingent on the change under A-25 of this
section. This is true even though A’s termination of
employment is presumed not to be materially related
to the change in ownership or control under Q/A-22
of this section.
Change in Ownership or Control
Q-27: When does a change in the own-
ership of a corporation occur?
A-27: (a) For purposes of this section,
a change in the ownership or control of a
corporation occurs on the date that any
one person, or more than one person act-
ing as a group, acquires ownership of
stock of the corporation that, together
with stock held by such person or group,
owns more than 50 percent of the total
fair market value or total voting power of
the stock of such corporation. However, if
any one person, or more than one person
acting as a group, is considered to own
more than 50 percent of the total fair mar-
ket value or total voting power of the
stock of a corporation, the acquisition of
additional stock by the same person or
persons is not considered to cause a
change in the ownership of the corpora-
tion (or to cause a change in the effective
control of the corporation (within the
meaning of Q/A-28 of this section)). An
increase in the percentage of stock owned
by any one person, or persons acting as a
group, as a result of a transaction in
which the corporation acquires its stock
in exchange for property will be treated
as an acquisition of stock for purposes of
this section.
(b) For purposes of paragraph (a) of
this A-27, persons will not be considered
to be acting as a group merely because
they happen to purchase or own stock of
the same corporation at the same time, or
as a result of the same public offering.
However, persons will be considered to
be acting as a group if they are owners of
an entity that enters into a merger, con-
solidation, purchase or acquisition of
stock, or similar business transaction with
the corporation. If a person, including an
entity shareholder, owns stock in both
entities that enter into a merger, consoli-
dation, purchase or acquisition of stock,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in an entity only to the
extent of his ownership in that entity prior
to the transaction giving rise to the
change and not with respect to his owner-
ship interest in the other entity.
(c) For purposes of this A-27, section
318(a) applies to determine stock owner-
ship.
(d) The following examples illustrate
the principles of this A-27:
Example 1. Corporation M has owned stock with
a fair market value equal to 19 percent of the value
of the stock of Corporation N (an otherwise unre-
lated corporation) for many years prior to 2006.
Corporation M acquires additional stock with a fair
market value equal to 15 percent of the value of the
stock of Corporation N on January 1, 2006, and an
additional 18 percent on February 21, 2007. As of
February 21, 2007, Corporation M has acquired
stock with a fair market value greater than 50 per-
cent of the value of the stock of Corporation N.
Thus, a change in the ownership of Corporation N is
considered to occur on February 21, 2007 (assuming
that Corporation M did not have effective control of
Corporation N immediately prior to the acquisition
on that date).
Example 2. All of the corporation’s stock is
owned by the founders of the corporation. The
board of directors of the corporation decides to offer
shares of the corporation to the public. After the
public offering, the founders of the corporation own
a total of 40 percent of the corporation’s stock, and
members of the public own 60 percent. If no one
person (or more than one person acting as a group)
owns more than 50 percent of the corporation’s
stock (by value or voting power) after the public
offering, there is no change in the ownership of the
corporation.
Example 3. Corporation P merges into Corpora-
tion O (a previously unrelated corporation). In the
merger, the shareholders of Corporation P receive
Corporation O stock in exchange for their Corpora-
tion P stock. Immediately after the merger, the
former shareholders of Corporation P own stock
with a fair market value equal to 60 percent of the
value of the stock of Corporation O, and the former
shareholders of Corporation O own stock with a fair
market value equal to 40 percent of the value of the
stock of Corporation O. The former shareholders of
Corporation P will be treated as acting as a group in
their acquisition of Corporation O stock. Thus, a
change in the ownership of Corporation O occurs on
the date of the merger.
Example 4. Assume the same facts as in
Example 3except that immediately after the change,
the former shareholders of Corporation P own stock
with a fair market value of 51 percent of the value
of Corporation O stock and the former shareholders
of Corporation O own stock with a fair market value
equal to 49 percent of the value of Corporation O
stock. Assume further that prior to the merger sev-
eral Corporation P shareholders also owned Corpo-
ration O stock (overlapping shareholders) with a fair
market value of 5 percent of the value of Corpora-
tion O stock. The overlapping shareholders consist
of Mutual Company A Growth Fund, which prior to
the transaction owns 3 percent of the value of Cor-
poration O stock, Mutual Company A Income Fund,
which prior to the transaction owns 1 percent of the
value of Corporation O stock, and B, an individual
who prior to the transaction owns 1 percent of the
value of Corporation O stock. Growth Fund and
Income Fund are treated as separate shareholders
with respect to their ownership interests in Corpora-
tion O and Corporation P. The overlapping share-
holders are not treated as acting as a group with the
Corporation P shareholders with respect to the Cor-
poration O stock each overlapping shareholder held
before the transaction. Instead, the overlapping
shareholders are treated as acting as a group sepa-
rately with respect to Corporation O and Corpora-
tion P. Because the former shareholders of Corpora-
tion O are treated as acting as a group with respect
to other Corporation O shareholders only to the
extent of their ownership interest in Corporation O
and not with respect to their ownership interest in
Corporation P, a change in the ownership of Corpo-
ration O occurs on the date of the merger.
Example 5. A, an individual, owns stock with a
fair market value equal to 20 percent of the value of
the stock of Corporation Q. On January 1, 2007,
Corporation Q acquires in a redemption for cash all
of the stock held by shareholders other than A.
Thus, A is left as the sole shareholder of Corpora-
tion O. A change in ownership of Corporation O is
considered to occur on January 1, 2007 (assuming
that A did not have effective control of Corporation
Q immediately prior to the redemption).
Example 6. Assume the same facts as in
Example 5, except that A owns stock with a fair
market value equal to 51 percent of the value of all
the stock of Corporation Q immediately prior to the
redemption. There is no change in the ownership of
Corporation Q as a result of the redemption.
Q-28: When does a change in the
effective control of a corporation occur?
A-28: (a) For purposes of this section,
a change in the effective control of a cor-
poration is presumed to occur on the date
that either—
(1) Any one person, or more than one
person acting as a group, acquires (or has
acquired during the 12-month period end-
ing on the date of the most recent acqui-
sition by such person or persons) owner-
ship of stock of the corporation
possessing 20 percent or more of the total
voting power of the stock of such corpo-
ration; or
2002–9 I.R.B.596March 4, 2002

(2) A majority of members of the cor-
poration’s board of directors is replaced
during any 12-month period by directors
whose appointment or election is not
endorsed by a majority of the members of
the corporation’s board of directors prior
to the date of the appointment or election.
(b) The presumption of paragraph (a)
of this A-28 may be rebutted by establish-
ing that such acquisition or acquisitions
of the corporation’s stock, or such
replacement of the majority of the mem-
bers of the corporation’s board of direc-
tors, does not transfer the power to con-
trol (directly or indirectly) the
management and policies of the corpora-
tion from any one person (or more than
one person acting as a group) to another
person (or group). For purposes of this
section, in the absence of an event
described in paragraph (a)(1) or (2) of
this A-28, a change in the effective con-
trol of a corporation is presumed not to
have occurred.
(c) If any one person, or more than one
person acting as a group, is considered to
effectively control a corporation (within
the meaning of this A-28), the acquisition
of additional control of the corporation by
the same person or persons is not consid-
ered to cause a change in the effective
control of the corporation (or to cause a
change in the ownership of the corpora-
tion within the meaning of Q/A-27 of this
section).
(d) For purposes of this A-28, persons
will not be considered to be acting as a
group merely because they happen to pur-
chase or own stock of the same corpora-
tion at the same time, or as a result of the
same public offering. However, persons
will be considered to be acting as a group
if they are owners of an entity that enters
into a merger, consolidation, purchase or
acquisition of stock, or similar business
transaction with the corporation. If a per-
son, including an entity shareholder, owns
stock in both entities that enter into a
merger, consolidation, purchase or acqui-
sition of stock, or similar transaction,
such shareholder is considered to be act-
ing as a group with other shareholders in
an entity only to the extent of his owner-
ship in that entity prior to the transaction
giving rise to the change and not with
respect to his ownership interest in the
other entity.
(e) Section 318(a) applies to determine
stock ownership for purposes of this
A-28.
(f) The following examples illustrate
the principles of this A-28:
Example 1. Shareholder A acquired the follow-
ing percentages of the voting stock of Corporation
M (an otherwise unrelated corporation) on the fol-
lowing dates: 16 percent on January 1, 2005; 10
percent on January 10, 2006; 8 percent on February
10, 2006; 11 percent on March 1, 2007; and 8 per-
cent on March 10, 2007. Thus, on March 10, 2007,
A owns a total of 53 percent of M’s voting stock.
Because A did not acquire 20 percent or more of
M’s voting stock during any 12-month period, there
is no presumption of a change in effective control
pursuant to paragraph (a)(1) of this A-28. In addi-
tion, under these facts there is a presumption that no
change in the effective control of Corporation M
occurred. If this presumption is not rebutted (and
thus no change in effective control of Corporation
M is treated as occurring prior to March 10, 2007),
a change in the ownership of Corporation M is
treated as having occurred on March 10, 2007 (pur-
suant to Q/A-27 of this section), because A had
acquired more than 50 percent of Corporation M’s
voting stock as of that date.
Example 2. A minority group of shareholders of
a corporation opposes the practices and policies of
the corporation’s current board of directors. A proxy
contest ensues. The minority group presents its own
slate of candidates for the board at the next annual
meeting of the corporation’s shareholders, and can-
didates of the minority group are elected to replace
a majority of the current members of the board. A
change in the effective control of the corporation is
presumed to have occurred on the date the election
of the new board of directors becomes effective.
Q-29: When does a change in the own-
ership of a substantial portion of a corpo-
ration’s assets occur?
A-29: (a) For purposes of this section,
a change in the ownership of a substantial
portion of a corporation’s assets occurs
on the date that any one person, or more
than one person acting as a group,
acquires (or has acquired during the
12-month period ending on the date of the
most recent acquisition by such person or
persons) assets from the corporation that
have a total gross fair market value equal
to or more than one third of the total
gross fair market value of all of the assets
of the corporation immediately prior to
such acquisition or acquisitions.
(b) A transfer of assets by a corpora-
tion is not treated as a change in the own-
ership of such assets if the assets are
transferred to—
(1) A shareholder of the corporation
(immediately before the asset transfer) in
exchange for or with respect to its stock;
(2) An entity, 50 percent or more of
the total value or voting power of which
is owned, directly or indirectly, by the
corporation;
(3) A person, or more than one person
acting as a group, that owns, directly or
indirectly, 50 percent or more of the total
value or voting power of all the outstand-
ing stock of the corporation; or
(4) An entity, at least 50 percent of the
total value or voting power is owned,
directly or indirectly, by a person
described in paragraph (b)(3) of this
A-29.
(c) For purposes of paragraph (b) and
except as otherwise provided, a person’s
status is determined immediately after the
transfer of the assets. For example, a
transfer of assets pursuant to a complete
liquidation of a corporation, a redemption
of a shareholder’s interest, or a transfer to
a majority-owned subsidiary of the corpo-
ration is not treated as a change in the
ownership of the assets of the transferor
corporation.
(d) For purposes of this A-29, persons
will not be considered to be acting as a
group merely because they happen to pur-
chase or own stock of the same corpora-
tion at the same time, or as a result of the
same public offering. However, persons
will be considered to be acting as a group
if they are owners of an entity that enters
into a merger, consolidation, purchase or
acquisition of stock, or similar business
transaction with the corporation. If a per-
son, including an entity shareholder, owns
stock in both entities that enter into a
merger, consolidation, purchase or acqui-
sition of stock, or similar transaction,
such shareholder is considered to be act-
ing as a group with other shareholders in
an entity only to the extent of his owner-
ship in that entity prior to the transaction
giving rise to the change and not with
respect to his ownership interest in the
other entity.
(e) For purposes of this A-29, section
318(a) applies in determining stock own-
ership.
(f) The following examples illustrate
the principles of this A-29:
Example 1. Corporation M acquires assets hav-
ing a gross fair market value of $500,000 from Cor-
poration N (an unrelated corporation) on January 1,
2006. The total gross fair market value of Corpora-
tion N’s assets immediately prior to the acquisition
was $3 million. Since the value of the assets
acquired by Corporation M is less than one-third of
the fair market value of Corporation N’s total assets
March 4, 20025972002–9 I.R.B.

immediately prior to the acquisition, the acquisition
does not represent a change in the ownership of a
substantial portion of Corporation N’s assets.
Example 2. Assume the same facts as in
Example 1. Also assume that on November 1, 2006,
Corporation M acquires from Corporation N addi-
tional assets having a fair market value of $700,000.
Thus, Corporation M has acquired from Corporation
N assets worth a total of $1.2 million during the
12-month period ending on November 1, 2006.
Since $1.2 million is more than one-third of the total
gross fair market value of all of Corporation N’s
assets immediately prior to the earlier of these
acquisitions ($3 million), a change in the ownership
of a substantial portion of Corporation N’s assets is
considered to have occurred on November 1, 2006.
Example 3. All of the assets of Corporation P are
transferred to Corporation O (an unrelated corpora-
tion). In exchange, the shareholders of Corporation
P receive Corporation O stock. Immediately after
the transfer, the former shareholders of Corporation
P own 60 percent of the fair market value of the
outstanding stock of Corporation O and the former
shareholders of Corporation O own 40 percent of
the fair market value of the outstanding stock of
Corporation O. Because Corporation O is an entity
more than 50 percent of the fair market value of the
outstanding stock of which is owned by the former
shareholders of Corporation P (based on ownership
of Corporation P prior the change), the transfer of
assets is not treated as a change in ownership of a
substantial portion of the assets of Corporation P.
However, a change in the ownership (within the
meaning of Q/A-27) of Corporation O occurs.
Three-Times-Base-Amount Test for
Parachute Payments
Q-30: Are all payments that are in the
nature of compensation, are made to a
disqualified individual, and are contingent
on a change in ownership or control,
parachute payments?
A-30: (a) No, to determine whether
such payments are parachute payments,
they must be tested against the individu-
al’sbase amount(as defined in Q/A-34 of
this section). To do this, the aggregate
present value of all payments in the
nature of compensation that are made or
to be made to (or for the benefit of) the
same disqualified individual and are con-
tingent on the change in ownership or
control must be determined. If this aggre-
gate present value equals or exceeds the
amount equal to 3 times the individual’s
base amount, the payments are parachute
payments. If this aggregate present value
is less than the amount equal to 3 times
the individual’s base amount, no portion
of the payment is a parachute payment.
See Q/A-31, Q/A-32, and Q/A-33 of this
section for rules on determining present
value. Parachute payments that are secu-
rities violation parachute payments are
not included in the foregoing computation
if they are not contingent on a change in
ownership or control. See Q/A-37 of this
section for the definition and treatment of
securities violation parachute payments.
(b) The following examples illustrate
the principles of this A-30:
Example 1. A is a disqualified individual with
respect to Corporation M. A’s base amount is
$100,000. Payments in the nature of compensation
that are contingent on a change in the ownership of
Corporation M totaling $400,000 are made to A on
the date of the change. The payments are parachute
payments since they have an aggregate present
value at least equal to 3 times A’s base amount of
$100,000 (3 X $100,000 = $300,000).
Example 2. Assume the same facts as in
Example 1, except that the payments contingent on
the change in the ownership of Corporation M total
$290,000. Since the payments do not have an aggre-
gate present value at least equal to 3 times A’s base
amount, no portion of the payments is a parachute
payment.
Q-31: As of what date is the present
value of a payment determined?
A-31: (a) Except as provided in this
section, the present value of a payment is
determined as of the date on which the
change in ownership or control occurs, or,
if a payment is made prior to such date,
the date on which the payment is made.
(b)(1) For purposes of determining
whether a payment is a parachute pay-
ment, if a payment in the nature of com-
pensation is the right to receive payments
in a year (or years) subsequent to the year
of the change in ownership or control, the
value of the payment is the present value
of such payment (or payments) calculated
in accordance with Q/A-32 of this section
and based on reasonable actuarial
assumptions.
(2) If the payment in the nature of
compensation is an obligation to provide
health care, then for purposes of this A-31
and for applying the 3-times-base-amount
test under Q/A-30 of this section, the
present value of such obligation should be
calculated in accordance with generally
accepted accounting principles. For pur-
poses of Q/A-30 and this A-31, the obli-
gation to provide health care is permitted
to be measured by projecting the cost of
premiums for purchased health care insur-
ance, even if no health care insurance is
actually purchased. If the obligation to
provide health care is made in coordina-
tion with a health care plan that the cor-
poration makes available to a group, then
the premiums used for this purpose may
be group premiums.
Q-32: What discount rate is to be used
to determine present value?
A-32: For purposes of this section,
present value generally is determined by
using a discount rate equal to 120 percent
of the applicable Federal rate (determined
under section 1274(d) and the regulations
thereunder) compounded semiannually.
The applicable Federal rate to be used for
this purpose is the Federal rate that is in
effect on the date as of which the present
value is determined. See Q/A-24 and 31
of this section. However, for any pay-
ment, the corporation and the disqualified
individual may elect to use the applicable
Federal rate that is in effect on the date
that the contract which provides for the
payment is entered into, if such election
is made in the contract.
Q-33: If the present value of a pay-
ment to be made in the future is contin-
gent on an uncertain future event or con-
dition, how is the present value of the
payment determined?
A-33: (a) In certain cases, it may be
necessary to apply the 3-times-base-
amount test of Q/A-30 of this section or
to allocate a portion of the base amount to
a payment described in paragraphs (a)(1),
(2), and (3) of Q/A-2 of this section at a
time when the aggregate present value of
all such payments cannot be determined
with certainty because the time, amount,
or right to receive one or more such pay-
ments is contingent on the occurrence of
an uncertain future event or condition.
For example, a disqualified individual’s
right to receive a payment may be contin-
gent on the involuntary termination of
such individual’s employment with the
corporation. In such a case, it must be
reasonably estimated whether the pay-
ment will be made. If it is reasonably esti-
mated that there is a 50-percent or greater
probability that the payment will be
made, the full amount of the payment is
considered for purposes of the 3-times-
base-amount test and the allocation of the
base amount. Conversely, if it is reason-
ably estimated that there is a less than
50-percent probability that the payment
will be made, the payment is not consid-
ered for either purpose.
(b) If the estimate made under para-
graph (a) of this A-33 is later determined
to be incorrect, the 3-times-base-amount
2002–9 I.R.B.598March 4, 2002

test described in Q/A-30 of this section
must be reapplied (and the portion of the
base amount allocated to previous pay-
ments must be reallocated (if necessary)
to such payments) to reflect the actual
time and amount of the payment. When-
ever the 3-times-base-amount test is
applied (or whenever the base amount is
allocated), the aggregate present value of
the payments received or to be received
by the disqualified individual is redeter-
mined as of the date described in A-31 of
this section, using the discount rate
described in A-32 of this section. This
redetermination may affect the amount of
any excess parachute payment for a prior
taxable year. Alternatively, if, based on
the application of the 3-times-base-
amount test without regard to the pay-
ment described in paragraph (a) of this
A-33, a disqualified individual is deter-
mined to have an excess parachute pay-
ment or payments, then the 3-times-base-
amount test does not have to be reapplied
when a payment described in paragraph
(a) of this A-33 is made (or becomes cer-
tain to be made) if no base amount is
allocated to such payment.
(c) The following examples illustrate
the principles of this A-33:
Example 1. A, a disqualified individual with
respect to Corporation M, has a base amount of
$100,000. Under A’s employment agreement with
Corporation M, A is entitled to receive a payment in
the nature of compensation in the amount of
$250,000 contingent on a change in ownership or
control of Corporation M. In addition, the agree-
ment provides that if A’s employment is terminated
within 1 year after the change in ownership or con-
trol, A will receive an additional payment in the
nature of compensation in the amount of $150,000,
payable 1 year after the date of the change in own-
ership or control. A change in ownership or control
of Corporation M occurs and A receives the first
payment of $250,000. Corporation M reasonably
estimates that there is a 50-percent probability that,
as a result of the change, A’s employment will be
terminated within 1 year of the date of the change.
For purposes of applying the 3-times-base-amount
test (and if the first payment is determined to be a
parachute payment, for purposes of allocating a por-
tion of A’s base amount to that payment), because
M reasonably estimates that there is a 50-percent or
greater probability that, as a result of the change, A’s
employment will be terminated within 1 year of the
date of the change, Corporation M must assume that
the $150,000 payment will be made to A as a result
of the change in ownership or control. The present
value of the additional payment is determined under
Q/A-31 and Q/A-32 of this section.
Example 2. Assume the same facts as in
Example 1except that Corporation M reasonably
estimates that there is a less than 50-percent prob-
ability that, as a result of the change, A’s employ-
ment will be terminated within 1 year of the date of
the change. For purposes of applying the 3-times-
base-amount test, because Corporation M reason-
ably estimates that there is a less than 50-percent
probability that, as a result of the change, A’s
employment will be terminated within 1 year of the
date of the change, Corporation M must assume that
the $150,000 payment will not be made to A as a
result of the change in ownership or control.
Example 3. B, a disqualified individual with
respect to Corporation P, has a base amount of
$200,000. Under B’s employment agreement with
Corporation P, if there is a change in ownership or
control of Corporation P, B will receive a severance
payment of $600,000 and a bonus payment of
$400,000. In addition, the agreement provides that if
B’s employment is terminated within 1 year after
the change, B will receive an additional payment in
the nature of compensation of $500,000. A change
in ownership or control of Corporation P occurs, and
B receives the $600,000 and $400,000 payments. At
the time of the change in ownership or control, Cor-
poration P reasonably estimates that there is a less
than 50-percent probability that B’s employment
will be terminated within 1 year of the change. For
purposes of applying the 3-times-base-amount test,
because Corporation P reasonably estimates that
there is a less than 50-percent probability that B’s
employment will be terminated within 1 year of the
date of the change, Corporation P assumes that the
$500,000 payment will not be made to B. Eleven
months after the change in ownership or control, B’s
employment is terminated, and the $500,000 pay-
ment is made to B. Because B was determined to
have excess parachute payments without regard to
the $500,000 payment, the 3-times-base-amount test
is not reapplied and the base amount is not reallo-
cated to include the $500,000 payment. The entire
$500,000 payment is treated as an excess parachute
payment.
Q-34: What is the base amount?
A-34: (a) The base amount of a dis-
qualified individual is the average annual
compensation for services performed for
the corporation with respect to which the
change in ownership or control occurs (or
for a predecessor entity or a related
entity) which was includible in the gross
income of such individual for taxable
years in the base period (including
amounts that were excluded under section
911), or which would have been includ-
ible in such gross income if such person
had been a United States citizen or resi-
dent. See Q/A-35 of this section for the
definition of base period and for
examples of base amount computations.
(b) If the base period of a disqualified
individual includes a short taxable year or
less than all of a taxable year, compensa-
tion for such short or incomplete taxable
year must be annualized before determin-
ing the average annual compensation for
the base period. In annualizing compensa-
tion, the frequency with which payments
are expected to be made over an annual
period must be taken into account. Thus,
any amount of compensation for such a
short or incomplete taxable year that rep-
resents a payment that will not be made
more often than once per year is not
annualized.
(c) Because the base amount includes
only compensation that is includible in
gross income, the base amount does not
include certain items that constitute para-
chute payments. For example, payments
in the form of excludible fringe benefits
are not included in the base amount but
may be treated as parachute payments.
(d) The base amount includes the
amount of compensation included in
income under section 83(b) during the
base period.
(e) The following example illustrates
the principles of this A-34:
Example. A disqualified individual, D, receives
an annual salary of $500,000 per year during the
5-year base period. D defers $100,000 of D’s salary
each year under the corporation’s nonqualified
deferred compensation plan. D’s base amount is
$400,000 ($400,000 x (5/5)).
Q-35: What is the base period?
A-35: (a) The base period of a dis-
qualified individual is the most recent 5
taxable years of the individual ending
before the date of the change in owner-
ship or control. For this purpose, the date
of the change in ownership or control is
the date the corporation experiences one
of the events described in Q/A-27, Q/A-
28, or Q/A-29 of this section. However, if
the disqualified individual was not an
employee or independent contractor of
the corporation with respect to which the
change in ownership or control occurs (or
a predecessor entity or a related entity as
defined in Q/A-21 of this section) for this
entire 5-year period, the individual’s base
period is the portion of such 5-year period
during which the individual performed
personal services for the corporation or
predecessor entity or related entity.
(b) The following examples illustrate
the principles of Q/A-34 of this section
and this Q/A-35:
Example 1. A disqualified individual, D, was
employed by a corporation for 2 years and 4 months
preceding the taxable year in which a change in
ownership or control of the corporation occurs. D’s
includible compensation income from the corpora-
tion was $30,000 for the 4-month period, $120,000
for the first full year, and $150,000 for the second
full year. D’s base amount is $120,000, ((3 x
$30,000) + $120,000 + $150,000) / 3.
March 4, 20025992002–9 I.R.B.

Example 2. Assume the same facts as in
Example 1, except that D also received a $60,000
signing bonus when D’s employment with the cor-
poration commenced at the beginning of the
4-month period. D’s base amount is $140,000,
(($60,000 + (3 x $30,000)) + $120,000 + $150,000)
/ 3. Since the bonus will not be paid more often than
once per year, the amount of the bonus is not
increased in annualizing D’s compensation for the
4-month period.
Q-36: How is the base amount deter-
mined in the case of a disqualified indi-
vidual who did not perform services for
the corporation (or a predecessor entity or
a related entity as defined in Q/A-21 of
this section), prior to the individual’s tax-
able year in which the change in owner-
ship or control occurs?
A-36: (a) In such a case, the individu-
al’s base amount is the annualized com-
pensation for services performed for the
corporation (or a predecessor entity or
related entity) which—
(1) Was includible in the individual’s
gross income for that portion, prior to
such change, of the individual’s taxable
year in which the change occurred
(including amounts that were excluded
under section 911), or would have been
includible in such gross income if such
person had been a United States citizen or
resident;
(2) Was not contingent on the change
in ownership or control; and
(3) Was not a securities violation para-
chute payment.
(b) The following examples illustrate
the principles of this A-36:
Example 1. On January 1, 2006, A, an individual
whose taxable year is the calendar year, enters into
a 4-year employment contract with Corporation M
as an officer of the corporation. A has not previously
performed services for Corporation M (or any pre-
decessor entity or related entity as defined in
Q/A-21 of this section). Under the employment con-
tract, A is to receive an annual salary of $120,000
for each of the 4 years that he remains employed by
Corporation M with any remaining unpaid balance
to be paid immediately in the event that A’s employ-
ment is terminated without cause. On July 1, 2006,
after A has received compensation of $60,000, a
change in the ownership of Corporation M occurs.
Because of the change, A’s employment is termi-
nated without cause, and he receives a payment of
$420,000. It is established by clear and convincing
evidence that the $60,000 in compensation is not
contingent on the change in ownership or control,
but the presumption that the $420,000 payment is
contingent on the change is not rebutted. Thus, the
payment of $420,000 is treated as contingent on the
change in ownership of Corporation M. In this case,
A’s base amount is $120,000 (2 X $60,000). Since
the present value of the payment which is contin-
gent on the change in ownership of Corporation M
($420,000) is more than 3 times A’s base amount of
$120,000 (3 X $120,000 = $360,000), the payment
is a parachute payment.
Example 2. Assume the same facts as in
Example 1, except that A also receives a signing
bonus of $50,000 from Corporation M on January 1,
2006. It is established by clear and convincing evi-
dence that the bonus is not contingent on the change
in ownership. When the change in ownership occurs
on July 1, 2006, A has received compensation of
$110,000 (the $50,000 bonus plus $60,000 in sal-
ary). In this case, A’s base amount is $170,000
[$50,000 + (2 X $60,000)]. Since the $50,000 bonus
will not be paid more than once per year, the
amount of the bonus is not increased in annualizing
A’s compensation. The present value of the poten-
tial parachute payment ($420,000) is less than 3
times A’s base amount of $170,000 (3 X $170,000
= $510,000), and therefore no portion of the pay-
ment is a parachute payment.
Securities Violation Parachute Payments
Q-37: Must a payment be contingent
on a change in ownership or control in
order to be a parachute payment?
A-37: (a) No, the termparachute pay-
mentalso includes any payment (other
than a payment exempted under Q/A-6 or
Q/A-8 of this section) that is in the nature
of compensation and is to (or for the ben-
efit of) a disqualified individual, if such
payment is a securities violation payment.
A securities violation payment is a pay-
ment made or to be made—
(1) Pursuant to an agreement that vio-
lates any generally enforced Federal or
State securities laws or regulations; and
(2) In connection with a potential or
actual change in ownership or control.
(b) A violation is not taken into
account under paragraph (a)(1) of this
A-37 if it is merely technical in character
or is not materially prejudicial to share-
holders or potential shareholders. More-
over, a violation will be presumed not to
exist unless the existence of the violation
has been determined or admitted in a civil
or criminal action (or an administrative
action by a regulatory body charged with
enforcing the particular securities law or
regulation) which has been resolved by
adjudication or consent. Parachute pay-
ments described in this A-37 are referred
to in this section as securities violation
payments.
(c) Securities violation parachute pay-
ments that are not contingent on a change
in ownership or control within the mean-
ing of Q/A-22 of this section are not
taken into account in applying the
3-times-base-amount test of Q/A-30 of
this section. Such payments are consid-
ered parachute payments regardless of
whether such test is met with respect to
the disqualified individual (and are
included in allocating base amount under
Q/A-38 of this section). Moreover, the
amount of a securities violation parachute
payment treated as an excess parachute
payment shall not be reduced by the por-
tion of such payment that is reasonable
compensation for personal services actu-
ally rendered before the date of a change
in ownership or control if such payment
is not contingent on such change. Like-
wise, the amount of a securities violation
parachute payment includes the portion of
such payment that is reasonable compen-
sation for personal services to be rendered
on or after the date of a change in owner-
ship or control if such payment is not
contingent on such change.
(d) The rules in paragraph (b) of this
A-37 also apply to securities violation
parachute payments that are contingent
on a change in ownership or control if the
application of these rules results in
greater total excess parachute payments
with respect to the disqualified individual
than would result if the payments were
treated simply as payments contingent on
a change in ownership or control (and
hence were taken into account in applying
the 3-times-base-amount test and were
reduced by, or did not include, any appli-
cable amount of reasonable compensa-
tion).
(e) The following examples illustrate
the principles of this A-37:
Example 1. A, a disqualified individual with
respect to Corporation M, receives two payments in
the nature of compensation that are contingent on a
change in the ownership or control of Corporation
M. The present value of the first payment is equal to
A’s base amount and is not a securities violation
parachute payment. The present value of the second
payment is equal to 1.5 times A’s base amount and
is a securities violation parachute payment. Neither
payment includes any reasonable compensation. If
the second payment is treated simply as a payment
contingent on a change in ownership or control, the
amount of A’s total excess parachute payments is
zero because the aggregate present value of the pay-
ments does not equal or exceed 3 times A’s base
amount. If the second payment is treated as a secu-
rities violation parachute payment subject to the
rules of paragraph (b) of this A-37, the amount of
A’s total excess parachute payments is 0.5 times A’s
base amount. Thus, the second payment is treated as
a securities violation parachute payment.
Example 2. Assume the same facts as in
Example 1, except that the present value of the first
payment is equal to 2 times A’s base amount. If the
2002–9 I.R.B.600March 4, 2002

second payment is treated simply as a payment con-
tingent on a change in ownership or control, the
total present value of the payments is 3.5 times A’s
base amount, and the amount of A’s total excess
parachute payments is 2.5 times A’s base amount. If
the second payment is treated as a securities viola-
tion parachute payment, the amount of A’s total
excess parachute payments is 0.5 times A’s base
amount. Thus, the second payment is treated simply
as a payment contingent on a change in ownership
or control.
Example 3. B, a disqualified individual with
respect to Corporation N, receives two payments in
the nature of compensation that are contingent on a
change in the control of Corporation N. The present
value of the first payment is equal to 4 times B’s
base amount and is a securities violation parachute
payment. The present value of the second payment
is equal to 2 times B’s base amount and is not a
securities violation parachute payment. B estab-
lishes by clear and convincing evidence that the
entire amount of the first payment is reasonable
compensation for personal services to be rendered
after the change in ownership or control. If the first
payment is treated simply as a payment contingent
on a change in ownership or control, it is exempt
from the definition ofparachute paymentpursuant
to Q/A-9 of this section. Thus, the amount of B’s
total excess parachute payment is zero because the
present value of the second payment does not equal
or exceed three times B’s base amount. However, if
the first payment is treated as a securities violation
parachute payment, the amount of B’s total excess
parachute payments is 3 times B’s base amount.
Thus, the first payment is treated as a securities vio-
lation parachute payment.
Example 4. Assume the same facts as in
Example 3, except that B does not receive the sec-
ond payment and B establishes by clear and con-
vincing evidence that the first payment is reasonable
compensation for services actually rendered before
the change in the control of Corporation N. If the
payment is treated simply as a payment contingent
on a change in ownership or control, the amount of
B’s excess parachute payment is zero because the
amount treated as an excess parachute payment is
reduced by the amount that B establishes as reason-
able compensation. However, if the payment is
treated as a securities violation parachute payment,
the amount of B’s excess parachute payment is 3
times B’s base amount. Thus, the payment is treated
as a securities violation parachute payment.
Computation and Reduction of Excess
Parachute Payments
Q-38: How is the amount of an excess
parachute payment computed?
A-38: (a) The amount of an excess
parachute payment is the excess of the
amount of any parachute payment over
the portion of the disqualified individu-
al’s base amount that is allocated to such
payment. For this purpose, the portion of
the base amount allocated to any para-
chute payment is the amount that bears
the same ratio to the base amount as the
present value of such parachute payment
bears to the aggregate present value of all
parachute payments made or to be made
to (or for the benefit of ) the same dis-
qualified individual. Thus, the portion of
the base amount allocated to any para-
chute payment is determined by multiply-
ing the base amount by a fraction, the
numerator of which is the present value
of such parachute payment and the
denominator of which is the aggregate
present value of all such payments. See
Q/A-31, Q/A-32, and Q/A-33 of this sec-
tion for rules on determining present
value and Q/A-34 of this section for the
definition ofbase amount.
(b) The following example illustrates
the principles of this A-38:
Example. An individual with a base amount of
$100,000 is entitled to receive two parachute pay-
ments, one of $200,000 and the other of $400,000.
The $200,000 payment is made at the time of the
change in ownership or control, and the $400,000
payment is to be made at a future date. The present
value of the $400,000 payment is $300,000 on the
date of the change in ownership or control. The por-
tions of the base amount allocated to these payments
are $40,000 (($200,000/$500,000) x $100,000) and
$60,000 (($300,000/$500,000) x $100,000), respec-
tively. Thus, the amount of the first excess parachute
payment is $160,000 ($200,000 - $40,000) and that
of the second is $340,000 ($400,000 - $60,000).
Q-39: May the amount of an excess
parachute payment be reduced by reason-
able compensation for personal services
actually rendered before the change in
ownership or control?
A-39: (a) Generally, yes, except that in
the case of payments treated as securities
violation parachute payments or when the
portion of a payment that is treated as
contingent on the change in ownership or
control is determined under paragraph (b)
or (c) of Q/A-24 of this section, the
amount of an excess parachute payment is
reduced by any portion of the payment
that the taxpayer establishes by clear and
convincing evidence is reasonable com-
pensation for personal services actually
rendered by the disqualified individual
before the date of the change in owner-
ship or control. Services reasonably com-
pensated for by payments that are not
parachute payments (for example,
because the payments are not contingent
on a change in ownership or control and
are not securities violation parachute pay-
ments, or because the payments are
exempt from the definition of parachute
payment under Q/A-6 through Q/A-9 of
this section) are not taken into account for
this purpose. The portion of any para-
chute payment that is established as rea-
sonable compensation is first reduced by
the portion of the disqualified individu-
al’s base amount that is allocated to such
parachute payment; any remaining por-
tion of the parachute payment established
as reasonable compensation then reduces
the excess parachute payment.
(b) The following examples illustrate
the principles of this A-39:
Example 1. Assume that a parachute payment of
$600,000 is made to a disqualified individual, and
the portion of the individual’s base amount that is
allocated to the parachute payment is $100,000.
Also assume that $300,000 of the $600,000 para-
chute payment is established as reasonable compen-
sation for personal services actually rendered by the
disqualified individual before the date of the change
in ownership or control. Before the reasonable com-
pensation is taken into account, the amount of the
excess parachute payment is $500,000 ($600,000 -
$100,000). In reducing the excess parachute pay-
ment by reasonable compensation, the portion of the
parachute payment that is established as reasonable
compensation ($300,000) is first reduced by the por-
tion of the disqualified individual’s base amount
that is allocated to the parachute payment
($100,000), and the remainder ($200,000) then
reduces the excess parachute payment. Thus, in this
case, the excess parachute payment of $500,000 is
reduced by $200,000 of reasonable compensation.
Example 2. Assume the same facts as in
Example 1, except that the full amount of the
$600,000 parachute payment is established as rea-
sonable compensation. In this case, the excess para-
chute payment of $500,000 is reduced to zero by
$500,000 of reasonable compensation. As a result,
no portion of any deduction for the payment is dis-
allowed by section 280G, and no portion of the pay-
ment is subject to the 20-percent excise tax of sec-
tion 4999.
Determination of Reasonable
Compensation
Q-40: How is it determined whether
payments are reasonable compensation?
A-40: (a) In general, whether pay-
ments are reasonable compensation for
personal services actually rendered, or to
be rendered, by the disqualified indi-
vidual is determined on the basis of all
the facts and circumstances of the particu-
lar case. Factors relevant to such a deter-
mination include, but are not limited to,
the following—
(1) The nature of the services rendered
or to be rendered;
March 4, 20026012002–9 I.R.B.

(2) The individual’s historic compen-
sation for performing such services; and
(3) The compensation of individuals
performing comparable services in situa-
tions where the compensation is not con-
tingent on a change in ownership or con-
trol.
(b) For purposes of section 280G, rea-
sonable compensation for personal ser-
vices includes reasonable compensation
for holding oneself out as available to
perform services and refraining from per-
forming services (such as under a cov-
enant not to compete).
Q-41: Is any particular type of evi-
dence generally considered clear and con-
vincing evidence of reasonable compen-
sation for personal services?
A-41: Yes. A showing that payments
are made under a nondiscriminatory
employee plan or program (as defined in
Q/A-26 of this section) generally is con-
sidered to be clear and convincing evi-
dence that the payments are reasonable
compensation. This is true whether the
personal services for which the payments
are made are actually rendered before, or
to be rendered on or after, the date of the
change in ownership or control. Q/A-46
of this section (relating to the treatment of
an affiliated group as one corporation)
does not apply for purposes of this A-41.
No determination of reasonable compen-
sation is needed for payments under
qualified plans to be exempt from the
definition ofparachute paymentunder
Q/A-8 of this section.
Q-42: Is any particular type of evi-
dence generally considered clear and con-
vincing evidence of reasonable compen-
sation for personal services to be rendered
on or after the date of a change in owner-
ship or control?
A-42: (a) Yes, if payments are made or
to be made to (or on behalf of ) a dis-
qualified individual for personal services
to be rendered on or after the date of a
change in ownership or control, a show-
ing of the following generally is consid-
ered to be clear and convincing evidence
that the payments are reasonable compen-
sation for services to be rendered on or
after the date of the change in ownership
or control—
(1) The payments were made or are to
be made only for the period the individual
actually performs such personal services;
and
(2) If the individual’s duties and
responsibilities are substantially the same
after the change in ownership or control,
the individual’s annual compensation for
such services is not significantly greater
than such individual’s annual compensa-
tion prior to the change in ownership or
control, apart from normal increases
attributable to increased responsibilities
or cost of living adjustments. If the scope
of the individual’s duties and responsibili-
ties are not substantially the same, the
annual compensation after the change is
not significantly greater than the annual
compensation customarily paid by the
employer or by comparable employers to
persons performing comparable services.
However, except as provided in paragraph
(b) of this A-42, such clear and convinc-
ing evidence will not exist if the indi-
vidual does not, in fact, perform the ser-
vices contemplated in exchange for the
compensation.
(b) Generally, an agreement under
which the disqualified individual must
refrain from performing services (such as
a covenant not to compete) is an agree-
ment for the performance of personal ser-
vices for purposes of this A-42 to the
extent that it is demonstrated by clear and
convincing evidence that the agreement
substantially constrains the individual’s
ability to perform services and there is a
reasonable likelihood that the agreement
will be enforced against the individual. In
the absence of clear and convincing evi-
dence, payments under the agreement are
treated as severance payments under
Q/A-44 of this section.
(c) If the employment of a disqualified
individual is involuntarily terminated
before the end of a contract term and the
individual is paid damages for breach of
contract, a showing of the following fac-
tors generally is considered clear and con-
vincing evidence that the payment is rea-
sonable compensation for personal
services to be rendered on or after the
date of change in ownership or control—
(1) The contract was not entered into,
amended, or renewed in contemplation of
the change in ownership or control;
(2) The compensation the individual
would have received under the contract
would have qualified as reasonable com-
pensation under section 162;
(3) The damages do not exceed the
present value (determined as of the date
of receipt) of the compensation the indi-
vidual would have received under the
contract if the individual had continued to
perform services for the employer until
the end of the contract term;
(4) The damages are received because
an offer to provide personal services was
made by the disqualified individual but
was rejected by the employer; and
(5) The damages are reduced by miti-
gation. Mitigation will be treated as
occurring when such damages are
reduced (or any payment of such damages
is returned) to the extent of the disquali-
fied individual’s earned income (within
the meaning of section 911(d)(2)(A)) dur-
ing the remainder of the period in which
the contract would have been in effect.
See Q/A-44 of this section for rules
regarding damages for a failure to make
severance payments.
(c) The following examples illustrate
the principles of this A-42:
Example 1. A, a disqualified individual, has a
three-year employment contract with Corporation
M, a publicly traded corporation. Under this con-
tract, A is to receive a salary for $100,000 for the
first year of the contract and, for each succeeding
year, an annual salary that is 10 percent higher than
the prior year’s salary. During the third year of the
contract, Corporation N acquires all the stock of
Corporation M. Prior to the change in ownership,
Corporation N arranges to retain A’s services by
entering into an employment contract with A that is
essentially the same as A’s contract with Corpora-
tion M. Under the new contract, Corporation N is to
fulfill Corporation M’s obligations for the third year
of the old contract, and, for each of the succeeding
years, pay A an annual salary that is 10 percent
higher than A’s prior year’s salary. Amounts are pay-
able under the new contract only for the portion of
the contract term during which A remains employed
by Corporation N. A showing of the facts described
above (and in the absence of contradictory evi-
dence) is regarded as clear and convincing evidence
that all payments under the new contract are reason-
able compensation for personal services to be ren-
dered on or after the date of the change in owner-
ship. Therefore, the payments under this agreement
are exempt from the definition ofparachute pay-
mentpursuant to Q/A-9 of this section.
Example 2. Assume the same facts as in
Example 1except that A does not perform the ser-
vices described in the new contract, but receives
payment under the new contract. Because services
were not rendered after the change, the payments
under this contract are not exempt from the defini-
tion ofparachute paymentpursuant to Q/A-9 of this
section.
Example 3. Assume the same facts as in
Example 1except that under the new contract A
agrees to perform consulting services to Corporation
N, when and if, Corporation N requires A’s services.
Assume further that when Corporation N does not
require A’s services, the contract provides that A
2002–9 I.R.B.602March 4, 2002

must not perform services for any other competing
company. Corporation N previously enforced simi-
lar contracts against former employees of Corpora-
tion N. Because A is substantially constrained under
this contract and Corporation N is reasonably likely
to enforce the contract against A, the agreement is
an agreement for the performance of services under
paragraph (b) of this A-42. Assuming the require-
ments of paragraph (a) of this A-42 are met and
there is clear and convincing evidence that all pay-
ments under the new contract are reasonable com-
pensation for personal services to be rendered on or
after the date of the change in ownership, the pay-
ments under this contract are exempt from the defi-
nition ofparachute paymentpursuant to Q/A-9 of
this section.
Example 4. Assume the same facts as in
Example 1, except that the employment contract
with Corporation N does not provide that amounts
are payable under the contract only for the portion
of the term for which A remains employed by Cor-
poration N. Shortly after the change in ownership,
and despite A’s request to remain employed by Cor-
poration N, A’s employment with Corporation N is
involuntarily terminated. Shortly thereafter, A
obtains employment with Corporation O. A com-
mences a civil action against Corporation N, alleg-
ing breach of the employment contract. In settle-
ment of the litigation, A receives an amount equal to
the present value of the compensation A would have
received under the contract with Corporation N,
reduced by the amount of compensation A otherwise
receives from Corporation O during the period that
the contract would have been in effect. A showing of
the facts described above (and in the absence of
contradictory evidence) is regarded as clear and
convincing evidence that the amount A receives as
damages is reasonable compensation for personal
services to be rendered on or after the date of the
change in ownership. Therefore, the amount
received by A is exempt from the definition ofpara-
chute paymentpursuant to Q/A-9 of this section.
Q-43: Is any particular type of pay-
ment generally considered reasonable
compensation for personal services actu-
ally rendered before the date of a change
in ownership or control?
A-43: (a) Yes, payments of compensa-
tion earned before the date of a change in
ownership or control generally are con-
sidered reasonable compensation for per-
sonal services actually rendered before
the date of a change in ownership or con-
trol if they qualify as reasonable compen-
sation under section 162.
Q-44: May severance payments be
treated as reasonable compensation?
A-44: (a) No, severance payments are
not treated as reasonable compensation
for personal services actually rendered
before, or to be rendered on or after, the
date of a change in ownership or control.
Moreover, any damages paid for a failure
to make severance payments are not
treated as reasonable compensation for
personal services actually rendered
before, or to be rendered on or after, the
date of such change. For purposes of this
section, the termseverance payment
means any payment that is made to (or
for the benefit of ) a disqualified indi-
vidual on account of the termination of
such individual’s employment prior to the
end of a contract term, but does not
include any payment that otherwise
would be made to (or for the benefit of )
such individual on the termination of such
individual’s employment, whenever
occurring.
(b) The following example illustrates
the principles of this A-44:
Example. A, a disqualified individual, has a
three-year employment contract with Corporation X.
Under the contract, A will receive a salary of
$200,000 for the first year of the contract, and for
each succeeding year, an annual salary that is
$100,000 higher than the previous year. In the event
of A’s termination of employment following a
change in ownership or control, the contract pro-
vides that A will receive the remaining salary due
under the employment contract. At the beginning of
the second year of the contract, Corporation Y
acquires all of the stock of Corporation X, A’s
employment is terminated, and A receives $700,000
($300,000 for the second year of the contract plus
$400,000 for the third year of the contract) repre-
senting the remaining salary due under the employ-
ment contract. Because the $700,000 payment is
treated as a severance payment, it is not reasonable
compensation for personal services on or after the
date of the change in ownership or control. Thus,
the full amount of the $700,000 is a parachute pay-
ment.
Miscellaneous Rules
Q-45: How is the termcorporation
defined?
A-45: For purposes of this section, the
termcorporationhas the meaning pre-
scribed by section 7701(a)(3) and
§301.7701–2(b) of this chapter. For
example, acorporation, for purposes of
this section, includes a publicly traded
partnership treated as a corporation under
section 7704 (a); an entity described in
§301.7701–3(c)(1)(v)(A) of this chapter;
a real estate investment trust under sec-
tion 856(a); a corporation that has mutual
or cooperative (rather than stock) owner-
ship, such as a mutual insurance com-
pany, a mutual savings bank, or a coop-
erative bank (as defined in section
7701(a)(32)), and a foreign corporation as
defined under section 7701(a)(5).
Q-46: How is an affiliated group
treated?
A-46: For purposes of this section, and
except as otherwise provided in this sec-
tion, all members of the same affiliated
group (as defined in section 1504, deter-
mined without regard to section 1504(b))
are treated as one corporation. Rules
affected by this treatment of an affiliated
group include (but are not limited to)
rules relating to exempt payments of cer-
tain corporations (Q/A-6, Q/A-7 of this
section (except as provided therein)),
payor of parachute payments (Q/A-10 of
this section), disqualified individuals
(Q/A-15 through Q/A-21 of this section
(except as provided therein)), rebuttal of
the presumption that payments are contin-
gent on a change (Q/A-26 of this section
(except as provided therein)), change in
ownership or control (Q/A-27, 28, and 29
of this section), and reasonable compen-
sation (Q/A-42, 43, and 44 of this sec-
tion).
Effective Date
Q-47: What is the general effective
date of section 280G?
A-47: (a) Generally, section 280G
applies to payments under agreements
entered into or renewed after June 14,
1984. Any agreement that is entered into
before June 15, 1984, and is renewed
after June 14, 1984, is treated as a new
contract entered into on the day the
renewal takes effect.
(b) For purposes of paragraph (a) of
this A-47, a contract that is terminable or
cancellable unconditionally at will by
either party to the contract without the
consent of the other, or by both parties to
the contract, is treated as a new contract
entered into on the date any such termina-
tion or cancellation, if made, would be
effective. However, a contract is not
treated as so terminable or cancellable if
it can be terminated or cancelled only by
terminating the employment relationship
or independent contractor relationship of
the disqualified individual.
(c) Section 280G applies to payments
under a contract entered into on or before
June 14, 1984, if the contract is amended
or supplemented after June 14, 1984, in
significant relevant respect. For this pur-
pose, asupplementto a contract is
defined as a new contract entered into
after June 14, 1984, that affects the trig-
ger, amount, or time of receipt of a pay-
ment under an existing contract.
March 4, 20026032002–9 I.R.B.

(d)(1) Except as otherwise provided in
paragraph (e) of this A-47, a contract is
considered to be amended or supple-
mented in significant relevant respect if
provisions for payments contingent on a
change in ownership or control (para-
chute provisions), or provisions in the
nature of parachute provisions, are added
to the contract, or are amended or supple-
mented to provide significant additional
benefits to the disqualified individual.
Thus, for example, a contract generally is
treated as amended or supplemented in
significant relevant respect if it is
amended or supplemented—
(i) To add or modify, to the disquali-
fied individual’s benefit, a change in
ownership or control trigger;
(ii) To increase amounts payable that
are contingent on a change in ownership
or control (or, where payment is to be
made under a formula, to modify the for-
mula to the disqualified individual’s
advantage); or
(iii) To accelerate, in the event of a
change in ownership or control, the pay-
ment of amounts otherwise payable at a
later date.
(2) For purposes of paragraph (a) of
this A-47, a payment is not treated as
being accelerated in the event of a change
in ownership or control if the acceleration
does not increase the present value of the
payment.
(e) A contract entered into on or before
June 14, 1984, is not treated as amended
or supplemented in significant relevant
respect merely by reason of normal
adjustments in the terms of employment
relationship or independent contractor
relationship of the disqualified individual.
Whether an adjustment in the terms of
such a relationship is considered normal
for this purpose depends on all of the
facts and circumstances of the particular
case. Relevant factors include, but are not
limited to, the following—
(1) The length of time between the
adjustment and the change in ownership
or control;
(2) The extent to which the corpora-
tion, at the time of the adjustment, viewed
itself as a likely takeover candidate;
(3) A comparison of the adjustment
with historical practices of the corpora-
tion;
(4) The extent of overlap between the
group receiving the benefits of the adjust-
ment and those members of that group
who are the beneficiaries of pre-June 15,
1984, parachute contracts; and
(5) The size of the adjustment, both in
absolute terms and in comparison with
the benefits provided to other members of
the group receiving the benefits of the
adjustment.
Q-48: What is the effective date of this
section?
A-48: This section applies to any pay-
ments that are contingent on a change in
ownership or control that occurs on or
after January 1, 2004. Taxpayers can rely
on these rules for the treatment of any
parachute payment made after February
20, 2002.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 19, 2002, 8:45 a.m., and published in the issue
of the Federal Register for February 20, 2002, 67
F.R. 7630)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Unit Livestock Price Method
REG–125626–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the use of
theunit-livestock-price methodof
accounting. The proposed regulations
affect livestock raisers and other farmers
that elect to use the unit-livestock-price
method. These proposed regulations pro-
vide rules relating to the annual reevalua-
tion of unit prices and the depreciation of
livestock raised for draft, breeding, or
dairy purposes. This document also pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
must be received by May 6, 2002.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for June 12, 2002, at 10 a.m.
must be received by May 22, 2002.
ADDRESSES: Send submissions to:
CC:IT&A:RU (REG–125626–01), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered between the hours of 8 a.m. and
5 p.m. to: CC:IT&A:RU (REG–125626–
01), Courier’s Desk, Internal Revenue
Service,1111Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the“Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS
Internet site athttp://www.irs.gov/
tax_regs/regslist.html. The public hearing
will be held in the room 4716, Internal
Revenue Building,1111 Constitution
Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, A.
Katharine Jacob Kiss at (202) 622–4920;
concerning submissions and the hearing,
Sonya M. Cruse at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) under section 471
of the Internal Revenue Code (Code). The
unit-livestock-price method, contained in
§1.471–6, provides for the valuation of
different classes of animals in inventory
at a standard unit price for each animal
within a class. A taxpayer that elects to
use the unit-livestock-price method must
apply it to all livestock raised, whether
for sale or for draft, breeding, or dairy
purposes. Once established, unit prices
and classifications selected by the tax-
payer must be consistently applied in
all subsequent years. Prior to 1997,
§1.471–6 did not allow a taxpayer to
make any changes in the unit prices with-
out first obtaining the consent of the
Commissioner.
2002–9 I.R.B.604March 4, 2002

Following the enactment of section
263A, the IRS and Treasury Department
published Notice 88–24 (1988–1 C.B.
491), which provided guidance to taxpay-
ers regarding the application of the uni-
form capitalization rules to property pro-
duced in the trade or business of farming.
Notice 88–24 indicated that forthcoming
regulations would modify the rule con-
tained in§1.471–6 and require that tax-
payers adjust their unit prices upward,
from time to time as specified by those
regulations, to reflect increases in costs
taxpayers experience in raising livestock.
Notice 88–24 also provided safe-harbor
unit prices for the unit-livestock-price
method with respect to female cattle
raised or purchased by a taxpayer for pur-
poses of breeding (beef cattle) or milk
production (dairy cattle).
Contemporaneous with the publication
of the section 263A temporary and pro-
posed regulations on August 22, 1997,
(T.D. 8729, 1997–2 C.B. 35), the IRS and
Treasury Department modified the final
regulations under§1.471–6 to provide,
for taxable years beginning after August
22, 1997, a taxpayer using the unit-
livestock-price method must annually
reevaluate its unit prices and must adjust
the prices upward to reflect increases in
the costs of raising livestock. The consent
of the Commissioner is not required to
make such upward adjustments, but no
other changes in the classification of ani-
mals or unit prices may be made without
the consent of the Commissioner.
On September 5, 2000, the IRS and
Treasury Department published final
regulations under section 263A (T.D.
8897, 2000–2 C.B. 234) in theFederal
Register(65 FR 50638), which obsoleted
Notice 88–24, relating to rules for prop-
erty produced in a farming business. The
preamble to these final regulations dis-
cussed comments received regarding the
modification made to the unit-livestock-
price method and indicated the IRS and
Treasury Department’s intent to study this
method. These proposed regulations are
promulgated in response to those com-
ments.
Explanation of Provisions
Commentators expressed concern that
if taxpayers are required to annually
reevaluate their unit prices, they should
be able to both increase and decrease the
unit prices to reflect all changes in the
costs of raising livestock. The IRS and
Treasury Department agree that to the
extent the unit-livestock-price method
requires an annual reevaluation of the unit
prices, a taxpayer should be able to
increase and decrease its unit prices with-
out securing the consent of the Commis-
sioner. Such a change is not a change in
method of accounting, but an application
of the unit-livestock-price method, similar
to the application of a standard cost
method. Consequently, the proposed
regulations allow a taxpayer to both
increase and decrease its unit prices with-
out obtaining the consent of the Commis-
sioner.
However, the IRS and Treasury
Department also recognize a broader con-
cern that the requirement to annually
reevaluate unit prices may have elimi-
nated much of the simplicity of the unit-
livestock-price method. In this respect,
the IRS and Treasury Department wel-
come comments on how the rules could
be made simpler to apply. For example,
the IRS and Treasury Department request
comments on whether safe harbor unit
prices similar to those announced in
Notice 88–24 should be made available
again to taxpayers using the unit-
livestock-price method. If so, comments
specifically are requested as to an index
or measure those safe harbor unit prices
should be based on and how often those
safe harbor unit prices should be adjusted.
Commentators also suggested that the
unit-livestock-price method should be
clarified to allow a taxpayer to remove
from inventory animals that have been
raised for use in a taxpayer’s trade or
business (such as a breeding cow) and
depreciate the cost of the animal based on
its inventoriable cost. Under§1.471–
6(g), a livestock raiser who uses the unit-
livestock-price method is permitted to
elect to include animalspurchasedfor
draft, breeding, or dairy purposes in
inventory or to treat those animals as
property used in a trade or business sub-
ject to depreciation after maturity. In con-
trast,§1.471–6(f) does not specifically
permit a livestock raiser who uses the
unit-livestock-price method to elect to
treat animalsraisedfor draft, breeding, or
dairy purposes as property used in a trade
or business subject to depreciation after
maturity. There does not appear to be a
current rationale for distinguishing
between animalsraisedversus animals
purchasedfor draft, breeding, or dairy
purposes. Accordingly, the proposed
regulations clarify that a livestock raiser
that uses the unit-livestock-price method
may elect to remove from inventory after
maturity an animal raised for draft, breed-
ing, or dairy purposes and treat the inven-
toriable cost of such animal as an asset
subject to depreciation.
Effective Date
These regulations are applicable to
taxable years ending after the date final
regulations are published in theFederal
Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations and, because these regu-
lations do not impose on small entities a
collection of information requirement, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f ) of
the Code, this notice of proposed rule-
making will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (preferably a signed original
and eight (8) copies) that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request com-
ments on the clarity of the proposed rules
and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for June 12, 2002, at 10 a.m. in room
4716, Internal Revenue Building,1111
March 4, 20026052002–9 I.R.B.

Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the 10th
Street entrance, located between Constitu-
tion and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the“FOR FURTHER INFORMA-
TION CONTACT”section of this pre-
amble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments and an outline of the topics to
be discussed and the time to be devoted
to each topic (signed original and 8 cop-
ies) by May 22, 2002. A period of 10
minutes will be allotted to each person for
making comments. An agenda showing
the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the
hearing.
Drafting Information
The principal author of these proposed
regulations is A. Katharine Jacob Kiss,
Office of Associate Chief Counsel
(Income Tax and Accounting). However,
other personnel from the IRS and Trea-
sury Department participated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.471–6 also issued under 26
U.S.C. 471.***
Par. 2. Section 1.471–6 is amended as
follows:
1. In paragraph (c), the last sentence is
removed.
2. Paragraph (f) is revised.
3. In paragraph (g), the first sentence
is amended by removing the language
“capital assets”and adding“property
used in a trade or business”in its place.
The revisions read as follows:
§1.471–6 Inventories of livestock raisers
and other farmers.
*****
(f) A taxpayer that elects to use the
“unit-livestock-price method”must apply
it to all livestock raised, whether for sale
or for draft, breeding, or dairy purposes.
The inventoriable costs of animals raised
for draft, breeding, or dairy purposes can,
at the election of the livestock raiser, be
included in inventory or treated as prop-
erty used in a trade or business subject to
depreciation after maturity. See
§1.263A–4 for rules regarding the com-
putation of inventoriable costs for pur-
poses of the unit-livestock-price method.
Once established, the methods of
accounting used by the taxpayer to deter-
mine unit prices and to classify animals
must be consistently applied in all subse-
quent taxable years. A taxpayer that uses
the unit-livestock-price method must
annually reevaluate its unit prices and
adjust the prices either upward to reflect
increases, or downward to reflect
decreases, in the costs of raising live-
stock. The consent of the Commissioner
is not required to make such upward or
downward adjustments. No other changes
in the classification of animals or unit
prices may be made without the consent
of the Commissioner. See§1.446–1(e)
for procedures for obtaining the consent
of the Commissioner. The provisions of
this paragraph (f ) apply to taxable years
ending after the date that final regulations
are published in theFederal Register.
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 1, 2002, 8:45 a.m., and published in the issue
of the Federal Register for February 4, 2002, 67 F.R.
5074)
Catch-Up Contributions for
Individuals Age 50 or Over;
Hearing
Announcement 2002–24
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Change of date of public hear-
ing; extension of time to submit written
comments and outlines of oral comments.
SUMMARY: This document changes the
date of the public hearing on the proposed
regulations (REG–142499–01, 2001–45
I.R.B. 476) that relate to requirements for
retirement plans providing catch-up con-
tributions to individuals age 50 or older
pursuant to the provisions of section
414(v) and supercedes the notice of pub-
lic hearing published in theFederal Reg-
isteron October 23, 2001. It also extends
the time to submit written comments and
outlines of oral comments for the hearing.
DATES: The public hearing will be held
April 30, 2002, beginning at 10 a.m.
Written comments and outlines of oral
comments must be received by April 15,
2002.
ADDRESSES: The public hearing will be
held in the Auditorium, Internal Revenue
Building,1111Constitution Avenue, NW,
Washington, DC. Send submissions to
CC:ITA:RU (REG–142499–01), Room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to
CC:ITA:RU (REG–142499–01), Couri-
er’s Desk, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. Alternatively, taxpayers may submit
comments directly to the IRS Internet site
atwww.irs.gov/regs.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, R. Lisa Mojiri-Azad or John
Ricotta (202) 622–6060 (not a toll-free
number); concerning submissions of com-
ments, the hearing, and/or to be placed on
the building access list to attend the hear-
ing, Donna Poindexter (202) 622–7180
(not a toll-free number).
2002–9 I.R.B.606March 4, 2002

SUPPLEMENTARY INFORMATION:
Background
A notice of proposed rulemaking and
notice of public hearing that appeared in
theFederal Registeron October 23,
2001, (66 FR 53555), announced that a
public hearing on the proposed regula-
tions relating to requirements for retire-
ment plans providing catch-up contribu-
tions to individuals age 50 or older
pursuant to the provisions of section
414(v) would be held on February 21,
2002, in the IRS Auditorium, Internal
Revenue Building,1111Constitution
Avenue, NW, Washington, DC. Subse-
quently, the date of the public hearing has
changed to April 30, 2002, at 10 a.m., in
the IRS Auditorium. Written comments
and outlines of oral comments must be
received by April 15, 2002.
Cynthia Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on Feb-
ruary 14, 2002, 3:44 p.m., and published in the issue
of the Federal Register for February 20, 2002, 67
F.R. 7656)
March 4, 20026072002–9 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes 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
withmodified, below).
Clarifiedis 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.
Modifiedis 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
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes 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.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes 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
period 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
andsupersededdescribes 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.
Supplementedis 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 published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis 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 formerly 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.—Intemal 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.
2002–9 I.R.B.iMarch 4, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–8
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–107100–00, 2002–7 I.R.B.529
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.376
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.400
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
March 4, 2002ii2002–9 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–8
Notices:
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.400
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
Revenue Procedures:—Continued
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
Revenue Rulings:
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
2002–9 I.R.B.iiiMarch 4, 2002

INDEX
Internal Revenue Bulletins
2002–1 through 2002–8
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Contributions by employer to accident
and health plans (RR 3) 3,316
Determination letters:
Issuing procedures (RP 6) 1,203
Temporary use of draft Form 8717
(Ann 1) 2,304
User fees (Notice 1) 2,283
EGTRRA, section 401(k) hardship distri-
butions; section 414(v) catch-up contri-
butions (Notice 4) 2,298
Eligible rollover distributions, safe harbor
explanation (Notice 3) 2,289
Employee stock ownership plans, divi-
dend elections (Notice 2) 2,285
EMPLOYEE PLANS—
Cont.
Family and Medical Leave Act and caf-
eteria plans (Ann 4) 2,306
Full funding limitations:
Weighted average interest rate for:
January 2002 (Notice 9) 5,450
Individual retirement arrangements, sim-
plified employee pension plans, etc.,
opinion letters (RP 10) 4,401
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
Minimum funding standards, terrorist
attack relief (Notice 7) 6,489
Nonbank trustees and custodians,
approval list (Ann 12) 8,553
Regulations:
26 CFR 1.125–3; effect of the Family
and Medical Leave Act on the
operation of cafeteria plans; correc-
tion (Ann 4) 2,306
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings
(RP 8) 1,252
EMPLOYMENT TAX
Contributions by employer to accident
and health plans (RR 3) 3,316
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Form W-2, extension of time for employ-
ers to furnish to household employees
(Ann 19) 8,561
Notice of Determination of Worker Clas-
sification, procedures (Notice 5) 3,320
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
EMPLOYMENT TAX—
Cont.
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Statutory stock options:
Change in hearing date for REG–
142686–01 (Ann 11) 6,494
Extension of deadline for comments to
Notices 2001–72 and 2001–73 (Ann
8) 6,494
ESTATE TAX
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
EXCISE TAX
Amended quarterly federal excise tax
return, new Form 720X (Ann 10)
7,539
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500
Form 720X, Amended Quarterly Federal
Excise Tax Return, new (Ann 10)
7,539
Liability for the foreign insurer or rein-
surer excise tax (REG–125450–01)
5,457
March 4, 2002iv2002–9 I.R.B.

EXCISE TAX—
Cont.
Proposed Regulations:
26 CFR 46.4374–1, revised; liability
for insurance premium excise tax
(REG–125450–01) 5,457
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
Regulations:
26 CFR 53.4958–0 through 8, added;
53.4958–0T through 8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978)
7,500
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Valuation of stock options for golden
parachute payments (RP 13) 8,549
EXEMPT
ORGANIZATIONS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
List of organizations classified as private
foundations (Ann 16) 7,541
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Regulations:
26 CFR 53.4958–0 through 8, added;
53.4958–0T through 8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978)
7,500
EXEMPT
ORGANIZATIONS—
Cont.
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings (RP 8)
1,252
GIFT TAX
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
INCOME TAX
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Agent, definition for certain purposes
(REG–120135–01) 8,552
Allocation of loss with respect to stock
and other personal property (TD 8973)
4,391; correction (Ann 14) 7,540
Automobile owners and lessees, determi-
nation of correct tax liability, 2002
inflation adjustment (RP 14) 5,450
Averaging of farm income (TD 8972) 5,
443; correction (Ann 23) 8,563
INCOME TAX—
Cont.
Classification of certain business entities,
check-the-box regulations (TD 8970)
2,281
Consolidated returns, loss disallowance,
duplicated loss (Notice 11) 7,526
Contributions by employer to accident
and health plans (RR 3) 3,316
Credits:
Low-income housing credit; resident
population estimates, 2002 (Notice
13) 8,547
New markets tax credit (TD 8971)
3,308; correction (Ann 20) 8,561;
(REG–119436–01) 3,377
Dealers in securities futures contracts, let-
ter rulings (RP 11) 7,526
Deduction and capitalization of expendi-
tures, rules and standards, public com-
ment (Ann 9) 7,536
Disallowance of deductions and credits
for failure to file timely return (TD
8981) 7496; (REG–107100–00)
7,529
Disaster relief for September 11, 2001,
terrorist attack for:
Tentative carryback adjustments; post-
ponement of time to apply (Notice
15) 8,548
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
Entity classification election, relief (RP
15) 6,490
Inflation-adjusted items for 2001, expa-
triation, correction (Ann 5) 4,420
Insurance companies, computation of life
insurance reserves for annuity contracts
using NAIC Actuarial Guideline 33,
changes basis subject to section 807(f)
(RR 6) 6,460
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2002 (RR 2),271;
correction (Ann 13) 7,540
February 2002 (RR 5) 6,461
Inventory:
Dollar-value LIFO and inventory price
index computation (IPIC) methods
(TD 8976) 5,421; correction (Ann
22) 8,562
2002–9 I.R.B.vMarch 4, 2002

INCOME TAX—
Cont.
LIFO:
Price indexes used by department
stores for:
November 2001 (RR 4) 4,389
December 2001 (RR 7) 8,543
Letter rulings; Determination letters, and
information letters issued by Associates
Chief Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
1) 1,1
Like-kind exchanges, definition of dis-
qualified person (TD 8982) 8,544
Materials and supplies, restaurant small-
wares (RP 12) 3,374
Methods of accounting:
Automatic consent to change:
Certain methods of accounting (RP
9) 3,327; correction (Ann 17)
8,561
To the cash method and the materi-
als and supplies method (Notice
14) 8,547
Notice and opportunity for hearing:
Before levy (TD 8980) 6,477
Upon filing of notice of federal tax
lien (TD 8979) 6,466
Partnership, Form 1065 electronic filing
waiver request (Ann 3) 2,305
Patriots’Day, filing date (Notice 12)
7,526
Payment of internal revenue taxes by
credit card and debit card (TD 8969)
2,276
Private foundations, organizations now
classified as (Ann 16) 7,541
Proposed Regulations:
26 CFR 1.41–0,–3,–8, amended;
1.41–4, revised; credit for increasing
research activities (REG–112991–
01) 4,404
26 CFR 1.45D–1, added; new markets
tax credit (REG–119436–01) 3,377
26 CFR 1.66–1 through–5, added;
treatment of community income for
certain individuals not filing joint
returns (REG–115054–01) 7,530
26 CFR 1.337(d)–6,–7, added; certain
transfers of property to regulated
investment companies (RICs) and
real estate investment trusts (REITs)
(REG–142299–01, REG–209135–
88) 4,418; notice of public hearing
(Ann 6) 5,458; correction (Ann 15)
7,540
INCOME TAX—
Cont.
26 CFR 1.874–1, amended; 1.882–4,
amended; disallowance of deduc-
tions and credits for failure to file
timely return (REG–107100–00)
7,529
26 CFR 1.1441–1, amended;
301.6109–1, amended; taxpayer
identification number rule where
taxpayer claims treaty rate and is
entitled to an unexpected payment
(REG–159079–01) 6,493
26 CFR 301.6103(1)–1, added;
301.6103(m)–1, added; definition of
agent for certain purposes (REG–
120135–01) 8,552
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Qualified research, credit computation
(REG–112991–01) 4,404
Regulations:
26 CFR 1.45D–1T, added; 602.101(b),
amended; new markets tax credit
(TD 8971) 3,308; correction (Ann
20) 8,561
26 CFR 1.337(d)–5T, amended;
1.337(d)–6T,–7T, added; 602.101,
amended; certain transfers of prop-
erty to regulated investment compa-
nies (RICs) and real estate invest-
ment trusts (REITs) (TD 8975) 4,
379; correction (Ann 21) 8,562
26 CFR 1.472–8, amended; 602.101,
revised; dollar-value LIFO regula-
tions; inventory price index compu-
tation (IPIC) method (TD 8976) 5,
421; correction (Ann 22) 8,562
26 CFR 1.861–8,–8T, amended;
1.865–1, added; 1.865–1T,–2T,
removed; 1.865–2, amended;
1.904–4, amended; allocation of loss
with respect to stock and other per-
sonal property (TD 8973) 4,391;
correction (Ann 14) 7,540
26 CFR 1.874–1, amended; 1.874–1T,
added; 1.882–4, amended; 1.882–
4T, added; disallowance of deduc-
tions and credits for failure to file
timely return (TD 8981) 7,496
INCOME TAX—
Cont.
26 CFR 1.1031(k)–1, revised; defini-
tion of disqualified person (TD
8982) 8,544
26 CFR 1.1301–1, added; 602.101,
amended; averaging of farm income
(TD 8972) 5,443; correction (Ann
23) 8,563
26 CFR 1.1441–6, amended; 1.1441–
1T,–6T, added; 301.6109–1,
revised; 301.6109–1T, added; tax-
payer identification number rule
where taxpayer claims treaty rate
and is entitled to an unexpected pay-
ment (TD 8977) 6,463
26 CFR 1.6050I–0,–1, amended; cross
referencing section 5331 of title 31
relating to reporting of certain cur-
rency transactions by nonfinancial
trades or businesses under the Bank
Secrecy Act (TD 8974) 3,318
26 CFR 301.6103(k)(9)–1, added;
301.6103(k)(9)–1T, removed;
301.6311–1, revised; 301.6311–2,
added; 301.6311–2T, removed; pay-
ment by credit card and debit card
(TD 8969) 2,276
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
26CFR301.6320–1,added;
301.6320–1T, removed; notice and
opportunity for hearing upon filing
of notice of federal tax lien (TD
8979) 6,466
26CFR301.6330–1,added;
301.6330–1T, removed; notice and
opportunity for hearing before levy
(TD 8980) 6,477
26 CFR 301.7701–3, amended; classi-
fication of certain business entities,
check-the-box regulations (TD
8970) 2,281
Reporting of certain currency transactions
by nonfinancial trades or businesses to
the IRS and FinCEN (TD 8974) 3,318
Restrictions on disclosure and use of tax
return information by tax return prepar-
ers (Notice 6) 3,326
March 4, 2002vii2002–9 I.R.B.

INCOME TAX—
Cont.
Spin-offs, employee stock options and
restricted stock (RR 1) 2,268
Split-dollar life insurance arrangements
(Notice 8) 4,398
Taxpayer identifying number, rule for cer-
tain foreign individuals claiming treaty
benefits (TD 8977) 6,463; (REG–
159079–01) 6,493
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE)(RP 2) 1,82
IRS employees (RP 5) 1,173
Transfers of property to RICs and REITs
(TD 8975) 4,379; (REG–142299–01,
REG–209135–88) 4,418; notice of
public hearing (Ann 6) 5,458; correc-
tion (Ann 15) 7,540; correction (Ann
21) 8,562
Treatment of community income for cer-
tain individuals not filing joint returns
(REG–115054–01) 7,530
Valuation of stock options for golden
parachute payments (RP 13) 8,549
Waiver of accuracy-related penalty for
disclosure of tax shelter treatment (Ann
2) 2,304
2002–9 I.R.B.viiMarch 4, 2002