Internal Revenue Bulletin 1996-10 (PDF rendition): IRS Notices

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

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Bulletin No. 1996–10
March 4, 1996
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. 96–13, page 19.
Election in respect of losses attributable to a disaster.
This ruling lists the areas declared by the President to
qualify as major disaster areas under the Disaster Relief
and Emergency Assistance Act since the publication of
Rev. Rul. 95–17.
T.D. 8648, page 23.
Final regulations under sections 358, 1032, and 1502
of the Code provide rules for adjusting the basis of a
controlling corporation in the stock of a controlled
corporation as the result of certain triangular reorgani-
zations involving the stock of the controlling
corporation.
T.D. 8650, page 5.
Final regulations under section 162 of the Code
relating to the disallowance of deductions for employee
remuneration in excess of $1,000,000.
EE–106–82, page 31.
Proposed regulations under section 72 of the Code
relating to loans made from a qualified employer plan
to plan participants or beneficiaries.
ADMINISTRATIVE
Notice 96–12, page 29.
Mark to market for dealers in securities; related parties
as customers. This notice describes guidance expected
to be issued in proposed regulations concerning
whether a taxpayer’s transactions with related parties,
including members of its consolidated group, may be
transactions with customers for purposes of section
475 of the Code.
Notice 96–13, page 29.
Certain payments from the Presidential Election Campaign
Fund. This notice announces a change that will be made
to the Presidential Election Campaign Fund regulations
for certain payments made to Presidential primary
candidates from that Fund.
Finding Lists begin on page 40.
Announcement Relating to Court Decisions, on page 4.
Announcement of Disbarments and Suspensions begins on page 37.
Index for January and February begins on page 42.

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Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of
view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

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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 Conventions, legisla-
tion, court decisions, and other items of general
interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscrip-
tion basis. Bulletin contents of a permanent nature are
consolidated semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin
all substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published
rulings apply retroactively unless otherwise indicated.
Procedures relating solely to matters of internal
management are not published; however, statements of
internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the
Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on
positions taken in rulings to taxpayers or technical
advice to Service field offices, identifying details and
information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply
with statutory requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be
considered, and Service personnel and others con-
cerned 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 Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellanous.
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 Rulings. Bank Secrecy Act Admin-
istrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly
and semiannual basis, and are published in the first
Bulletin of the succeeding quarterly and semi-annual
period, respectively.
The Bulletin Index-Digest System, a research and
reference service supplementing the Bulletin, may be
obtained from the Superintendent of Documents on a
subscription basis. It consists of four Services: Service
No. 1, Income Tax; Service No. 2, Estate and Gift
Taxes; Service No. 3, Employment Taxes; Service No.
4, Excise Taxes. Each Service consists of a basic
volume and a cumulative supplement that provides (1)
finding lists of items published in the Bulletin, (2)
digests of revenue rulings, revenue procedures, and
other published items, and (3) indexes of Public Laws,
Treasury Decisions, and Tax Conventions.
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, D.C. 20402.

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Announcement Relating to Court Decisions
It is the policy of the Internal
Revenue Service to announce at an
early date whether it will follow the
holdings in certain cases. An Action
on Decision is the document making
such an announcement. An Action
on Decision will be issued at the
discretion of the Service only on
unappealed issues decided adverse
to the government. Generally, an
Action on Decision is issued where
its guidance would be helpful to
Service personnel working with the
same or similar issues. Unlike a
Treasury Regulation or a Revenue
Ruling, an Action on Decision is not
an affirmative statement of Service
position. It is not intended to serve
as public guidance and may not be
cited as precedent.
Actions on Decisions shall be
relied upon within the Service only
as conclusions applying the law to
the facts in the particular case at the
time the Action on Decision was
issued. Caution should be exercised
in extending the recommendation of
the Action on Decision to similar
cases where the facts are different.
Moreover, the recommendation in
the Action on Decision may be
superseded by new legislation, re-
gulations, rulings, cases, or Actions
on Decisions.
Prior to 1991, the Service pub-
lished acquiescence or nonacquies-
cence only in certain regular Tax
Court opinions. The Service has
expanded its acquiescence program
to include other civil tax cases where
guidance is determined to be help-
ful. Accordingly, the Service now
may acquiesce or nonacquiesce in
the holdings of memorandum Tax
Court opinions, as well as those of
the United States District Courts,
Claims Court, and Circuit Courts of
Appeal. Regardless of the court de-
ciding the case, the recommendation
of any Action on Decision will be
published in the Internal Revenue
Bulletin.
The recommendation in every Ac-
tion on Decision will be summarized
as acquiescence, acquiescence in
result only, or nonacquiescence.
Both ‘‘acquiescence’’ and ‘‘acquies-
cence in result only’’ mean that the
Service accepts the holding of the
court in a case and that the Service
will follow it in disposing of cases
with the same controlling facts.
However, ‘‘acquiescence’’ indicates
neither approval nor disapproval of
the reasons assigned by the court for
its conclusions; whereas, ‘‘acquies-
cence in result only’’ indicates dis-
agreement or concern with some or
all of those reasons. Nonacquies-
cence signifies that, although no
further review was sought, the Serv-
ice does not agree with the holding
of the court and, generally, will not
follow the decision in disposing of
cases involving other taxpayers. In
reference to an opinion of a circuit
court of appeals, a nonacquiescence
indicates that the Service will not
follow the holding on a nationwide
basis. However, the Service will
recognize the precedential impact of
the opinion on cases arising within
the venue of the deciding circuit.
The announcements published in
the weekly Internal Revenue Bul-
letins are consolidated semiannually
and annually. The semiannual con-
solidation appears in the first
Bulletin for July and in the
Cumulative Bulletin for the first half of
the year, and the annual consolidation
appears in the first Bulletin for the
following January and in the Cumula-
tive Bulletin for the last half of the
year.
The Commissioner ACQUIESCE
in the following decisions:
William H. and Patricia Adair v. Com-
missioner,
1
T.C. Memo. 1995 – 493
The Commissioner does NOT AC-
QUIESCE in the following decisions:
Estate of Goree v. Commissioner,
2
T.C.
1994 – 331
Robert B. and Eleanor Risman v.
Commissioner,
3
100 T.C. 191 (1993)
Anthony Teong-Chan and Rosanna W.
Gaw v. Commissioner,
4
45 F.3d 461
(D.C. Cir. 1995)
1
Acquiescence relating to whether petitioner who performed services for the North Atlantic Treaty Organization as a transferee transferred and paid by the U.S.
Department of the Army was entitled to the foreign earned income exclusion under section 911 of the Code.
2
Nonacquiescence relating to whether under Estate of Bosch v. Commissioner, 387 U.S. 456 (1967), the Tax Court erred in applying an appellate standard of
review to a lower state court factual determination instead of reviewing the question
de novo.
3
Nonacquiescence relating to whether a remittance forwarded to the Service with a Form 4868 constitutes a payment of tax or a deposit in the nature of a cash
bond for purposes of the period of limitations for seeking a refund of such remittance.
4
Nonacquiescence relating to when the period for filing a Tax Court petition begins to run if the notice of deficiency is mailed to the taxpayers’ last known address
and the Service knows or should know the taxpayers will not receive the noice at their last known address.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 162.—Trade or Business
Expenses
26 CFR 1.162–27: Certain employee
remuneration in excess of $1,000,000.
T.D. 8650
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Disallowance of Deductions for
Employee Remuneration in Excess of
$1,000,000
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the dis-
allowance of deductions for employee
remuneration in excess of $1,000,000.
The regulations provide guidance to
taxpayers that are subject to section
162(m), which was added to the Code
by the Omnibus Budget Reconciliation
Act of 1993.
DATES: January 1, 1994.
For dates of applicability, see
§1.162–27(j).
FOR FURTHER INFORMATION
CONTACT: Robert Misner or Charles
T. Deliee at (202) 622-6060 (not a toll
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1466. Responses
to these collections of information are
required to obtain a tax deduction for
performance-based compensation in ex-
cess of $1 million.
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
displays a valid control number.
The estimated average annual burden
per respondent is 50 hours.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
Under section 162(m) of the Internal
Revenue Code, a publicly held corpora-
tion is denied a deduction for compen-
sation paid to its ‘‘covered employees’’
to the extent the compensation exceeds
$1,000,000 if the compensation would
otherwise be deductible in a taxable
year beginning on or after January 1,
1994.
On December 20, 1993, proposed
regulations under section 162(m) (the
1993 proposed regulations) were pub-
lished in the Federal Register (58 FR
66310 [EE–61–93, 1994–1 C.B. 775]).
Amendments to the proposed regula-
tions (the 1994 amendments) were
published in the Federal Register on
December 2, 1994 (59 FR 61844 [EE–
61–93, 1994–2 C.B. 853]). Public
hearings were held on May 9, 1994,
and August 11, 1995. After considera-
tion of the comments that were re-
ceived in response to the notices of
proposed rulemaking and at the hear-
ings, the IRS and Treasury adopt the
proposed regulations as amended and
revised by this Treasury decision.
Explanation of Provisions
A.Overview of Provisions
As noted above, section 162(m) pro-
vides that a publicly held corporation is
denied a deduction for compensation
paid to a ‘‘covered employee’’ to the
extent the compensation exceeds
$1,000,000. A ‘‘covered employee’’
includes the chief executive officer
(CEO), as well as any other individual
whose compensation is required to be
reported to the Securities and Exchange
Commission by reason of that individ-
ual being among the four highest
compensated officers for the taxable
year (other than the CEO), as of the
end of the corporation’s taxable year.
‘‘Performance-based compensation’’
and certain other compensation is not
subject to the deduction limitation of
section 162(m). Performance-based
compensation is remuneration payable
solely on account of the attainment of
one or more performance goals, but
only if: (1) the goals are determined by
a compensation committee of the board
of directors consisting solely of two or
more outside directors; (2) the material
terms under which the compensation is
to be paid are disclosed to the share-
holders and approved by a majority in
a separate vote before payment is
made; and (3) before any payment is
made, the compensation committee cer-
tifies that the performance goals and
any other material terms have been
satisfied.
Compensation is also excluded from
the deduction limitation of section
162(m) if it is paid under a binding
written contract that was in existence
on February 17, 1993. In addition, in
accordance with the legislative history,
the proposed regulations exempt from
the limitation compensation that is paid
under an arrangement that existed be-
fore the corporation became publicly
held, to the extent that the arrangement
is disclosed in the initial public
offering.
B.Discussion of Comments
Comments that relate to the applica-
tion of the proposed regulations and the
responses to the comments, including
an explanation of the revisions re-
flected in the final regulations, are
summarized below.
Dividend Equivalents Paid on Stock
Options
Under the proposed regulations, the
performance-based exception to the

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deduction limitation generally is
applied on a grant-by-grant basis. If the
facts and circumstances indicate,
however, that the employee would
receive all or part of the compensation
regardless of whether the performance
goal is attained, the compensation is
not performance based. For example,
where payment under a nonperform-
ance based bonus is contingent upon
the failure to attain the performance
goals under an otherwise performance-
based bonus, neither bonus arrangement
will be considered performance based.
The proposed regulations provide that
whether dividends (which generally are
not performance based) on restricted
stock are payable before attainment of
the performance goal, will not affect
the determination of whether the
restricted stock is performance based.
The proposed regulations also provide,
however, that if the amount of any
compensation the employee will
receive under a stock option is not
based solely on an increase in the value
of the stock after the date of grant (for
example, an option granted with an
exercise price that is less than the fair
market value of the stock as of the date
of grant), none of the compensation
attributable to the grant will be
performance based.
Commentators raised the question of
whether nonperformance-based divi-
dend equivalents that are paid with
respect to a granted but unexercised
stock option irrespective of whether the
option is exercised will cause the
compensation paid upon the exercise of
the option to be nonperformance based.
Section 1.162–27(e)(2)(vi) of the final
regulations provides that such dividend
equivalents will not cause the com-
pensation paid upon the exercise of the
option to be nonperformance based,
provided that the payment of the
dividend equivalents is not conditioned
upon the employee exercising the
option. If the payment of the dividend
equivalent is conditioned upon the
employee exercising the option, the
dividend effectively reduces the
exercise price of the option, thereby
causing the option to be nonperform-
ance based upon its exercise.
Bonus Pools
Section 1.162–27(e)(2)(ii) of the
proposed regulations provides that a
preestablished performance goal must
state, in terms of an objective formula
or standard, the method for computing
the amount of compensation payable to
the employee if the goal is attained. A
formula or standard is objective if a
third party having knowledge of the
relevant performance results could
calculate the amount to be paid to the
employee.
Section 1.162–27(e)(2)(iii) prohibits
discretion to increase the amount of
compensation to be paid under the
preestablished performance goal, but
permits the compensation committee to
reduce or eliminate the compensation
that is due upon attainment of the goal.
Examples 7 and 8 under §1.162–27-
(e)(2)(vii) of the proposed regulations
illustrated the application of these rules
to bonus pools. In Example 7, the
amount of the bonus pool was deter-
mined under an objective formula.
However, because the compensation
committee retained the discretion to
determine the fraction of the bonus
pool that each covered employee would
receive, the compensation that any
individual could receive was not
determined under an objective formula
and, therefore, the bonus plan did not
satisfy the requirements of paragraph
(e)(2). In Example 8, the compensation
for any individual was determined
under an objective formula because
each employee’s share of the bonus
pool was specified and because,
notwithstanding the compensation
committee’s ability to reduce the
compensation payable to each in-
dividual employee, a reduction in one
employee’s bonus would not result in
an increase in the amount of any other
employee’s bonus.
Several commentators have indicated
that, in some cases where compensation
committees have stated the amount
payable to each individual under a
bonus pool plan as a percentage of the
bonus pool, the total of these
percentages has exceeded 100 percent
of the pool. The use of such over-
lapping percentages is inconsistent with
§1.162–27(e)(2), as illustrated by both
Example 7 and Example 8. As noted,
Example 8 states that negative dis-
cretion will not cause the bonus plan to
fail to satisfy the requirements of
paragraph (e)(2), ‘‘provided that a
reduction in the amount of one em-
ployee’s bonus does not result in an
increase in the amount of any other
employee’s bonus.’’ Where the total of
the percentages payable under a bonus
pool plan exceeds 100 percent, it is
impossible to award each individual the
stated percentage, and this necessary
exercise of negative discretion with
respect to one or more employees
means that it is impossible for a third
party, with knowledge of the relevant
performance results, to calculate the
amount to be paid to each employee.
Further, a reduction in at least some
employees’ bonuses will result in an
increase in the amount available to pay
other employees’ bonuses.
Accordingly, §1.162–27(e)(2)(iii) is
amended to state more clearly that,
when the compensation to be paid to
each employee is stated in terms of a
percentage of a bonus pool, the sum of
the individual percentages for all
participants in the pool cannot exceed
100 percent. In addition, the principle
stated in Example 8, that the exercise
of negative discretion with respect to
one employee cannot increase the
amount payable to another employee, is
incorporated in paragraph (e)(2)(iii).
Example 8 is also revised to more
clearly illustrate this rule.
Although the IRS and Treasury be-
lieve that the changes made merely
clarify the proposed regulations, it is
recognized that others have interpreted
the language of the proposed regula-
tions differently. Therefore, under
§1.162–27(j)(2)(iv), this clarified rule
will not be applied to any compensa-
tion paid before January 1, 2001, under
a bonus pool based on performance in
any period that began before December
20, 1995.
Outside Directors
Section 1.162–27(e)(3)(vi) provides
that a director is not precluded from
being an outside director solely because
he or she is a former officer of a
corporation that previously was an
affiliated corporation of the publicly
held corporation. The regulation is
revised to clarify that a former officer
of either a spun off or liquidated
corporation, that formerly was a
member of the affiliated group, is not
precluded from serving on the com-
pensation committee of the publicly
held member of the affiliated group.
Companies that Become Publicly
Held Without an Initial Public
Offering
Under §1.162–27(f), the $1 million
deduction limit does not apply to any
compensation plan or agreement that
existed before the corporation became

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publicly held to the extent that the plan
or agreement was disclosed in the
prospectus accompanying the initial
public offering (IPO). This exception
may be relied on until the earliest of:
(1) the expiration of the plan or
agreement, (2) the material modifi-
cation of the plan or agreement, (3) the
issuance of all stock and other compen-
sation that has been allocated under the
plan, or (4) the first shareholder meet-
ing at which directors will be elected
that occurs after the close of the third
calendar year following the calendar
year in which the IPO occurs.
Commentators have asked whether
this rule applies to corporations that
become publicly held without an IPO.
As indicated in the legislative history
accompanying Code section 162(m),
the prospectus that accompanies the
IPO provides an opportunity to disclose
the terms of the plan or agreement to
the potential shareholders, and the
subsequent purchase of the stock with
that knowledge may be viewed as tant-
amount to a favorable vote on the
compensation arrangement. When a
corporation becomes publicly held
without an IPO, there is no comparable
alternative means of satisfying the
requirements of section 162(m)(4)(C)-
(ii). On the other hand, because there is
no requirement for privately held cor-
porations to comply with section
162(m), the IRS and Treasury recog-
nize the need for a transition rule for
plans and agreements that are in
existence when a privately held corpo-
ration becomes publicly held without
an IPO.
Accordingly, §1.162–27(f)(1) is re-
vised to provide relief for privately
held corporations that become publicly
held without an IPO. Under the transi-
tion rule for these corporations, the
reliance period in §1.162–27(f)(2)
lapses upon the first meeting of share-
holders at which directors are to be
elected that occurs after the close of
the first calendar year following the
calendar year in which the corporation
becomes publicly held.
Written Binding Contracts
Section 1.162–27(h)(1) provides the
transition rules for compensation pay-
able under a written binding contract
that was in effect on February 17,
1993. Under those rules, a written
binding contract that is terminable or
cancelable by the corporation after
February 17, 1993, without the
employee’s consent is treated as a new
contract as of the date that any such
termination or cancelation, if made,
would be effective. The proposed reg-
ulations further provide that, if the
terms of a contract provide that the
contract will be terminated or canceled
as of a certain date unless either the
corporation or the employee elects to
renew within 30 days of that date, the
contract is treated as renewed by the
corporation as of that date.
Commentators have suggested that
these regulations clarify the outcome
where a corporation will remain bound
by the terms of a contract beyond a
certain date at the sole discretion of the
employee. For example, if a contract
that is in effect on February 17, 1993,
provides that the employee has the sole
discretion to extend or renew the terms
beyond its stated expiration, without
the consent of the corporation, a
question arises whether the contract
will be considered a pre-February 17,
1993 written binding contract after the
employee chooses to extend.
Generally, the question of whether
the terms of a contract are binding is
determined under state law. The IRS
and Treasury believe that the rules for
determining whether a contract is bind-
ing should be applied based on whether
the corporation is bound by the terms
of the contract. Thus, if a contract
provides the employee with the right to
extend or renew its terms without the
consent of the corporation, and the
corporation is legally obligated to pay
the agreed-upon compensation to the
employee if the employee chooses to
extend or renew the contract, the
contract will be considered binding on
the corporation. Accordingly, a new
sentence has been added to §1.162–
27(h)(1)(i) to clarify that, if the corpo-
ration will remain legally obligated by
the terms of a contract beyond a certain
date at the sole discretion of the em-
ployee, the contract will not be treated
as a new contract as of that date if the
employee exercises the discretion.
Awards Based on a Percentage of
Salary
The 1994 amendments modified
§1.162–27(e)(2)(iii) to provide that, if
the terms of an objective formula or
standard fail to preclude discretion
merely because the amount of compen-
sation to be paid upon attainment of
the performance goal is based, in whole
or in part, on a percentage of salary or
base pay, the objective formula or
standard will not be considered discre-
tionary (and thus §1.162–27(e)(2)(iii)
will not be violated) if the maximum
dollar amount to be paid is fixed at the
time the performance goal is estab-
lished. The final regulations clarify that
a maximum dollar amount need not be
specified under this provision if, at the
time the performance goal is estab-
lished, the dollar amount of salary or
base pay is fixed. In such a case, the
use of salary or base pay does not
cause the formula to fail to preclude
discretion to increase compensation.
The 1994 amendments made a cor-
responding amendment with respect to
salary-based formulas to the share-
holder disclosure rules in §1.162–
27(e)(4)(i). However, the shareholder
disclosure amendment was not ex-
plicitly limited to formulas that would
otherwise be discretionary. The final
regulations clarify that the shareholder
disclosure rule relating to salary-based
formulas applies only to those formulas
that would otherwise be discretionary.
In addition, the final regulations
provide transition relief with respect to
the 1994 amendment of the shareholder
disclosure requirement relating to
salary-based formulas. New §1.162–27-
(j)(2)(v) provides that this disclosure
requirement applies only to plans ap-
proved by shareholders after April 30,
1995.
In the case of a preestablished
performance goal that was established
prior to the publication of the 1994
amendments, a corporation could, of
course, rely upon a reasonable good
faith interpretation of the statutory
provisions to determine that the per-
formance goal was stated in terms of
an objective formula, to the extent the
issue to which the interpretation relates
was not covered by the 1993 regula-
tions. An award made pursuant to such
a performance goal would not fail to be
performance based merely because the
award was made after the publication
of the 1994 amendments.
Stock-Based Compensation
The 1993 proposed regulations pro-
vided transition relief for previously
approved plans and agreements that did
not satisfy the written binding contract
requirement as of February 17, 1993,
but that were approved by shareholders

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before December 20, 1993. See
§1.162–27(h)(3)(iii). The transition re-
lief applied to compensation paid prior
to the expiration of a reliance period.
In response to comments on the 1993
proposed regulations, the 1994 amend-
ments expanded this relief to encom-
pass compensation paid after the re-
liance period with respect to the
exercise of stock options and stock
appreciation rights, and the substantial
vesting of restricted property, provided
that the stock option, stock appreciation
right, or restricted property was granted
during the reliance period. Similar
relief provisions were also included in
new transition rules added by the 1994
amendments. (See §§1.162–27(f)(3),
(f)(4), (j)(2)(ii), and (j)(2)(iii) of the
final regulations.)
Commentators have asked that the
relief provided in the 1994 amendments
for stock options, stock appreciation
rights, and restricted property be ex-
tended even further to cover other
stock-based compensation and deferred
compensation in general. After careful
consideration of the comments re-
ceived, the IRS and Treasury have
concluded that there is not adequate
justification for a further expansion of
the 1994 expansion of the prior regula-
tory transition relief for previously
approved plans and agreements, or the
other similar relief provisions added in
1994.
Subsidiaries That Become Separate
Publicly Held Corporations
Section 1.162–27(f)(4) of the pro-
posed regulations contains special rules
for subsidiaries that become separate
publicly held corporations. A transition
rule set forth in §1.162–27(i)(2)(iii) of
the proposed regulations specified de-
layed effective dates for these special
rules. However, commentators indi-
cated that the regulation were not
explicit as to which rules applied prior
to the delayed effective dates.
The final regulations clarify that
compensation paid prior to the delayed
effective dates by a subsidiary that
becomes a separate publicly held cor-
poration will not be subject to the $1
million deduction limit if the conditions
of the transition rule are satisfied. (This
transition rule and all other effective
date provisions have been moved from
paragraph (i) to paragraph (j) of the
final regulations. Paragraph (i) is
reserved.)
Special Analysis
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal authors of these reg-
ulations are Charles T. Deliee and
Robert Misner, Office of the Associate
Chief Counsel (Employee Benefits and
Exempt Organizations), Internal Reve-
nue Service. However, other personnel
from IRS and the Treasury Department
participated in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.162–27 is added to
read as follows:
§1.162–27 Certain employee
remuneration in excess of $1,000,000
(a)Scope. This section provides
rules for the application of the $1
million deduction limit under section
162(m) of the Internal Revenue Code.
Paragraph (b) of this section provides
the general rule limiting deductions
under section 162(m). Paragraph (c) of
this section provides definitions of
generally applicable terms. Paragraph
(d) of this section provides an excep-
tion from the deduction limit for
compensation payable on a commission
basis. Paragraph (e) of this section
provides an exception for qualified
performance-based compensation. Para-
graphs (f) and (g) of this section
provide special rules for corporations
that become publicly held corporations
and payments that are subject to
section 280G, respectively. Paragraph
(h) of this section provides transition
rules, including the rules for contracts
that are grandfathered and not subject
to section 162(m). Paragraph (j) of this
section contains the effective date pro-
visions. For rules concerning the de-
ductibility of compensation for services
that are not covered by section 162(m)
and this section, see section 162(a)(1)
and §1.162–7. This section is not
determinative as to whether compensa-
tion meets the requirements of section
162(a)(1).
(b)Limitation on deduction. Section
162(m) precludes a deduction under
chapter 1 of the Internal Revenue Code
by any publicly held corporation for
compensation paid to any covered
employee to the extent that the com-
pensation for the taxable year exceeds
$1,000,000.
(c)Definitions—(1) Publicly held
corporation—(i) General rule. A pub-
licly held corporation means any cor-
poration issuing any class of common
equity securities required to be regis-
tered under section 12 of the Exchange
Act. A corporation is not considered
publicly held if the registration of its
equity securities is voluntary. For pur-
poses of this section, whether a corpo-
ration is publicly held is determined
based solely on whether, as of the last
day of its taxable year, the corporation
is subject to the reporting obligations
of section 12 of the Exchange Act.
(ii)Affiliated groups. A publicly
held corporation includes an affiliated
group of corporations, as defined in
section 1504 (determined without re-
gard to section 1504(b)). For purposes
of this section, however, an affiliated
group of corporations does not include
any subsidiary that is itself a publicly
held corporation. Such a publicly held
subsidiary, and its subsidiaries (if any),
are separately subject to this section. If
a covered employee is paid compensa-
tion in a taxable year by more than one
member of an affiliated group, compen-
sation paid by each member of the
affiliated group is aggregated with
compensation paid to the covered
employee by all other members of the
group. Any amount disallowed as a
deduction by this section must be

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prorated among the payor corporations
in proportion to the amount of compen-
sation paid to the covered employee by
each such corporation in the taxable
year.
(2)Covered employee—(i) General
rule. A covered employee means any
individual who, on the last day of the
taxable year, is—
(A)The chief executive officer of
the corporation or is acting in such
capacity; or
(B)Among the four highest compen-
sated officers (other than the chief
executive officer).
(ii)Application of rules of the Se-
curities and Exchange Commission.
Whether an individual is the chief
executive officer described in para-
graph (c)(2)(i)(A) of this section or an
o f f i c e r d e s c r i b e d i n p a r a g r a p h
(c)(2)(i)(B) of this section is deter-
mined pursuant to the executive com-
pensation disclosure rules under the
Exchange Act.
(3)Compensation—(i) In general.
For purposes of the deduction limita-
tion described in paragraph (b) of this
section, compensation means the aggre-
gate amount allowable as a deduction
under chapter 1 of the Internal Revenue
Code for the taxable year (determined
without regard to section 162(m)) for
remuneration for services performed by
a covered employee, whether or not the
services were performed during the
taxable year.
(ii)Exceptions. Compensation does
not include—
(A)Remuneration covered in section
3121(a)(1) through section 3121(a)-
(5)(D) (concerning remuneration that is
not treated as wages for purposes of
the Federal Insurance Contributions
Act); and
(B)Remuneration consisting of any
benefit provided to or on behalf of an
employee if, at the time the benefit is
provided, it is reasonable to believe
that the employee will be able to
exclude it from gross income. In
addition, compensation does not in-
clude salary reduction contributions
described in section 3121(v)(1).
(4)Compensation Committee. The
compensation committee means the
committee of directors (including any
subcommittee of directors) of the pub-
licly held corporation that has the
authority to establish and administer
performance goals described in para-
graph (e)(2) of this section, and to
certify that performance goals are
attained, as described in paragraph
(e)(5) of this section. A committee of
directors is not treated as failing to
have the authority to establish perform-
ance goals merely because the goals
are ratified by the board of directors of
the publicly held corporation or, if
applicable, any other committee of the
board of directors. See paragraph (e)(3)
of this section for rules concerning the
composition of the compensation com-
mittee.
(5)Exchange Act. The Exchange Act
means the Securities Exchange Act of
1934.
(6)Examples. This paragraph (c)
may be illustrated by the following
examples:
Example 1. Corporation X is a publicly held
corporation with a July 1 to June 30 fiscal year.
For Corporation X’s taxable year ending on June
30, 1995, Corporation X pays compensation of
$2,000,000 to A, an employee. However, A’s
compensation is not required to be reported to
shareholders under the executive compensation
disclosure rules of the Exchange Act because A
is neither the chief executive officer nor one of
the four highest compensated officers employed
on the last day of the taxable year. A’s
compensation is not subject to the deduction
limitation of paragraph (b) of this section.
Example 2. C, a covered employee, performs
services and receives compensation from Corpo-
rations X, Y, and Z, members of an affiliated
group of corporations. Corporation X, the parent
corporation, is a publicly held corporation. The
total compensation paid to C from all affiliated
group members is $3,000,000 for the taxable
year, of which Corporation X pays $1,500,000;
Corporation Y pays $900,000; and Corporation Z
pays $600,000. Because the compensation paid
by all affiliated group members is aggregated for
purposes of section 162(m), $2,000,000 of the
aggregate compensation paid is nondeductible.
Corporations X, Y, and Z each are treated as
paying a ratable portion of the nondeductible
compensation. Thus, two thirds of each corpora-
tion’s payment will be nondeductible. Corpora-
tion X has a nondeductible compensation ex-
p e n s e o f $ 1 , 0 0 0 , 0 0 0 ( $ 1 , 5 0 0 , 0 0 0 3
$2,000,000/$3,000,000). Corporation Y has a
nondeductible compensation expense of $600,000
($900,000 3 $2,000,000/$3,000,000). Corpora-
tion Z has a nondeductible compensation expense
o f $ 4 0 0 , 0 0 0 ( $ 6 0 0 , 0 0 0 3 $ 2 , 0 0 0 , 0 0 0 /
$3,000,000).
Example 3. Corporation W, a calendar year
taxpayer, has total assets equal to or exceeding
$5 million and a class of equity security held of
record by 500 or more persons on December 31,
1994. However, under the Exchange Act, Corpo-
ration W is not required to file a registration
statement with respect to that security until April
30, 1995. Thus, Corporation W is not a publicly
held corporation on December 31, 1994, but is a
publicly held corporation on December 31, 1995.
Example 4. The facts are the same as in
Example 3, except that on December 15, 1996,
Corporation W files with the Securities and
Exchange Commission to disclose that Corpora-
tion W is no longer required to be registered
under section 12 of the Exchange Act and to
terminate its registration of securities under that
provision. Because Corporation W is no longer
subject to Exchange Act reporting obligations as
of December 31, 1996, Corporation W is not a
publicly held corporation for taxable year 1996,
even though the registration of Corporation W’s
securities does not terminate until 90 days after
Corporation W files with the Securities and
Exchange Commission.
(d)Exception for compensation paid
on a commission basis. The deduction
limit in paragraph (b) of this section
shall not apply to any compensation
paid on a commission basis. For this
purpose, compensation is paid on a
commission basis if the facts and
circumstances show that it is paid
solely on account of income generated
directly by the individual performance
of the individual to whom the compen-
sation is paid. Compensation does not
fail to be attributable directly to the
individual merely because support serv-
ices, such as secretarial or research
services, are utilized in generating the
income. However, if compensation is
paid on account of broader perform-
ance standards, such as income pro-
duced by a business unit of the
corporation, the compensation does not
qualify for the exception provided
under this paragraph (d).
( e )E x c e p t i o n f o r q u a l i f i e d
performance-based compensation—
(1)In general. The deduction limit
in paragraph (b) of this section does
not apply to qualified performance-
based compensation. Qualified per-
formance-based compensation is com-
pensation that meets all of the require-
ments of paragraphs (e)(2) through
(e)(5) of this section.
(2)Performance goal requirement—
(i) Preestablished goal. Qualified
performance-based compensation must
be paid solely on account of the
attainment of one or more pre-
established, objective performance
goals. A performance goal is consid-
ered preestablished if it is established
in writing by the compensation com-
mittee not later than 90 days after the
commencement of the period of service
to which the performance goal relates,
provided that the outcome is substan-
tially uncertain at the time the compen-
sation committee actually establishes
the goal. However, in no event will a
performance goal be considered to be
preestablished if it is established after
25 percent of the period of service (as
scheduled in good faith at the time the
goal is established) has elapsed. A

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performance goal is objective if a third
party having knowledge of the relevant
facts could determine whether the goal
is met. Performance goals can be based
on one or more business criteria that
apply to the individual, a business unit,
or the corporation as a whole. Such
business criteria could include, for
example, stock price, market share,
sales, earnings per share, return on
equity, or costs. A performance goal
need not, however, be based upon an
increase or positive result under a
business criterion and could include,
for example, maintaining the status quo
or limiting economic losses (measured,
in each case, by reference to a specific
business criterion). A performance goal
does not include the mere continued
employment of the covered employee.
Thus, a vesting provision based solely
on continued employment would not
constitute a performance goal. See
paragraph (e)(2)(vi) of this section for
rules on compensation that is based on
an increase in the price of stock.
(ii)Objective compensation formula.
A preestablished performance goal
must state, in terms of an objective
formula or standard, the method for
computing the amount of compensation
payable to the employee if the goal is
attained. A formula or standard is
objective if a third party having knowl-
edge of the relevant performance re-
sults could calculate the amount to be
paid to the employee. In addition, a
formula or standard must specify the
individual employees or class of
employees to which it applies.
(iii)Discretion.
(A)The terms of an objective for-
mula or standard must preclude discre-
tion to increase the amount of compen-
sation payable that would otherwise be
due upon attainment of the goal. A
performance goal is not discretionary
for purposes of this paragraph
(e)(2)(iii) merely because the compen-
sation committee reduces or eliminates
the compensation or other economic
benefit that was due upon attainment of
the goal. However, the exercise of
negative discretion with respect to one
employee is not permitted to result in
an increase in the amount payable to
another employee. Thus, for example,
in the case of a bonus pool, if the
amount payable to each employee is
stated in terms of a percentage of the
pool, the sum of these individual
percentages of the pool is not permitted
to exceed 100 percent. If the terms of
an objective formula or standard fail to
preclude discretion to increase the
amount of compensation merely be-
cause the amount of compensation to
be paid upon attainment of the per-
formance goal is based, in whole or in
part, on a percentage of salary or base
pay and the dollar amount of the salary
or base pay is not fixed at the time the
performance goal is established, then
the objective formula or standard will
not be considered discretionary for
purposes of this paragraph (e)(2)(iii) if
the maximum dollar amount to be paid
is fixed at that time.
(B)If compensation is payable upon
or after the attainment of a perform-
ance goal, and a change is made to
accelerate the payment of compensation
to an earlier date after the attainment of
the goal, the change will be treated as
an increase in the amount of compensa-
tion, unless the amount of compensa-
tion paid is discounted to reasonably
reflect the time value of money. If
compensation is payable upon or after
the attainment of a performance goal,
and a change is made to defer the
payment of compensation to a later
date, any amount paid in excess of the
amount that was originally owed to the
employee will not be treated as an
increase in the amount of compensation
if the additional amount is based either
on a reasonable rate of interest or on
one or more predetermined actual
investments (whether or not assets
associated with the amount originally
owed are actually invested therein)
such that the amount payable by the
employer at the later date will be based
on the actual rate of return of a specific
investment (including any decrease as
well as any increase in the value of an
investment). If compensation is payable
in the form of property, a change in the
timing of the transfer of that property
after the attainment of the goal will not
be treated as an increase in the amount
of compensation for purposes of this
paragraph (e)(2)(iii). Thus, for exam-
ple, if the terms of a stock grant
provide for stock to be transferred after
the attainment of a performance goal
and the transfer of the stock also is
subject to a vesting schedule, a change
in the vesting schedule that either
accelerates or defers the transfer of
stock will not be treated as an increase
in the amount of compensation payable
under the performance goal.
(C)Compensation attributable to a
stock option, stock appreciation right,
or other stock-based compensation does
not fail to satisfy the requirements of
this paragraph (e)(2) to the extent that
a change in the grant or award is made
to reflect a change in corporate capital-
ization, such as a stock split or
dividend, or a corporate transaction,
such as any merger of a corporation
into another corporation, any consolida-
tion of two or more corporations into
another corporation, any separation of a
corporation (including a spinoff or
other distribution of stock or property
by a corporation), any reorganization of
a corporation (whether or not such
reorganization comes within the defini-
tion of such term in section 368), or
any partial or complete liquidation by a
corporation.
(iv)Grant-by-grant determination.
The determination of whether compen-
sation satisfies the requirements of this
paragraph (e)(2) generally shall be
made on a grant-by-grant basis. Thus,
for example, whether compensation
attributable to a stock option grant
satisfies the requirements of this para-
graph (e)(2) generally is determined on
the basis of the particular grant made
and without regard to the terms of any
other option grant, or other grant of
compensation, to the same or another
employee. As a further example, except
as provided in paragraph (e)(2)(vi),
whether a grant of restricted stock or
other stock-based compensation satis-
fies the requirements of this paragraph
(e)(2) is determined without regard to
whether dividends, dividend equiva-
lents, or other similar distributions with
respect to stock, on such stock-based
compensation are payable prior to the
attainment of the performance goal.
Dividends, dividend equivalents, or
other similar distributions with respect
to stock that are treated as separate
grants under this paragraph (e)(2)(iv)
are not performance-based compensa-
tion unless they separately satisfy the
requirements of this paragraph (e)(2).
(v)Compensation contingent upon
attainment of performance goal. Com-
pensation does not satisfy the require-
ments of this paragraph (e)(2) if the
facts and circumstances indicate that
the employee would receive all or part
of the compensation regardless of
whether the performance goal is at-
tained. Thus, if the payment of com-
pensation under a grant or award is
only nominally or partially contingent
on attaining a performance goal, none
of the compensation payable under the
grant or award will be considered

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performance-based. For example, if an
employee is entitled to a bonus under
either of two arrangements, where
payment under a nonperformance-based
arrangement is contingent upon the
failure to attain the performance goals
under an otherwise performance-based
arrangement, then neither arrangement
provides for compensation that satisfies
the requirements of this paragraph
(e)(2). Compensation does not fail to
be qualified performance-based com-
pensation merely because the plan
allows the compensation to be payable
upon death, disability, or change of
ownership or control, although compen-
sation actually paid on account of those
events prior to the attainment of the
performance goal would not satisfy the
requirements of this paragraph (e)(2).
As an exception to the general rule set
forth in the first sentence of paragraph
(e)(2)(iv) of this section, the facts-and-
circumstances determination referred to
in the first sentence of this paragraph
(e)(2)(v) is made taking into account
all plans, arrangements, and agreements
that provide for compensation to the
employee.
(vi)Application of requirements to
stock options and stock appreciation
rights—(A) In general. Compensation
attributable to a stock option or a stock
appreciation right is deemed to satisfy
the requirements of this paragraph
(e)(2) if the grant or award is made by
the compensation committee; the plan
under which the option or right is
granted states the maximum number of
shares with respect to which options or
rights may be granted during a spec-
ified period to any employee; and,
under the terms of the option or right,
the amount of compensation the em-
ployee could receive is based solely on
an increase in the value of the stock
after the date of the grant or award.
Conversely, if the amount of compen-
sation the employee will receive under
the grant or award is not based solely
on an increase in the value of the stock
after the date of grant or award (e.g., in
the case of restricted stock, or an
option that is granted with an exercise
price that is less than the fair market
value of the stock as of the date of
grant), none of the compensation at-
tributable to the grant or award is
qualified performance-based compensa-
tion because it does not satisfy the
requirement of this paragraph (e)(2)-
(vi)(A). Whether a stock option grant is
based solely on an increase in the value
of the stock after the date of grant is
determined without regard to any divi-
dend equivalent that may be payable,
provided that payment of the dividend
equivalent is not made contingent on
the exercise of the option. The rule that
the compensation attributable to a stock
option or stock appreciation right must
be based solely on an increase in the
value of the stock after the date of
grant or award does not apply if the
grant or award is made on account of,
or if the vesting or exercisability of the
grant or award is contingent on, the
attainment of a performance goal that
satisfies the requirements of this para-
graph (e)(2).
(B)Cancellation and repricing.
Compensation attributable to a stock
option or stock appreciation right does
not satisfy the requirements of this
paragraph (e)(2) to the extent that the
number of options granted exceeds the
maximum number of shares for which
options may be granted to the em-
ployee as specified in the plan. If an
option is canceled, the canceled option
continues to be counted against the
maximum number of shares for which
options may be granted to the em-
ployee under the plan. If, after grant,
the exercise price of an option is
reduced, the transaction is treated as a
cancellation of the option and a grant
of a new option. In such case, both the
option that is deemed to be canceled
and the option that is deemed to be
granted reduce the maximum number
of shares for which options may be
granted to the employee under the plan.
This paragraph (e)(2)(vi)(B) also ap-
plies in the case of a stock appreciation
right where, after the award is made,
the base amount on which stock ap-
preciation is calculated is reduced to
reflect a reduction in the fair market
value of stock.
(vii)Examples. This paragraph (e)(2)
may be illustrated by the following
examples:
Example 1. No later than 90 days after the
start of a fiscal year, but while the outcome is
substantially uncertain, Corporation S establishes
a bonus plan under which A, the chief executive
officer, will receive a cash bonus of $500,000, if
year-end corporate sales are increased by at least
5 percent. The compensation committee retains
the right, if the performance goal is met, to
reduce the bonus payment to A if, in its
judgment, other subjective factors warrant a
reduction. The bonus will meet the requirements
of this paragraph (e)(2).
Example 2. The facts are the same as in
Example 1, except that the bonus is based on a
percentage of Corporation S’s total sales for the
fiscal year. Because Corporation S is virtually
certain to have some sales for the fiscal year, the
outcome of the performance goal is not substan-
tially uncertain, and therefore the bonus does not
meet the requirements of this paragraph (e)(2).
Example 3. The facts are the same as in
Example 1, except that the bonus is based on a
percentage of Corporation S’s total profits for the
fiscal year. Although some sales are virtually
certain for virtually all public companies, it is
substantially uncertain whether a company will
have profits for a specified future period even if
the company has a history of profitability.
Therefore, the bonus will meet the requirements
of this paragraph (e)(2).
Example 4. B is the general counsel of
Corporation R, which is engaged in patent
litigation with Corporation S. Representatives of
Corporation S have informally indicated to
Corporation R a willingness to settle the
litigation for $50,000,000. Subsequently, the
compensation committee of Corporation R agrees
to pay B a bonus if B obtains a formal settlement
for at least $50,000,000. The bonus to B does
not meet the requirement of this paragraph (e)(2)
because the performance goal was not estab-
lished at a time when the outcome was
substantially uncertain.
Example 5. Corporation S, a public utility,
adopts a bonus plan for selected salaried
employees that will pay a bonus at the end of a
3-year period of $750,000 each if, at the end of
the 3 years, the price of S stock has increased by
10 percent. The plan also provides that the 10-
percent goal will automatically adjust upward or
downward by the percentage change in a pub-
lished utilities index. Thus, for example, if the
published utilities index shows a net increase of
5 percent over a 3-year period, then the salaried
employees would receive a bonus only if
Corporation S stock has increased by 15 percent.
Conversely, if the published utilities index shows
a net decrease of 5 percent over a 3-year period,
then the salaried employees would receive a
bonus if Corporation S stock has increased by 5
percent. Because these automatic adjustments in
the performance goal are preestablished, the
bonus meets the requirement of this paragraph
(e)(2), notwithstanding the potential changes in
the performance goal.
Example 6. The facts are the same as in
Example 5, except that the bonus plan provides
that, at the end of the 3-year period, a bonus of
$750,000 will be paid to each salaried employee
if either the price of Corporation S stock has
increased by 10 percent or the earnings per share
on Corporation S stock have increased by 5
percent. If both the earnings-per-share goal and
the stock-price goal are preestablished, the
compensation committee’s discretion to choose
to pay a bonus under either of the two goals does
not cause any bonus paid under the plan to fail
to meet the requirement of this paragraph (e)(2)
because each goal independently meets the re-
quirements of this paragraph (e)(2). The choice
to pay under either of the two goals is
tantamount to the discretion to choose not to pay
under one of the goals, as provided in paragraph
(e)(2)(iii) of this section.
Example 7. Corporation U establishes a bonus
plan under which a specified class of employees
will participate in a bonus pool if certain
preestablished performance goals are attained.
The amount of the bonus pool is determined
under an objective formula. Under the terms of
the bonus plan, the compensation committee
retains the discretion to determine the fraction of
the bonus pool that each employee may receive.

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The bonus plan does not satisfy the requirements
of this paragraph (e)(2). Although the aggregate
amount of the bonus plan is determined under an
objective formula, a third party could not
determine the amount that any individual could
receive under the plan.
Example 8. The facts are the same as in
Example 7, except that the bonus plan provides
that a specified share of the bonus pool is
payable to each employee, and the total of these
shares does not exceed 100% of the pool. The
bonus plan satisfies the requirements of this
paragraph (e)(2). In addition, the bonus plan will
satisfy the requirements of this paragraph (e)(2)
even if the compensation committee retains the
discretion to reduce the compensation payable to
any individual employee, provided that a reduc-
tion in the amount of one employee’s bonus does
not result in an increase in the amount of any
other employee’s bonus.
Example 9. Corporation V establishes a stock
option plan for salaried employees. The terms of
the stock option plan specify that no salaried
employee shall receive options for more than
100,000 shares over any 3-year period. The
compensation committee grants options for
50,000 shares to each of several salaried
employees. The exercise price of each option is
equal to or greater than the fair market value at
the time of each grant. Compensation attributable
to the exercise of the options satisfies the
requirements of this paragraph (e)(2). If, how-
ever, the terms of the options provide that the
exercise price is less than fair market value at
the date of grant, no compensation attributable to
the exercise of those options satisfies the
requirements of this paragraph (e)(2) unless
issuance or exercise of the options was con-
tingent upon the attainment of a preestablished
performance goal that satisfies this paragraph
(e)(2).
Example 10. The facts are the same as in
Example 9, except that, within the same 3-year
grant period, the fair market value of Corpora-
tion V stock is significantly less than the
exercise price of the options. The compensation
committee reprices those options to that lower
current fair market value of Corporation V stock.
The repricing of the options for 50,000 shares
held by each salaried employee is treated as the
grant of new options for an additional 50,000
shares to each employee. Thus, each of the
salaried employees is treated as having received
grants for 100,000 shares. Consequently, if any
additional options are granted to those employees
during the 3-year period, compensation attributa-
ble to the exercise of those additional options
would not satisfy the requirements of this
paragraph (e)(2). The results would be the same
if the compensation committee canceled the
outstanding options and issued new options to
the same employees that were exercisable at the
fair market value of Corporation V stock on the
date of reissue.
Example 11. Corporation W maintains a plan
under which each participating employee may
receive incentive stock options, nonqualified
stock options, stock appreciation rights, or grants
of restricted Corporation W stock. The plan
specifies that each participating employee may
receive options, stock appreciation rights,
restricted stock, or any combination of each, for
no more than 20,000 shares over the life of the
plan. The plan provides that stock options may
be granted with an exercise price of less than,
equal to, or greater than fair market value on the
date of grant. Options granted with an exercise
price equal to, or greater than, fair market value
on the date of grant do not fail to meet the
requirements of this paragraph (e)(2) merely
because the compensation committee has the
discretion to determine the types of awards (i.e.,
options, rights, or restricted stock) to be granted
to each employee or the discretion to issue
options or make other compensation awards
under the plan that would not meet the re-
quirements of this paragraph (e)(2). Whether an
option granted under the plan satisfies the
requirements of this paragraph (e)(2) is deter-
mined on the basis of the specific terms of the
option and without regard to other options or
awards under the plan.
Example 12. Corporation X maintains a plan
under which stock appreciation rights may be
awarded to key employees. The plan permits the
compensation committee to make awards under
which the amount of compensation payable to
the employee is equal to the increase in the stock
price plus a percentage ‘‘gross up’’ intended to
offset the tax liability of the employee. In
addition, the plan permits the compensation
committee to make awards under which the
amount of compensation payable to the employee
is equal to the increase in the stock price, based
on the highest price, which is defined as the
highest price paid for Corporation X stock (or
offered in a tender offer or other arms-length
offer) during the 90 days preceding exercise.
Compensation attributable to awards under the
plan satisfies the requirements of paragraph
(e)(2)(vi) of this section, provided that the terms
of the plan specify the maximum number of
shares for which awards may be made.
Example 13. Corporation W adopts a plan
under which a bonus will be paid to the CEO
only if there is a 10% increase in earnings per
share during the performance period. The plan
provides that earnings per share will be calcu-
lated without regard to any change in accounting
standards that may be required by the Financial
Accounting Standards Board after the goal is
established. After the goal is established, such a
change in accounting standards occurs. Corpora-
tion W’s reported earnings, for purposes of
determining earnings per share under the plan,
are adjusted pursuant to this plan provision to
factor out this change in standards. This adjust-
ment will not be considered an exercise of
impermissible discretion because it is made
pursuant to the plan provision.
Example 14. Corporation X adopts a
performance-based incentive pay plan with a
four-year performance period. Bonuses under the
plan are scheduled to be paid in the first year
after the end of the performance period (year 5).
However, in the second year of the performance
period, the compensation committee determines
that any bonuses payable in year 5 will instead,
for bona fide business reasons, be paid in year
10. The compensation committee also determines
that any compensation that would have been
payable in year 5 will be adjusted to reflect the
delay in payment. The adjustment will be based
on the greater of the future rate of return of a
specified mutual fund that invests in blue chip
stocks or of a specified venture capital invest-
ment over the five-year deferral period. Each of
these investments, considered by itself, is a
predetermined actual investment because it is
based on the future rate of return of an actual
investment. However, the adjustment in this case
is not based on predetermined actual investments
within the meaning of paragraph (e)(2)(iii)(B) of
this section because the amount payable by
Corporation X in year 10 will be based on the
greater of the two investment returns and, thus,
will not be based on the actual rate of return on
either specific investment.
Example 15. The facts are the same as in
Example 14, except that the increase will be
based on Moody’s Average Corporate Bond
Yield over the five-year deferral period. Because
this index reflects a reasonable rate of interest,
the increase in the compensation payable that is
based on the index’s rate of return is not con-
sidered an impermissible increase in the amount
of compensation payable under the formula.
Example 16. The facts are the same as in
Example 14, except that the increase will be
based on the rate of return for the Standard &
Poor’s 500 Index. This index does not measure
interest rates and thus does not represent a
reasonable rate of interest. In addition, this index
does not represent an actual investment. There-
fore, any additional compensation payable based
on the rate of return of this index will result in
an impermissible increase in the amount payable
under the formula. If, in contrast, the increase
were based on the rate of return of an existing
mutual fund that is invested in a manner that
seeks to approximate the Standard & Poor’s 500
Index, the increase would be based on a pre-
determined actual investment within the meaning
of paragraph (e)(2)(iii)(B) of this section and
thus would not result in an impermissible
increase in the amount payable under the
formula.
(3)Outside directors—(i) General
rule. The performance goal under
which compensation is paid must be
established by a compensation commit-
tee comprised solely of two or more
outside directors. A director is an
outside director if the director—
(A)Is not a current employee of the
publicly held corporation;
(B)Is not a former employee of the
publicly held corporation who receives
compensation for prior services (other
than benefits under a tax-qualified
retirement plan) during the taxable
year;
(C)Has not been an officer of the
publicly held corporation; and
(D)Does not receive remuneration
from the publicly held corporation,
either directly or indirectly, in any
capacity other than as a director. For
this purpose, remuneration includes any
payment in exchange for goods or
services.
(ii)Remuneration received. For pur-
poses of this paragraph (e)(3), re-
muneration is received, directly or
indirectly, by a director in each of the
following circumstances:
(A)If remuneration is paid, directly
or indirectly, to the director personally
or to an entity in which the director has
a beneficial ownership interest of

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greater than 50 percent. For this
purpose, remuneration is considered
paid when actually paid (and through-
out the remainder of that taxable year
of the corporation) and, if earlier,
throughout the period when a contract
or agreement to pay remuneration is
outstanding.
(B)If remuneration, other than de
minimis remuneration, was paid by the
publicly held corporation in its preced-
ing taxable year to an entity in which
the director has a beneficial ownership
interest of at least 5 percent but not
more than 50 percent. For this purpose,
remuneration is considered paid when
actually paid or, if earlier, when the
publicly held corporation becomes lia-
ble to pay it.
(C)If remuneration, other than de
minimis remuneration, was paid by the
publicly held corporation in its preced-
ing taxable year to an entity by which
the director is employed or self-
employed other than as a director. For
this purpose, remuneration is consid-
ered paid when actually paid or, if
earlier, when the publicly held corpora-
tion becomes liable to pay it.
(iii)De minimis remuneration—(A)
In general. For purposes of paragraphs
(e)(3)(ii)(B) and (C) of this section,
remuneration that was paid by the
publicly held corporation in its preced-
ing taxable year to an entity is de
minimis if payments to the entity did
not exceed 5 percent of the gross
revenue of the entity for its taxable
year ending with or within that preced-
ing taxable year of the publicly held
corporation.
(B)Remuneration for personal serv-
ices and substantial owners. Notwith-
standing paragraph (e)(3)(iii)(A) of this
section, remuneration in excess of
$60,000 is not de minimis if the
remuneration is paid to an entity
described in paragraph (e)(3)(ii)(B) of
this section, or is paid for personal
services to an entity described in
paragraph (e)(3)(ii)(C) of this section.
(iv)Remuneration for personal serv-
ices. For purposes of paragraph (e)(3)-
(iii)(B) of this section, remuneration
from a publicly held corporation is for
personal services if—
(A)The remuneration is paid to an
entity for personal or professional
services, consisting of legal, account-
ing, investment banking, and manage-
ment consulting services (and other
similar services that may be specified
by the Commissioner in revenue rul-
ings, notices, or other guidance pub-
lished in the Internal Revenue Bul-
letin), performed for the publicly held
corporation, and the remuneration is
not for services that are incidental to
the purchase of goods or to the
purchase of services that are not
personal services; and
(B)The director performs significant
services (whether or not as an em-
ployee) for the corporation, division, or
similar organization (within the entity)
that actually provides the services
described in paragraph (e)(3)(iv)(A) of
this section to the publicly held corpo-
ration, or more than 50 percent of the
entity’s gross revenues (for the entity’s
preceding taxable year) are derived
from that corporation, subsidiary, or
similar organization.
(v)Entity defined. For purposes of
this paragraph (e)(3), entity means an
organization that is a sole proprietor-
ship, trust, estate, partnership, or corpo-
ration. The term also includes an af-
filiated group of corporations as de-
fined in section 1504 (determined
without regard to section 1504(b)) and
a group of organizations that would be
an affiliated group but for the fact that
one or more of the organizations are
not incorporated. However, the ag-
gregation rules referred to in the
preceding sentence do not apply for
purposes of determining whether a
director has a beneficial ownership
interest of at least 5 percent or greater
than 50 percent.
(vi)Employees and former officers.
Whether a director is an employee or a
former officer is determined on the
basis of the facts at the time that the
individual is serving as a director on
the compensation committee. Thus, a
director is not precluded from being an
outside director solely because the
director is a former officer of a
corporation that previously was an
affiliated corporation of the publicly
held corporation. For example, a direc-
tor of a parent corporation of an af-
filiated group is not precluded from
being an outside director solely because
that director is a former officer of an
affiliated subsidiary that was spun off
or liquidated. However, an outside
director would no longer be an outside
director if a corporation in which the
director was previously an officer
became an affiliated corporation of the
publicly held corporation.
(vii)Officer. Solely for purposes of
this paragraph (e)(3), officer means an
administrative executive who is or was
in regular and continued service. The
term implies continuity of service and
excludes those employed for a special
and single transaction. An individual
who merely has (or had) the title of
officer but not the authority of an
officer is not considered an officer. The
determination of whether an individual
is or was an officer is based on all the
of facts and circumstances in the
particular case, including without lim-
itation the source of the individual’s
authority, the term for which the
individual is elected or appointed, and
the nature and extent of the individ-
ual’s duties.
(viii)Members of affiliated groups.
For purposes of this paragraph (e)(3),
the outside directors of the publicly
held member of an affiliated group are
treated as the outside directors of all
members of the affiliated group.
(ix)Examples. This paragraph (e)(3)
may be illustrated by the following
examples:
Example 1. Corporations X and Y are mem-
bers of an affiliated group of corporations as
defined in section 1504, until July 1, 1994, when
Y is sold to another group. Prior to the sale, A
served as an officer of Corporation Y. After July
1, 1994, A is not treated as a former officer of
Corporation X by reason of having been an
officer of Y.
Example 2. Corporation Z, a calendar-year
taxpayer, uses the services of a law firm by
which B is employed, but in which B has a less-
than-5-percent ownership interest. The law firm
reports income on a July 1 to June 30 basis.
Corporation Z appoints B to serve on its
compensation committee for calendar year 1998
after determining that, in calendar year 1997, it
did not become liable to the law firm for
remuneration exceeding the lesser of $60,000 or
five percent of the law firm’s gross revenue
(calculated for the year ending June 30, 1997).
On October 1, 1998, Corporation Z becomes
liable to pay remuneration of $50,000 to the law
firm on June 30, 1999. For the year ending June
30, 1998, the law firm’s gross revenue was less
than $1 million. Thus, in calendar year 1999, B
is not an outside director. However, B may
satisfy the requirements for an outside director in
calendar year 2000, if, in calendar year 1999,
Corporation Z does not become liable to the law
firm for additional remuneration. This is because
the remuneration actually paid on June 30, 1999
was considered paid on October 1, 1998 under
paragraph (e)(3)(ii)(C) of this section.
Example 3. Corporation Z, a publicly held
corporation, purchases goods from Corporation
A. D, an executive and less-than-5-percent owner
of Corporation A, sits on the board of directors
of Corporation Z and on its compensation com-
mittee. For 1997, Corporation Z obtains repre-
sentations to the effect that D is not eligible for
any commission for D’s sales to Corporation Z
and that, for purposes of determining D’s
compensation for 1997, Corporation A’s sales to
Corporation Z are not otherwise treated dif-

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ferently than sales to other customers of Corpo-
ration A (including its affiliates, if any) or are
irrelevant. In addition, Corporation Z has no
reason to believe that these representations are
inaccurate or that it is otherwise paying re-
muneration indirectly to D personally. Thus, in
1997, no remuneration is considered paid by
Corporation Z indirectly to D personally under
paragraph (e)(3)(ii)(A) of this section.
Example 4. (i) Corporation W, a publicly held
corporation, purchases goods from Corporation
T. C, an executive and less-than-5-percent owner
of Corporation T, sits on the board of directors
of Corporation W and on its compensation com-
mittee. Corporation T develops a new product
and agrees on January 1, 1998 to pay C a bonus
of $500,000 if Corporation W contracts to
purchase the product. Even if Corporation W
purchases the new product, sales to Corporation
W will represent less than 5 percent of
Corporation T’s gross revenues. In 1999, Corpo-
ration W contracts to purchase the new product
and, in 2000, C receives the $500,000 bonus
from Corporation T. In 1998, 1999, and 2000,
Corporation W does not obtain any representa-
tions relating to indirect remuneration to C
personally (such as the representations described
in Example 3).
(ii)Thus, in 1998, 1999, and 2000, remunera-
tion is considered paid by Corporation W
indirectly to C personally under paragraph
(e)(3)(ii)(A) of this section. Accordingly, in
1998, 1999, and 2000, C is not an outside
director of Corporation W. The result would
have been the same if Corporation W had ob-
tained appropriate representations but neverthe-
less had reason to believe that it was paying
remuneration indirectly to C personally.
Example 5. Corporation R, a publicly held
corporation, purchases utility service from Cor-
poration Q, a public utility. The chief executive
officer, and less-than-5-percent owner, of Corpo-
ration Q is a director of Corporation R.
Corporation R pays Corporation Q more than
$60,000 per year for the utility service, but less
than 5 percent of Corporation Q’s gross reve-
nues. Because utility services are not personal
services, the fees paid are not subject to the
$60,000 de minimis rule for remuneration for
personal services within the meaning of para-
graph (e)(3)(iii)(B) of this section. Thus, the
chief executive officer qualifies as an outside
director of Corporation R, unless disqualified on
some other basis.
Example 6. Corporation A, a publicly held
corporation, purchases management consulting
services from Division S of Conglomerate P. The
chief financial officer of Division S is a director
of Corporation A. Corporation A pays more than
$60,000 per year for the management consulting
services, but less than 5 percent of Conglomerate
P’s gross revenues. Because management con-
sulting services are personal services within the
meaning of paragraph (e)(3)(iv)(A) of this
section, and the chief financial officer performs
significant services for Division S, the fees paid
are subject to the $60,000 de minimis rule as
remuneration for personal services. Thus, the
chief financial officer does not qualify as an
outside director of Corporation A.
Example 7. The facts are the same as in
Example 6, except that the chief executive
officer, and less-than-5-percent owner, of the
parent company of Conglomerate P is a director
of Corporation A and does not perform signifi-
cant services for Division S. If the gross
revenues of Division S do not constitute more
than 50 percent of the gross revenues of
Conglomerate P for P’s preceding taxable year,
the chief executive officer will qualify as an
outside director of Corporation A, unless dis-
qualified on some other basis.
(4)Shareholder approval require-
ment—(i) General rule. The material
terms of the performance goal under
which the compensation is to be paid
must be disclosed to and subsequently
approved by the shareholders of the
publicly held corporation before the
compensation is paid. The requirements
of this paragraph (e)(4) are not satisfied
if the compensation would be paid
regardless of whether the material
terms are approved by shareholders.
The material terms include the
employees eligible to receive compen-
sation; a description of the business
criteria on which the performance goal
is based; and either the maximum
amount of compensation that could be
paid to any employee or the formula
used to calculate the amount of com-
pensation to be paid to the employee if
the performance goal is attained (ex-
cept that, in the case of a formula that
fails to preclude discretion to increase
the amount of compensation (as de-
scribed in paragraph (e)(2)(iii)(A) of
this section) merely because the
amount of compensation to be paid is
based, in whole or in part, on a
percentage of salary or base pay and
the dollar amount of the salary or base
pay is not fixed at the time the
performance goal is established, the
maximum dollar amount of compensa-
tion that could be paid to the employee
must be disclosed).
(ii)Eligible employees. Disclosure of
the employees eligible to receive com-
pensation need not be so specific as to
identify the particular individuals by
name. A general description of the
class of eligible employees by title or
class is sufficient, such as the chief
executive officer and vice presidents,
or all salaried employees, all executive
officers, or all key employees.
( i i i )D e s c r i p t i o n o f b u s i n e s s
criteria—(A) In general. Disclosure of
the business criteria on which the
performance goal is based need not
include the specific targets that must be
satisfied under the performance goal.
For example, if a bonus plan provides
that a bonus will be paid if earnings
per share increase by 10 percent, the
10-percent figure is a target that need
not be disclosed to shareholders. How-
ever, in that case, disclosure must be
made that the bonus plan is based on
an earnings-per-share business crite-
rion. In the case of a plan under which
employees may be granted stock op-
tions or stock appreciation rights, no
specific description of the business
criteria is required if the grants or
awards are based on a stock price that
is no less than current fair market
value.
(B)Disclosure of confidential infor-
mation. The requirements of this para-
graph (e)(4) may be satisfied even
though information that otherwise
would be a material term of a perform-
ance goal is not disclosed to share-
holders, provided that the compensation
committee determines that the informa-
tion is confidential commercial or
business information, the disclosure of
which would have an adverse effect on
the publicly held corporation. Whether
disclosure would adversely affect the
corporation is determined on the basis
of the facts and circumstances. If the
compensation committee makes such a
determination, the disclosure to share-
holders must state the compensation
committee’s belief that the information
is confidential commercial or business
information, the disclosure of which
would adversely affect the company. In
addition, the ability not to disclose
confidential information does not elimi-
nate the requirement that disclosure be
made of the maximum amount of
compensation that is payable to an
individual under a performance goal.
Confidential information does not in-
clude the identity of an executive or
the class of executives to which a
performance goal applies or the amount
of compensation that is payable if the
goal is satisfied.
(iv)Description of compensation.
Disclosure as to the compensation
payable under a performance goal must
be specific enough so that shareholders
can determine the maximum amount of
compensation that could be paid to any
employee during a specified period. If
the terms of the performance goal do
not provide for a maximum dollar
amount, the disclosure must include the
formula under which the compensation
would be calculated. Thus, for exam-
ple, if compensation attributable to the
exercise of stock options is equal to the
difference in the exercise price and the
current value of the stock, disclosure
would be required of the maximum
number of shares for which grants may
be made to any employee and the
exercise price of those options (e.g.,
fair market value on date of grant). In

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that case, shareholders could calculate
the maximum amount of compensation
that would be attributable to the
exercise of options on the basis of their
assumptions as to the future stock
price.
(v)Disclosure requirements of the
Securities and Exchange Commission.
To the extent not otherwise specifically
provided in this paragraph (e)(4),
whether the material terms of a per-
formance goal are adequately disclosed
to shareholders is determined under the
same standards as apply under the
Exchange Act.
(vi)Frequency of disclosure. Once
the material terms of a performance
goal are disclosed to and approved by
shareholders, no additional disclosure
or approval is required unless the
compensation committee changes the
material terms of the performance goal.
If, however, the compensation commit-
tee has authority to change the targets
under a performance goal after share-
holder approval of the goal, material
terms of the performance goal must be
disclosed to and reapproved by share-
holders no later than the first share-
holder meeting that occurs in the fifth
year following the year in which
shareholders previously approved the
performance goal.
(vii)Shareholder vote. For purposes
of this paragraph (e)(4), the material
terms of a performance goal are ap-
proved by shareholders if, in a separate
vote, a majority of the votes cast on the
issue (including abstentions to the
extent abstentions are counted as voting
under applicable state law) are cast in
favor of approval.
(viii)Members of affiliated group.
For purposes of this paragraph (e)(4),
the shareholders of the publicly held
member of the affiliated group are
treated as the shareholders of all
members of the affiliated group.
(ix)Examples. This paragraph (e)(4)
may be illustrated by the following
examples:
Example 1. Corporation X adopts a plan that
will pay a specified class of its executives an
annual cash bonus based on the overall increase
in corporate sales during the year. Under the
terms of the plan, the cash bonus of each
executive equals $100,000 multiplied by the
number of percentage points by which sales
increase in the current year when compared to
the prior year. Corporation X discloses to its
shareholders prior to the vote both the class of
executives eligible to receive awards and the
annual formula of $100,000 multiplied by the
percentage increase in sales. This disclosure
meets the requirements of this paragraph (e)(4).
Because the compensation committee does not
have the authority to establish a different target
under the plan, Corporation X need not re-
disclose to its shareholders and obtain their
reapproval of the material terms of the plan until
those material terms are changed.
Example 2. The facts are the same as in
Example 1 except that Corporation X discloses
only that bonuses will be paid on the basis of the
annual increase in sales. This disclosure does not
meet the requirements of this paragraph (e)(4)
because it does not include the formula for
calculating the compensation or a maximum
amount of compensation to be paid if the
performance goal is satisfied.
Example 3. Corporation Y adopts an incentive
compensation plan in 1995 that will pay a
specified class of its executives a bonus every 3
years based on the following 3 factors: increases
in earnings per share, reduction in costs for
specified divisions, and increases in sales by
specified divisions. The bonus is payable in cash
or in Corporation Y stock, at the option of the
executive. Under the terms of the plan, prior to
the beginning of each 3-year period, the compen-
sation committee determines the specific targets
under each of the three factors (i.e., the amount
of the increase in earnings per share, the
reduction in costs, and the amount of sales) that
must be met in order for the executives to
receive a bonus. Under the terms of the plan, the
compensation committee retains the discretion to
determine whether a bonus will be paid under
any one of the goals. The terms of the plan also
specify that no executive may receive a bonus in
excess of $1,500,000 for any 3-year period. To
satisfy the requirements of this paragraph (e)(4),
Corporation Y obtains shareholder approval of
the plan at its 1995 annual shareholder meeting.
In the proxy statement issued to shareholders,
Corporation Y need not disclose to shareholders
the specific targets that are set by the compensa-
tion committee. However, Corporation Y must
disclose that bonuses are paid on the basis of
earnings per share, reductions in costs, and
increases in sales of specified divisions. Corpora-
tion Y also must disclose the maximum amount
of compensation that any executive may receive
under the plan is $1,500,000 per 3-year period.
Unless changes in the material terms of the plan
are made earlier, Corporation Y need not
disclose the material terms of the plan to the
shareholders and obtain their reapproval until the
first shareholders’ meeting held in 2000.
Example 4. The same facts as in Example 3,
except that prior to the beginning of the second
3-year period, the compensation committee deter-
mines that different targets will be set under the
plan for that period with regard to all three of
the performance criteria (i.e., earnings per share,
reductions in costs, and increases in sales). In
addition, the compensation committee raises the
maximum dollar amount that can be paid under
the plan for a 3-year period to $2,000,000. The
increase in the maximum dollar amount of
compensation under the plan is a changed
material term. Thus, to satisfy the requirements
of this paragraph (e)(4), Corporation Y must
disclose to and obtain approval by the share-
holders of the plan as amended.
Example 5. In 1998, Corporation Z establishes
a plan under which a specified group of
executives will receive a cash bonus not to
exceed $750,000 each if a new product that has
been in development is completed and ready for
sale to customers by January 1, 2000. Although
the completion of the new product is a material
term of the performance goal under this para-
graph (e)(4), the compensation committee deter-
mines that the disclosure to shareholders of the
performance goal would adversely affect Corpo-
ration Z because its competitors would be made
aware of the existence and timing of its new
product. In this case, the requirements of this
paragraph (e)(4) are satisfied if all other material
terms, including the maximum amount of com-
pensation, are disclosed and the disclosure
affirmatively states that the terms of the perform-
ance goal are not being disclosed because the
compensation committee has determined that
those terms include confidential information, the
disclosure of which would adversely affect
Corporation Z.
(5)Compensation committee cer-
tification. The compensation committee
must certify in writing prior to payment
of the compensation that the perform-
ance goals and any other material terms
were in fact satisfied. For this purpose,
approved minutes of the compensation
committee meeting in which the cer-
tification is made are treated as a
written certification. Certification by
the compensation committee is not
required for compensation that is at-
tributable solely to the increase in the
stock of the publicly held corporation.
(f)Companies that become publicly
held, spinoffs, and similar trans-
actions—(1) In general. In the case of
a corporation that was not a publicly
held corporation and then becomes a
publicly held corporation, the deduction
limit of paragraph (b) of this section
does not apply to any remuneration
paid pursuant to a compensation plan
or agreement that existed during the
period in which the corporation was
not publicly held. However, in the case
of such a corporation that becomes
publicly held in connection with an
initial public offering, this relief applies
only to the extent that the prospectus
accompanying the initial public offer-
ing disclosed information concerning
those plans or agreements that satisfied
all applicable securities laws then in
effect. In accordance with paragraph
(c)(1)(ii) of this section, a corporation
that is a member of an affiliated group
that includes a publicly held corpora-
tion is considered publicly held and,
therefore, cannot rely on this paragraph
(f)(1).
(2)Reliance period. Paragraph (f)(1)
of this section may be relied upon until
the earliest of—
(i)The expiration of the plan or
agreement;
(ii)The material modification of the
plan or agreement, within the meaning
of paragraph (h)(1)(iii) of this section;

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(iii)The issuance of all employer
stock and other compensation that has
been allocated under the plan; or
(iv)The first meeting of share-
holders at which directors are to be
elected that occurs after the close of
the third calendar year following the
calendar year in which the initial public
offering occurs or, in the case of a
privately held corporation that becomes
publicly held without an initial public
offering, the first calendar year follow-
ing the calendar year in which the
corporation becomes publicly held.
(3)Stock-based compensation. Para-
graph (f)(1) of this section will apply
to any compensation received pursuant
to the exercise of a stock option or
stock appreciation right, or the substan-
tial vesting of restricted property,
granted under a plan or agreement
described in paragraph (f)(1) of this
section if the grant occurs on or before
the earliest of the events specified in
paragraph (f)(2) of this section.
(4)Subsidiaries that become sepa-
rate publicly held corporations—(i) In
general. If a subsidiary that is a
member of the affiliated group de-
scribed in paragraph (c)(1)(ii) of this
section becomes a separate publicly
held corporation (whether by spinoff or
otherwise), any remuneration paid to
covered employees of the new publicly
held corporation will satisfy the excep-
tion for performance-based compensa-
tion described in paragraph (e) of this
section if the conditions in either
paragraph (f)(4)(ii) or (f)(4)(iii) of this
section are satisfied.
(ii)Prior establishment and ap-
proval. Remuneration satisfies the re-
quirements of this paragraph (f)(4)(ii) if
the remuneration satisfies the require-
ments for performance-based compen-
sation set forth in paragraphs (e)(2),
(e)(3), and (e)(4) of this section (by
application of paragraphs (e)(3)(viii)
and (e)(4)(viii) of this section) before
the corporation becomes a separate
publicly held corporation, and the
certification required by paragraph
(e)(5) of this section is made by the
compensation committee of the new
publicly held corporation (but if the
performance goals are attained before
the corporation becomes a separate
publicly held corporation, the certifica-
tion may be made by the compensation
committee referred to in paragraph
(e)(3)(viii) of this section before it
becomes a separate publicly held cor-
poration). Thus, this paragraph (f)(4)(ii)
requires that the outside directors and
shareholders (within the meaning of
paragraphs (e)(3)(viii) and (e)(4)(viii)
of this section) of the corporation
before it becomes a separate publicly
held corporation establish and approve,
respectively, the performance-based
compensation for the covered em-
ployees of the new publicly held
corporation in accordance with para-
graphs (e)(3) and (e)(4) of this section.
(iii)Transition period. Remuneration
satisfies the requirements of this para-
graph (f)(4)(iii) if the remuneration
satisfies all of the requirements of
paragraphs (e)(2), (e)(3), and (e)(5) of
this section. The outside directors
(within the meaning of paragraph
(e)(3)(viii) of this section) of the
corporation before it becomes a sepa-
rate publicly held corporation, or the
outside directors of the new publicly
held corporation, may establish and
administer the performance goals for
the covered employees of the new
publicly held corporation for purposes
of satisfying the requirements of para-
graphs (e)(2) and (e)(3) of this section.
The certification required by paragraph
(e)(5) of this section must be made by
the compensation committee of the new
publicly held corporation. However, a
taxpayer may rely on this paragraph
(f)(4)(iii) to satisfy the requirements of
paragraph (e) of this section only for
compensation paid, or stock options,
stock appreciation rights, or restricted
property granted, prior to the first
regularly scheduled meeting of the
shareholders of the new publicly held
corporation that occurs more than 12
months after the date the corporation
becomes a separate publicly held cor-
poration. Compensation paid, or stock
options, stock appreciation rights, or
restricted property granted, on or after
the date of that meeting of shareholders
must satisfy all requirements of para-
graph (e) of this section, including the
shareholder approval requirement of
paragraph (e)(4) of this section, in
order to satisfy the requirements for
performance-based compensation.
(5)Example. The following example
illustrates the application of paragraph
(f)(4)(ii) of this section:
Example. Corporation P, which is publicly
held, decides to spin off Corporation S, a wholly
owned subsidiary of Corporation P. After the
spinoff, Corporation S will be a separate publicly
held corporation. Before the spinoff, the compen-
sation committee of Corporation P, pursuant to
paragraph (e)(3)(viii) of this section, establishes
a bonus plan for the executives of Corporation S
that provides for bonuses payable after the
spinoff and that satisfies the requirements of
paragraph (e)(2) of this section. If, pursuant to
paragraph (e)(4)(viii) of this section, the share-
holders of Corporation P approve the plan prior
to the spinoff, that approval will satisfy the
requirements of paragraph (e)(4) of this section
with respect to compensation paid pursuant to
the bonus plan after the spinoff. However, the
compensation committee of Corporation S will
be required to certify that the goals are satisfied
prior to the payment of the bonuses in order for
the bonuses to be considered performance-based
compensation.
(g)Coordination with disallowed ex-
c e s s p a r a c h u t e p a y m e n t s. T h e
$1,000,000 limitation in paragraph (b)
of this section is reduced (but not
below zero) by the amount (if any) that
would have been included in the
compensation of the covered employee
for the taxable year but for being
disallowed by reason of section 280G.
For example, assume that during a
taxable year a corporation pays
$1,500,000 to a covered employee and
no portion satisfies the exception in
paragraph (d) of this section for com-
missions or paragraph (e) of this
section for qualified performance-based
compensation. Of the $1,500,000,
$600,000 is an excess parachute pay-
ment, as defined in section 280G(b)(1)
and is disallowed by reason of that
section. Because the excess parachute
payment reduces the limitation of para-
graph (b) of this section, the corpora-
tion can deduct $400,000, and
$500,000 of the otherwise deductible
amount is nondeductible by reason of
section 162(m).
(h)Transition rules—(1) Compensa-
tion payable under a written binding
contract which was in effect on Febru-
ary 17, 1993—(i) General rule. The
deduction limit of paragraph (b) of this
section does not apply to any compen-
sation payable under a written binding
contract that was in effect on February
17, 1993. The preceding sentence does
not apply unless, under applicable state
law, the corporation is obligated to pay
the compensation if the employee per-
forms services. However, the deduction
limit of paragraph (b) of this section
does apply to a contract that is renewed
after February 17, 1993. A written
binding contract that is terminable or
cancelable by the corporation after
February 17, 1993, without the
employee’s consent is treated as a new
contract as of the date that any such
termination or cancellation, if made,
would be effective. Thus, for example,
if the terms of a contract provide that it

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will be automatically renewed as of a
certain date unless either the corpora-
tion or the employee gives notice of
termination of the contract at least 30
days before that date, the contract is
treated as a new contract as of the date
that termination would be effective if
that notice were given. Similarly, for
example, if the terms of a contract
provide that the contract will be
terminated or canceled as of a certain
date unless either the corporation or the
employee elects to renew within 30
days of that date, the contract is treated
as renewed by the corporation as of
that date. Alternatively, if the corpora-
tion will remain legally obligated by
the terms of a contract beyond a certain
date at the sole discretion of the
employee, the contract will not be
treated as a new contract as of that date
if the employee exercises the discretion
to keep the corporation bound to the
contract. A contract is not treated as
terminable or cancelable if it can be
terminated or canceled only by termi-
nating the employment relationship of
the employee.
(ii)Compensation payable under a
plan or arrangement. If a compensation
plan or arrangement meets the require-
ments of paragraph (h)(1)(i) of this
section, the compensation paid to an
employee pursuant to the plan or
arrangement will not be subject to the
deduction limit of paragraph (b) of this
section even though the employee was
not eligible to participate in the plan as
of February 17, 1993. However, the
preceding sentence does not apply
unless the employee was employed on
February 17, 1993, by the corporation
that maintained the plan or arrange-
ment, or the employee had the right to
participate in the plan or arrangement
under a written binding contract as of
that date.
(iii)Material modifications.
(A)Paragraph (h)(1)(i) of this sec-
tion will not apply to any written
binding contract that is materially
modified. A material modification oc-
curs when the contract is amended to
increase the amount of compensation
payable to the employee. If a binding
written contract is materially modified,
it is treated as a new contract entered
into as of the date of the material
modification. Thus, amounts received
by an employee under the contract
prior to a material modification are not
affected, but amounts received subse-
quent to the material modification are
not treated as paid under a binding,
written contract described in paragraph
(h)(1)(i) of this section.
(B)A modification of the contract
that accelerates the payment of com-
pensation will be treated as a material
modification unless the amount of
compensation paid is discounted to
reasonably reflect the time value of
money. If the contract is modified to
defer the payment of compensation,
any compensation paid in excess of the
amount that was originally payable to
the employee under the contract will
not be treated as a material modifica-
tion if the additional amount is based
on either a reasonable rate of interest
or one or more predetermined actual
investments (whether or not assets
associated with the amount originally
owed are actually invested therein)
such that the amount payable by the
employer at the later date will be based
on the actual rate of return of the
specific investment (including any de-
crease as well as any increase in the
value of the investment).
(C)The adoption of a supplemental
contract or agreement that provides for
increased compensation, or the payment
of additional compensation, is a mate-
rial modification of a binding, written
contract where the facts and circum-
stances show that the additional com-
pensation is paid on the basis of
substantially the same elements or
conditions as the compensation that is
otherwise paid under the written bind-
ing contract. However, a material mod-
ification of a written binding contract
does not include a supplemental pay-
ment that is equal to or less than a
reasonable cost-of-living increase over
the payment made in the preceding
year under that written binding con-
tract. In addition, a supplemental pay-
ment of compensation that satisfies the
requirements of qualified performance-
based compensation in paragraph (e) of
this section will not be treated as a
material modification.
(iv)Examples. The following exam-
ples illustrate the exception of this
paragraph (h)(1):
Example 1. Corporation X executed a 3-year
compensation arrangement with C on February
15, 1993, that constitutes a written binding
contract under applicable state law. The terms of
the arrangement provide for automatic extension
after the 3-year term for additional 1-year
periods, unless the corporation exercises its
option to terminate the arrangement within 30
days of the end of the 3-year term or, thereafter,
within 30 days before each anniversary date.
Termination of the compensation arrangement
does not require the termination of C’s employ-
ment relationship with Corporation X. Unless
terminated, the arrangement is treated as renewed
on February 15, 1996, and the deduction limit of
paragraph (b) of this section applies to payments
under the arrangement after that date.
Example 2. Corporation Y executed a 5-year
employment agreement with B on January 1,
1992, providing for a salary of $900,000 per
year. Assume that this agreement constitutes a
written binding contract under applicable state
law. In 1992 and 1993, B receives the salary of
$900,000 per year. In 1994, Corporation Y
increases B’s salary with a payment of $20,000.
The $20,000 supplemental payment does not
constitute a material modification of the written
binding contract because the $20,000 payment is
less than or equal to a reasonable cost-of-living
increase from 1993. However, the $20,000
supplemental payment is subject to the limitation
in paragraph (b) of this section. On January 1,
1995, Corporation Y increases B’s salary to
$1,200,000. The $280,000 supplemental payment
is a material modification of the written binding
contract because the additional compensation is
paid on the basis of substantially the same
elements or conditions as the compensation that
is otherwise paid under the written binding
contract and it is greater than a reasonable,
annual cost-of-living increase. Because the writ-
ten binding contract is materially modified as of
January 1, 1995, all compensation paid to B in
1995 and thereafter is subject to the deduction
limitation of section 162(m).
Example 3. Assume the same facts as in
Example 2, except that instead of an increase in
salary, B receives a restricted stock grant subject
to B’s continued employment for the balance of
the contract. The restricted stock grant is not a
material modification of the binding written
contract because any additional compensation
paid to B under the grant is not paid on the basis
of substantially the same elements and conditions
as B’s salary because it is based both on the
stock price and B’s continued service. However,
compensation attributable to the restricted stock
grant is subject to the deduction limitation of
section 162(m).
(2)Special transition rule for out-
side directors. A director who is a
disinterested director is treated as satis-
fying the requirements of an outside
director under paragraph (e)(3) of this
section until the first meeting of
shareholders at which directors are to
be elected that occurs on or after
January 1, 1996. For purposes of this
paragraph (h)(2) and paragraph (h)(3)
of this section, a director is a disin-
terested director if the director is
disinterested within the meaning of
Rule 16b–3(c)(2)(i), 17 CFR 240.16b–
3(c)(2)(i), under the Exchange Act
(including the provisions of Rule 16b–
3(d)(3), as in effect on April 30, 1991).
(3)Special transition rule for pre-
viously-approved plans—(i) In general.
Any compensation paid under a plan or
agreement approved by shareholders
before December 20, 1993, is treated as
satisfying the requirements of para-

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graphs (e)(3) and (e)(4) of this section,
provided that the directors administer-
ing the plan or agreement are disin-
terested directors and the plan was
approved by shareholders in a manner
consistent with Rule 16b–3(b), 17 CFR
240.16b–3(b), under the Exchange Act
or Rule 16b–3(a), 17 CFR 240.16b–
3(a) (as contained in 17 CFR part 240
revised April 1, 1990). In addition, for
purposes of satisfying the requirements
of paragraph (e)(2)(vi) of this section, a
plan or agreement is treated as stating a
maximum number of shares with re-
spect to which an option or right may
be granted to any employee if the plan
or agreement that was approved by the
shareholders provided for an aggregate
limit, consistent with Rule 16b–3(b), 17
CFR 250.16b–3(b), on the shares of
employer stock with respect to which
awards may be made under the plan or
agreement.
(ii)Reliance period. The transition
rule provided in this paragraph (h)(3)
shall continue and may be relied upon
until the earliest of—
(A) The expiration or material
modification of the plan or agreement;
(B)The issuance of all employer
stock and other compensation that has
been allocated under the plan; or
(C)The first meeting of shareholders
at which directors are to be elected that
occurs after December 31, 1996.
(iii)Stock-based compensation. This
paragraph (h)(3) will apply to any
compensation received pursuant to the
exercise of a stock option or stock
appreciation right, or the substantial
vesting of restricted property, granted
under a plan or agreement described in
paragraph (h)(3)(i) of this section if the
grant occurs on or before the earliest of
the events specified in paragraph
(h)(3)(ii) of this section.
(iv)Example. The following exam-
ple illustrates the application of this
paragraph (h)(3):
Example. Corporation Z adopted a stock
option plan in 1991. Pursuant to Rule 16b-3
under the Exchange Act, the stock option plan
has been administered by disinterested directors
and was approved by Corporation Z share-
holders. Under the terms of the plan, shareholder
approval is not required again until 2001. In
addition, the terms of the stock option plan
include an aggregate limit on the number of
shares available under the plan. Option grants
under the Corporation Z plan are made with an
exercise price equal to or greater than the fair
market value of Corporation Z stock. Compensa-
tion attributable to the exercise of options that
are granted under the plan before the earliest of
the dates specified in paragraph (h)(3)(ii) of this
section will be treated as satisfying the require-
ments of paragraph (e) of this section for
qualified performance-based compensation, re-
gardless of when the options are exercised.
(i) (Reserved)
(j)Effective date—(1) In general.
Section 162(m) and this section apply
to compensation that is otherwise de-
ductible by the corporation in a taxable
year beginning on or after January 1,
1994.
(2)Delayed effective date for certain
provisions—(i) Date on which re-
muneration is considered paid. Not-
withstanding paragraph (j)(1) of this
section, the rules in the second sen-
tence of each of paragraphs (e)(3)(ii)-
(A), (e)(3)(ii)(B), and (e)(3)(ii)(C) of
this section for determining the date or
dates on which remuneration is consid-
ered paid to a director are effective for
taxable years beginning on or after
January 1, 1995. Prior to those taxable
years, taxpayers must follow the rules
in paragraphs (e)(3)(ii)(A), (e)(3)-
(ii)(B), and (e)(3)(ii)(C) of this section
or another reasonable, good faith inter-
pretation of section 162(m) with re-
spect to the date or dates on which
remuneration is considered paid to a
director.
(ii)Separate treatment of publicly
held subsidiaries. Notwithstanding
paragraph (j)(1) of this section, the rule
in paragraph (c)(1)(ii) of this section
that treats publicly held subsidiaries as
separately subject to section 162(m) is
effective as of the first regularly
scheduled meeting of the shareholders
of the publicly held subsidiary that
occurs more than 12 months after
December 2, 1994. The rule for stock-
based compensation set forth in para-
graph (f)(3) of this section will apply
for this purpose, except that the grant
must occur before the shareholder
meeting specified in this paragraph
(j)(2)(ii). Taxpayers may choose to rely
on the rule referred to in the first
sentence of this paragraph (j)(2)(ii) for
the period prior to the effective date of
the rule.
(iii)Subsidiaries that become sepa-
rate publicly held corporations. Not-
withstanding paragraph (j)(1) of this
section, if a subsidiary of a publicly
held corporation becomes a separate
publicly held corporation as described
in paragraph (f)(4)(i) of this section,
then, for the duration of the reliance
period described in paragraph (f)(2) of
this section, the rules of paragraph
(f)(1) of this section are treated as
applying (and the rules of paragraph
(f)(4) of this section do not apply) to
r e m u n e r a t i o n p a i d t o c o v e r e d
employees of that new publicly held
corporation pursuant to a plan or
agreement that existed prior to Decem-
ber 2, 1994, provided that the treatment
of that remuneration as performance-
based is in accordance with a reason-
able, good faith interpretation of sec-
tion 162(m). However, if remuneration
is paid to covered employees of that
new publicly held corporation pursuant
to a plan or agreement that existed
prior to December 2, 1994, but that
remuneration is not performance-based
under a reasonable, good faith inter-
pretation of section 162(m), the rules
of paragraph (f)(1) of this section will
be treated as applying only until the
first regularly scheduled meeting of
shareholders that occurs more than 12
months after December 2, 1994. The
rules of paragraph (f)(4) of this section
will apply as of that first regularly
scheduled meeting. The rule for stock-
based compensation set forth in para-
graph (f)(3) of this section will apply
for purposes of this paragraph
(j)(2)(iii), except that the grant must
occur before the shareholder meeting
specified in the preceding sentence if
the remuneration is not performance-
based under a reasonable, good faith
interpretation of section 162(m). Tax-
payers may choose to rely on the rules
of paragraph (f)(4) of this section for
the period prior to the applicable ef-
fective date referred to in the first or
second sentence of this paragraph
(j)(2)(iii).
(iv)Bonus Pools. Notwithstanding
paragraph (j)(1) of this section, the
rules in paragraph (e)(2)(iii)(A) that
limit the sum of individual percentages
of a bonus pool to 100 percent will not
apply to remuneration paid before
January 1, 2001, based on performance
in any performance period that began
prior to December 20, 1995.
(v)Compensation based on a per-
centage of salary or base pay. Notwith-
standing paragraph (j)(1) of this
section, the requirement in paragraph
(e)(4)(i) of this section that, in the case
of certain formulas based on a percent-
age of salary or base pay, a corporation
disclose to shareholders the maximum
dollar amount of compensation that
could be paid to the employee, will
apply only to plans approved by
shareholders after April 30, 1995.

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PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§602.101 [Amended]
Par.4. In §602.101, paragraph (c) is
amended by adding the entry ‘‘1.162–
27 . . . .1545–1466’’ in numerical order
to the table.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved December 12, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 19, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 20, 1995, 60 F.R. 65534)
Section 165.—Losses
26 CFR 1.165–11: Election in respect of
losses attributable to a disaster.
Election in respect of losses attribu-
table to a disaster. This ruling lists the
areas declared by the President to
qualify as major disaster areas under
the Disaster Relief and Emergency
Assistance Act since the publication of
Rev. Rul. 95–17.
Rev. Rul. 96–13
Under §165(i) of the Internal Reve-
nue Code, if a taxpayer suffers a loss
attributable to a disaster occurring in an
area subsequently determined by the
President of the United States to
warrant assistance by the Federal Gov-
ernment under the Disaster Relief and
Emergency Assistance Act, 42 U.S.C.
§§5121–5204c (1988 & Supp. V 1993)
(the Act), the taxpayer may elect to
claim a deduction for that loss on the
taxpayer’s federal income tax return for
the taxable year immediately preceding
the taxable year in which the disaster
occurred.
Section 1.165–11(e) of the Income
Tax Regulations provides that the
election to deduct a disaster loss for the
preceding year must be made by filing
a return, an amended return, or a claim
for refund on or before the later of (1)
the due date of the taxpayer’s income
tax return (determined without regard
to any extension of time to file the
return) for the taxable year in which
the disaster actually occurred, or (2)
the due date of the taxpayer’s income
tax return (determined with regard to
any extension of time to file the return)
for the taxable year immediately pre-
ceding the taxable year in which the
disaster actually occurred.
The provisions of §165(i) apply
only to losses that are otherwise
deductible under §165(a). An individ-
ual taxpayer may deduct losses if they
are incurred in a trade or business, if
they are incurred in a transaction
entered into for profit, or if they are
casualty losses under §165(c)(3).
The President has determined that
during 1995 the areas listed below have
been adversely affected by disasters of
sufficient severity and magnitude to
warrant assistance by the Federal Gov-
ernment under the Act.
DRAFTING INFORMATION
The principal author of this revenue
ruling is David B. Auclair of the Office
of Assistant Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue ruling,
contact Mr. Auclair on (202) 622-4910
(not a toll-free call).
Disaster Areas in 1995Type of DisasterDate of Disaster
Alabama
Counties of Cullman, DeKalb, Marion, Marshall,
and Winston
Severe storms, tornadoes,
and flooding
February 15-20, 1995
Counties of Autauga, Baldwin, Barbour, Bullock,
Bulter, Calhoun, Chambers, Cherokee, Chilton,
Clarke, Clay, Cleburne, Coffee, Conecuh, Coosa,
Covington, Crenshaw, Cullman, Dale, DeKalb,
Elmore, Escambia, Etowah, Geneva, Henry,
Houston, Jefferson, Lee, Lowndes, Macon, Mobile,
Montgomery, Pike, Randolph, Russell, St. Clair,
Talladega, and Tallapoosa
Hurricane OpalOctober 4-8, 1995
Alaska
Chugach and Copper River Education Attendance
Areas (these areas include the City of Cordova,
the City of Valdez, and the Richardson, Cooper
River, and Edgerton Highway Areas); Municipality
of Anchorage; Kenai Peninsula Borough, Kodiak
Island Borough, and Matanuska-Susitna Borough
Severe storms and flood-
ing
September 18-October 10, 1995

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Disaster Areas in 1995Type of DisasterDate of Disaster
California
Counties of Alameda, Amador, Butte, Colusa,
Contra Costa, Del Norte, El Dorado, Glenn, Hum-
boldt, Kern, Kings, Lake, Lassen, Los Angeles,
Madera, Marin, Mendocino, Modoc, Monterey,
Napa, Nevada, Orange, Placer, Plumas, Riverside,
Sacramento, San Bernardino, San Diego, San
Mateo, San Luis Obispo, Santa Barbara, Santa
Clara, Santa Cruz, Shasta, Solano, Sonoma, Sutter,
Tehama, Trinity, Ventura, Yolo, and Yuba
Severe winter stormsJanuary 3-February 10, 1995
Counties of Alameda, Alpine, Amador, Butte,
Calaveras, Colusa, Contra Costa, El Dorado,
Fresno, Glenn, Humboldt, Imperial, Inyo, Kern,
Kings, Lake, Lassen, Los Angeles, Madera, Marin,
Mariposa, Mendocino, Merced, Modoc, Mono,
Monterey, Napa, Nevada, Orange, Placer, Plumas,
Riverside, Sacramento, San Benito, San Bernar-
dino, San Diego, San Francisco, San Joaquin, San
Luis Obispo, San Mateo, Santa Barbara, Santa
Clara, Santa Cruz, Shasta, Sierra, Siskiyou,
Sonoma, Solano, Stanislaus, Sutter, Tehama, Trin-
ity, Tulare, Tuolumne, Ventura, Yolo, and Yuba
Severe winter stormsFebruary 13-April 19, 1995
Florida
Counties of Bay, Brevard, Escambia, Okaloosa,
Santa Rosa, and Walton
Hurricane ErinAugust 2-3, 1995
Counties of Bay, Calhoun, Escambia, Franklin,
Gadsden, Gulf, Holmes, Jackson, Leon, Liberty,
Okaloosa, Santa Rosa, Taylor, Wakulla, Walton,
and Washington
Hurricane OpalOctober 4-11, 1995
Counties of Collier and LeeHurricane OpalOctober 4-31, 1995
Counties of Martin, Palm Beach, and St. LucieSevere storms and flood-
ing
October 13-November 20, 1995
Georgia
Counties of Banks, Barrow, Bartow, Carroll,
Catoosa, Chattooga, Cherokee, Clay, Clayton,
Cobb, Coweta, Dade, Dawson, Dekalb, Douglas,
Fannin, Fayette, Floyd, Forsyth, Fulton, Gilmer,
Gordon, Gwinnett, Habersham, Hall, Haralson,
Harris, Heard, Lumpkin, Meriwether, Murray,
Muscogee, Paulding, Pickens, Pike, Polk, Quitman,
Rabun, Randolph, Rockdale, Spalding, Stewart,
Talbot, Towns, Troup, Union, Upson, Walker,
White, and Whitfield
City of Albany located in Dougherty CountySevere storms and tor-
nadoes
November 7-8, 1995
Illinois
Counties of Alexander, Brown, Calhoun, Cass,
Fulton, Greene, Jackson, Jersey, Madison, Mason,
Monroe, Morgan, Pike, Pulaski, Randolph,
Schuyler, Scott, St. Clair, and Union
Severe storms and flood-
ing
May 15-June 15, 1995
Kentucky
Counties of Adair, Bath, Boyd, Breathitt,
Breckinridge, Carter, Casey, Christian, Clark,
Cumberland, Elliot, Floyd, Fulton, Green, Hardin,
Jackson, Jessamine, Johnson, Lawrence, Laurel,
Magoffin, Meade, Mercer, Montgomery, Owsley,
Perry, Pike, Pulaski, Rockcastle, Rowan, Russell,
and Taylor
Tornadoes, severe wind
and hail storms, torren-
tial rain, and flooding
May 13-19, 1995

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Disaster Areas in 1995Type of DisasterDate of Disaster
Louisiana
Parishes of Ascension, Assumption, Jefferson,
LaFourche, Orleans, St. Bernard, St. Charles, St.
James, St. John, St. Tammany, Tangipahoa, and
Terrebonne
Severe storms, tornadoes,
and flooding
May 8-16, 1995
Minnesota
Counties of Aitkin, Becker, Beltrami, Cass, Clay,
Clearwater, Crow Wing, Hubbard, Itasca, Kittson,
Mahnomen, Otter Tail, St. Louis, Wadena, and Wilkin,
and White Earth Indian Reservation
Severe storms, straight line
winds, and tornadoes
July 9-14, 1995
Counties of Big Stone, Stevens, Swift, and TraverseSevere ice stormOctober 23-24, 1995
Mississippi
Counties of Hancock, Harrison, Jackson, and Pearl
River
Severe storms, tornadoes,
and flooding
May 8-17, 1995
Missouri
City of St. Louis; Counties of Adair, Andrew, Atchin-
son, Barry, Barton, Bates, Benton, Boone, Callaway,
Camden, Cape Girardeau, Carroll, Cass, Chariton,
Clark, Cole, Cooper, Dallas, Daviess, Dekalb, Franklin,
Gasconade, Gentry, Henry, Howard, Jackson, Jasper,
Jefferson, Johnson, Lafayette, Lewis, Lincoln, Linn,
Macon, Maries, McDonald, Mercer, Miller, Mississippi,
Moniteau, Montgomery, Morgan, New Madrid, Newton,
Nodaway, Osage, Pemiscot, Perry, Ray, Saint Francois,
Saline, Scotland, Scott, St. Charles, St. Clair, Ste.
Genevieve, St. Louis, Stone, Sullivan, Vernon, and
Warren
Severe storms, hail, tor-
nadoes, and flooding
May 13-June 23, 1995
New Hampshire
Counties of Carroll, Cheshire, Coos, Grafton,
Merrimack, and Sullivan
Excessive rain, high winds,
and flooding
October 20-November 15,
1995
North Carolina
Counties of Ashe, Avery, Cherokee, Clay, Graham,
Haywood, Jackson, Macon, Madison, Mitchell, Swain,
Transylvania, Watauga, Wilkes, and Yancey; the
Eastern Band of the Cherokee Indian Reservation
Severe storm, high winds,
and flooding
October 4-6, 1995
North Dakota
Counties of Barnes, Benson, Bottineau, Burleigh,
Cavalier, Dickey, Eddy, Emmons, Foster, Griggs, Kid-
der, La Moure, Logan, McHenry, McIntosh, McLean,
Nelson, Pembina, Pierce, Ramsey, Ransom, Renville,
Rolette, Sargent, Sheridan, Sioux, Steele, Stutsman,
Towner, Traill, Walsh, and Wells
Severe storms, flooding,
and ground saturation due
to high water tables
March 1-July 5, 1995
Ohio
Counties of Champaign, Erie, Licking, Logan, Lorain,
Marion, Mercer, Miami, Scioto, Shelby, and Wash-
ington
Severe storms and floodingAugust 7-18, 1995
Oklahoma
City of Oklahoma City; County of OklahomaExplosion at the Alfred P.
Murrah Federal Building in
Oklahoma City
April 19, 1995
Counties of Alfalfa, Atoka, Beckham, Caddo, Cana-
dian, Carter, Cotton, Creek, Custer, Ellis, Grady,
Grant, Harmon, Jackson, Kingfisher, Kiowa, Lincoln,
Logan, Major, Murray, Nowata, Osage, Ottawa, Pot-
tawatomie, Roger Mills, Seminole, Tillman, Washita,
and Woodward
Severe storms, flooding,
and tornadoes
May 26-June 11, 1995

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Disaster Areas in 1995Type of DisasterDate of Disaster
Counties of Alfalfa, Blaine, Caddo, Canadian, Cotton,
Custer, Grant, Greer, Harmon, Jackson, Kay, Kiowa,
Major, Oklahoma, Tillman, Washita, and Woods
Tornadoes, severe storms,
and flooding
July 21-August 6, 1995
Oregon
County of WascoFlash floodingJuly 8-9, 1995
Puerto Rico
Municipalities of Aquas Buenas, Barranquitas,
Canovanas, Carolina, Ceiba, Ciales, Comerio, Culebra,
Fajardo, Juncos, Loiza, Naguabo, San Lorenzo, and
Vieques
Hurricane MarilynSeptember 15-17, 1995
South Dakota
Counties of Aurora, Brule, Buffalo, Campbell, Corson,
Dewey, Edmunds, Faulk, Haakon, Hand, Hughes,
Hyde, Jerauld, Jones, Lyman, McPherson, Potter,
Stanley, Sully, Walworth, and Ziebach
Severe winter stormsJanuary 13-February 10,
1995
Counties of Aurora, Beadle, Bon Homme, Brookings,
Brown, Brule, Buffalo, Butte, Campbell, Charles Mix,
Clark, Clay, Codington, Custer, Davison, Day, Deuel,
Douglas, Edmunds, Faulk, Grant, Gregory, Haakon,
Hamlin, Hand, Hanson, Hughes, Hutchinson, Hyde,
Jerauld, Jones, Kingsbury, Lake, Lawrence, Lincoln,
Lyman, Marshall, McCook, McPherson, Meade, Miner,
Moody, Pennington, Potter, Roberts, Sanborn, Spink,
Stanley, Sully, Tripp, Turner, Walworth, and Yankton
Severe storms, flooding,
and ground saturation due
to high water tables
March 1-June 20, 1995
Counties of Aurora, Beadle, Bon Homme, Brookings,
Brule, Buffalo, Charles Mix, Clark, Codington,
Davison, Deuel, Douglas, Grant, Gregory, Hamlin,
Hanson, Hutchinson, Jerauld, Kingsbury, Lake,
McCook, Miner, Roberts, Sanborn, Spink, and Tripp
Severe winter stormOctober 22-24, 1995
Tennesee
Counties of Cumberland, Houston, Lake, Lauderdale,
and Lawrence
Severe stroms and tor-
nadoes
May 14-19, 1995
Texas
County of Tom GreenSevere thunderstorms,
flooding, hail, and tor-
nadoes
May 28-31, 1995
U.S. Virgin Islands
Islands of St. Croix, St. John, and St. ThomasHurricane MarilynSeptember 15-17, 1995
Vermont
Counties of Caledonia, Chittenden, Essex, Lamoille,
Orleans, and Washington
Excessive rain and floodingAugust 4-6, 1995
Virginia
Cities of Bedford, Buena Vista, Lexington, Lynchburg,
Roanoke, and Staunton; Counties of Albemarle,
Amherst, Augusta, Bath, Bedford, Campbell, Culpeper,
Franklin, Giles, Greene, Halifax, Madison, Orange, Pit-
tsylvania, Rappahannock, Roanoke, Rockbridge, and
Warren
Severe storms and floodingJune 22-July 7, 1995
Washington
Counties of Chelan, Clallam, Clark, Cowlitz, Grays
Harbor, Island, Jefferson, King, Kittitas, Lewis, Mason,
Pacific, Pierce, Skagit, Snohomish, Thurston,
Wahkiakum, Whatcom, and Yakima
Severe storms, high wind,
and flooding
November 7-December 18,
1995

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Disaster Areas in 1995Type of DisasterDate of Disaster
West Virginia
Counties of Mercer, Mineral, and NicholasSevere storms, heavy
rain, and flash flooding
June 23-28, 1995
Section 358.—Basis to Distributees
26 CFR 1.358–6: Stock basis in certain
triangular reorganizations.
T.D. 8648
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Controlling Corporation’s Basis
Adjustment in its Controlled
Corporation’s Stock Following a
Triangular Reorganization
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under sections 358,
1032, and 1502 of the Internal Revenue
Code of 1986. The final regulations
provide rules for adjusting the basis of
a controlling corporation in the stock of
a controlled corporation as the result of
certain triangular reorganizations in-
volving the stock of the controlling
corporation. They also generally pro-
vide that the use of the controlling
corporation’s stock provided by the
controlling corporation pursuant to the
plan of reorganization is treated as a
disposition of those shares by the
controlling corporation.
DATES: These regulations are effective
December 21, 1995.
For dates of applicability, see the
‘‘Effective Dates’’ section under the
‘ ‘ S U P P L E M E N T A R Y I N F O R M A -
TION’’ portion of the preamble and the
effective date provisions of the new or
revised regulations.
FOR FURTHER INFORMATION
CONTACT: Curt Cutting, (202)
622-7550 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions under sections 358, 1032, and
1502. The proposed regulations were
published in the Federal Register on
December 23, 1994 (59 F.R. 66280
[CO–993–71], 1995–1 C.B. 832. The
IRS received many comments on the
proposed regulations and held a public
hearing on March 31, 1995.
After consideration of the comments
and the statements made at the hearing,
the proposed regulations are adopted as
revised by this Treasury decision.
Overview
The final regulations adopt the over-
the-top model contained in the pro-
posed regulations. Subject to certain
modifications, the model generally ad-
justs a controlling corporation’s (P’s)
basis in the stock of its controlled
corporation (S or T) as a result of
certain triangular reorganizations as if
P had acquired the T assets (and any
liabilities assumed or to which the T
assets were subject) directly from T in
a transaction in which P’s basis in the
T assets was determined under section
362(b), and P then had transferred the
T assets (and liabilities) to S in a
transaction in which P’s basis in the S
or T stock was adjusted under section
358. The preamble to the proposed
regulations contains a discussion of the
justification for the model. See 59 FR
66280–81.
The final regulations also provide a
special rule that treats S’s use of P’s
stock provided by P pursuant to the
plan of reorganization as a disposition
of those shares by P.
The final regulations apply only for
the purpose of determining P’s basis in
its S or T stock following a transaction
that otherwise qualifies as a reorganiza-
tion within the meaning of section 368.
They do not address issues concerning
the qualification of a transaction as a
reorganization.
With the publication of these final
regulations, the IRS announces the
closing of its study project referred to
in §5.14 of Rev. Proc. 95–3, 1995–1
C.B. 385, 395.
The significant comments on the
proposed regulations and revisions
made are discussed below.
Summary of comments and
explanation of revisions
P’s basis in T stock owned before
a reverse triangular merger
The proposed regulations adjusted
basis as a result of a reverse triangular
merger to reflect the amount of T stock
received in the transaction. Comments
on the proposed regulations questioned
how an adjustment based on the
amount of T stock received in the
transaction would apply in the case in
which P owns T stock before the
transaction.
In response to these comments, the
final regulations allow P to treat its T
stock as acquired in the transaction or
not, without regard to the form of the
transaction. Thus, P may retain its basis
in the T stock owned before the trans-
action, or may determine its basis in
that stock as an allocable portion of T’s
net asset basis. The regulations require
no explicit election. Instead, it is
assumed P will pick the higher basis.
This rule applies only for determining
basis, and not for qualifying the trans-
action as a reverse triangular merger.
See Rev. Rul. 74–564, 1974–2 C.B.
124.
The Treasury and the IRS continue
to study issues relating to restructurings
involving related parties and cross-
ownership, and welcome comments and
suggestions on these issues.
Net negative adjustment
Under the proposed regulations, P’s
basis adjustment was reduced by the
fair market value of consideration not
provided by P, and by the amount of

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liabilities assumed by S or to which T
assets are subject. These reductions did
not result in a net negative basis
adjustment to P’s basis in its S stock
before the transaction. This limitation
did not apply, however, where P and S,
or P and T, as applicable, were
members of a consolidated group fol-
lowing the triangular reorganization. In
the consolidated context, the negative
adjustments could result in a net
negative adjustment to P’s basis in its
S stock before the transaction, even if
the adjustment resulted in an excess
loss account under §1.1502–19.
Some comments on the proposed
regulations argued against reducing P’s
basis in its S stock before the transac-
tion by a net negative adjustment in the
consolidated context. Other comments,
however, agreed that it is appropriate
not to limit the net negative adjustment
in this context.
The Treasury and the IRS continue
to believe that the proposed regulations
reach the correct result. Therefore, the
final regulations adopt the rules as
proposed.
Overlap of reverse triangular
merger and other transactions
The proposed regulations provided
that if a transaction qualified as both a
reverse triangular merger and a stock
acquisition under section 368(a)(1)(B),
P adjusted its basis in its T stock based
either on T’s net asset basis or on the
aggregate basis of the T stock surren-
dered in the transaction (as if the
transaction were a reorganization under
section 368(a)(1)(B)).
One comment noted that a reverse
triangular merger might overlap with a
section 351 transfer and therefore re-
quested that this rule also apply to such
a case. The final regulations adopt this
suggestion.
Manner of making elections
The proposed and final regulations
provide P with elections for its basis
adjustments when P owns stock of T
and when a reverse triangular merger
also qualifies as a section 351 transac-
tion or B reorganization. In these
situations, P does not have to declare
how it will compute its basis. Rather, P
must simply retain appropriate records.
See §1.368–3.
Application of section 1032
The proposed regulations under sec-
tion 1032 generally provided that P
stock provided by P to S, or directly to
T or T’s shareholders on behalf of S,
pursuant to the plan of reorganization
would be treated as a disposition by P
of shares of its own stock for T assets
or stock, as applicable. Thus, no gain
or loss was recognized on the use of
such P stock in the transaction. S,
however, recognized gain or loss on its
use of P stock if S did not receive the
stock from P as part of the plan of
reorganization. This rule did not apply
in the case of a reverse triangular
merger; section 361 provides nonrecog-
nition treatment for S’s use of P stock
in such a case. To clarify this treat-
ment, a cross-reference has been added
to the final regulations.
Comments to the proposed regula-
tions requested that they be expanded
to cover P debt, warrants and options
provided by P to S, or directly to T or
T’s shareholders on behalf of S,
pursuant to the plan of reorganization.
Comments also requested that the rule
be extended to taxable transactions.
The issues raised in these comments
are beyond the scope of this project.
However, the Treasury and the IRS are
studying issues relating to the scope of
section 1032 and welcome comments
and suggestions.
Special analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Effective dates
Generally, §1.358–6 applies with
respect to all triangular reorganizations
occurring on or after December 23,
1994, the day that the proposed regula-
tions were published in the Federal
Register.
As stated in the preamble to the
proposed regulations, any adjustment to
P’s basis in its S or T stock (as
applicable) following a triangular reor-
ganization occurring before December
23, 1994, must be consistent with the
adjustment that would be made if P had
made the acquisition directly and P then
transferred the assets to a controlled
subsidiary. However, with respect to
reverse triangular mergers occurring
before December 23, 1994, P may ad-
just its basis in its T stock as if P
acquired the stock of the former T
shareholders in a transaction in which
its basis was determined under section
362(b).
Section 1.1032–2 applies with respect
to certain triangular reorganizations oc-
curring on or after December 23, 1994.
With respect to triangular reorganiza-
tions occurring before December 23,
1994, see, e.g., §1.1032–1 and Rev. Rul.
57–278, 1957–1 C.B. 124.
Section 1.1502–30 applies with re-
spect to triangular reorganizations oc-
curring on or after December 21, 1995,
in which P and S, or P and T, as
applicable, are members of a consoli-
dated group following the triangular
reorganization. For similar triangular
reorganizations occurring before De-
cember 21, 1995, any adjustments to
P’s basis in its S or T stock (as
applicable) must be consistent with the
rules applicable for nonconsolidated
taxpayers, except to the extent that
§1.1502–31 applies to a transaction that
is a group structure change.
Drafting information
The principal authors of these reg-
ulations are Rose Williams and Curt
Cutting, Office of Assistant Chief
Counsel (Corporate). However, other
personnel from the IRS and the Treas-
ury Department participated in their
development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part:

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Authority: 26 U.S.C. 7805 * * *
Section 1.1502–30 also issued under
26 U.S.C. 1502 * * *
Par. 2. Section 1.358–2(d) is
removed.
Par. 3. Section 1.358–6 is added to
read as follows:
§1.358–6 Stock basis in certain
triangular reorganizations.
(a)Scope. This section provides
rules for computing the basis of a
controlling corporation in the stock of a
controlled corporation as the result of
certain reorganizations involving the
stock of the controlling corporation as
described in paragraph (b) of this
section. The rules of this section are in
addition to rules under other provisions
of the Internal Revenue Code and
principles of law. See, e.g., section
1001 for the recognition of gain or loss
by the controlled corporation on the
exchange of property for the assets or
stock of a target corporation in a
reorganization described in section 368.
(b)Triangular reorganizations—(1)
Nomenclature. For purposes of this
section—
(i)P is a corporation—
( A ) T h a t i s a p a r t y t o a
reorganization,
(B)That is in control (within the
meaning of section 368(c)) of another
party to the reorganization, and
(C)Whose stock is transferred pur-
suant to the reorganization.
(ii)S is a corporation—
(A)That is a party to the reorganiza-
tion, and
(B)That is controlled by P.
(iii)T is a corporation that is an-
other party to the reorganization.
(2)Definitions of triangular reorga-
nizations. This section applies to the
following reorganizations (which are
referred to collectively as triangular
reorganizations):
(i)Forward triangular merger. A
forward triangular merger is a statutory
merger of T and S, with S surviving,
that qualifies as a reorganization under
section 368(a)(1)(A) or (G) by reason
of the application of section 368(a)-
(2)(D).
(ii)Triangular C reorganization. A
triangular C reorganization is an ac-
quisition by S of substantially all of T’s
assets in exchange for P stock in a
transaction that qualifies as a reorgani-
zation under section 368(a)(1)(C).
(iii)Reverse triangular merger. A
reverse triangular merger is a statutory
merger of S and T, with T surviving,
that qualifies as a reorganization under
section 368(a)(1)(A) by reason of the
application of section 368(a)(2)(E).
(iv)Triangular B reorganization. A
triangular B reorganization is an ac-
quisition by S of T stock in exchange
for P stock in a transaction that
qualifies as a reorganization under
section 368(a)(1)(B).
(c)General rules. Subject to the
special rule provided in paragraph (d)
of this section, P’s basis in the stock of
S or T, as applicable, as a result of a
triangular reorganization, is adjusted
under the following rules—
(1)Forward triangular merger or
triangular C reorganization—(i) In
general. In a forward triangular merger
or a triangular C reorganization, P’s
basis in its S stock is adjusted as if—
(A) P acquired the T assets acquired
by S in the reorganization (and P
assumed any liabilities which S as-
sumed or to which the T assets
acquired by S were subject) directly
from T in a transaction in which P’s
basis in the T assets was determined
under section 362(b); and
(B)P transferred the T assets (and
liabilities which S assumed or to which
the T assets acquired by S were
subject) to S in a transaction in which
P’s basis in S stock was determined
under section 358.
(ii)Limitation. If, in applying sec-
tion 358, the amount of T liabilities
assumed by S or to which the T assets
acquired by S are subject equals or
exceeds T’s aggregate adjusted basis in
its assets, the amount of the adjustment
under paragraph (c)(1)(i) of this section
is zero. P recognizes no gain under
section 357(c) as a result of a triangu-
lar reorganization.
(2)Reverse triangular merger—(i)
In general—(A) Treated as a forward
triangular merger. Except as otherwise
provided in this paragraph (c)(2), P’s
basis in its T stock acquired in a
reverse triangular merger equals its
basis in its S stock immediately before
the transaction adjusted as if T had
merged into S in a forward triangular
merger to which paragraph (c)(1) of
this section applies.
(B)Allocable share. If P acquires
less than all of the T stock in the
transaction, the basis adjustment de-
scribed in paragraph (c)(2)(i)(A) of this
section is reduced in proportion to the
percentage of T stock not acquired in
the transaction. The percentage of T
stock not acquired in the transaction is
determined by taking into account the
fair market value of all classes of T
stock.
(C)Special rule if P owns T stock
before the transaction. Solely for pur-
poses of paragraphs (c)(2)(i)(A) and
(B) of this section, if P owns T stock
before the transaction, P may treat that
stock as acquired in the transaction or
not, without regard to the form of the
transaction.
(ii)Reverse triangular merger that
qualifies as a section 351 transfer or
section 368(a)(1)(B) reorganization.
Notwithstanding paragraph (c)(2)(i) of
this section, if a reorganization
qualifies as both a reverse triangular
merger and as a section 351 transfer or
as both a reverse triangular merger and
a reorganization under section 368(a)-
(1)(B), P can—
(A)Determine the basis in its T
stock as if paragraph (c)(2)(i) of this
section applies; or
(B)Determine the basis in the T
stock acquired as if P acquired such
stock from the former T shareholders in
a transaction in which P’s basis in the
T stock was determined under section
362(b).
(3)Triangular B reorganization. In
a triangular B reorganization, P’s basis
in its S stock is adjusted as if—
(i)P acquired the T stock acquired
by S in the reorganization directly from
the T shareholders in a transaction in
which P’s basis in the T stock was
determined under section 362(b); and
(ii)P transferred the T stock to S in
a transaction in which P’s basis in its S
stock was determined under section
358.
(4)Examples. The rules of this
paragraph (c) are illustrated by the
following examples. For purposes of
these examples, P, S, and T are
domestic corporations, P and S do not
file consolidated returns, P owns all of
the only class of S stock, the P stock
exchanged in the transaction satisfies
the requirements of the applicable
triangular reorganization provisions,
and the facts set forth the only
corporate activity.
Example 1. Forward triangular merger. (a)
Facts. T has assets with an aggregate basis of
$60 and fair market value of $100 and no
liabilities. Pursuant to a plan, P forms S with $5
cash (which S retains), and T merges into S. In

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the merger, the T shareholders receive P stock
worth $100 in exchange for their T stock. The
transaction is a reorganization to which sections
368(a)(1)(A) and (a)(2)(D) apply.
(b)Basis adjustment. Under §1.358–6(c)(1),
P’s $5 basis in its S stock is adjusted as if P
acquired the T assets acquired by S in the
reorganization directly from T in a transaction in
which P’s basis in the T assets was determined
under section 362(b). Under section 362(b), P
would have an aggregate basis of $60 in the T
assets. P is then treated as if it transferred the T
assets to S in a transaction in which P’s basis in
the S stock was determined under section 358.
Under section 358, P’s $5 basis in its S stock
would be increased by the $60 basis in the T
assets deemed transferred. Consequently, P has a
$65 basis in its S stock as a result of the
reorganization.
(c)Use of pre-existing S. The facts are the
same as paragraph (a) of this Example 1, except
that S is an operating company with substantial
assets that has been in existence for several
years. P has a $110 basis in the S stock. Under
§1.358–6(c)(1), P’s $110 basis in its S stock is
increased by the $60 basis in the T assets
deemed transferred. Consequently, P has a $170
basis in its S stock as a result of the
reorganization.
(d)Mixed consideration. The facts are the
same as paragraph (a) of this Example 1, except
that the T shareholders receive P stock worth
$80 and $20 cash from P. Under section 358, P’s
$5 basis in its S stock is increased by the $60
basis in the T assets deemed transferred.
Consequently, P has a $65 basis in its S stock as
a result of the reorganization.
(e)Liabilities. The facts are the same as
paragraph (a) of this Example 1, except that T’s
assets are subject to $50 of liabilities, and the T
shareholders receive $50 of P stock in exchange
for their T stock. Under section 358, P’s basis in
its S stock is increased by the $60 basis in the T
assets deemed transferred and decreased by the
$50 of liabilities to which the T assets acquired
by S are subject. Consequently, P has a net basis
adjustment of $10, and a $15 basis in its S stock
as a result of the reorganization.
(f)Liabilities in excess of basis. The facts are
the same as in paragraph (a) of this Example 1,
except that T’s assets are subject to liabilities of
$90, and the T shareholders receive $10 of P
stock in exchange for their T stock in the
reorganization. Under §1.358–6(c)(1)(ii), the ad-
justment under §1.358–6(c) is zero if the amount
of the liabilities which S assumed or to which
the T assets acquired by S are subject exceeds
the aggregate adjusted basis in T’s assets.
Consequently, P has no adjustment in its S stock,
and P has a $5 basis in its S stock as a result of
the reorganization.
Example 2. Reverse triangular merger. (a)
Facts. T has assets with an aggregate basis of
$60 and a fair market value of $100 and no
liabilities. P has a $110 basis in its S stock.
Pursuant to a plan, S merges into T with T
surviving. In the merger, the T shareholders
receive $10 cash from P and P stock worth $90
in exchange for their T stock. The transaction is
a reorganization to which sections 368(a)(1)(A)
and (a)(2)(E) apply.
(b)Basis adjustment. Under §1.358–6(c)(2)-
(i)(A), P’s basis in the T stock acquired is P’s
$110 basis in its S stock before the transaction,
adjusted as if T had merged into S in a forward
triangular merger to which §1.358–6(c)(1) ap-
plies. In such a case, P’s $110 basis in its S
stock before the transaction would have been
increased by the $60 basis of the T assets
deemed transferred. Consequently, P has a $170
basis in its T stock immediately after the
transaction.
(c)Reverse triangular merger that also
qualifies under section 368(a)(1)(B). The facts
relating to T are the same as in paragraph (a) of
this Example 2. P, however, forms S pursuant to
the plan of reorganization. The T shareholders
receive $100 worth of P stock (and no cash) in
exchange for their T stock. The T shareholders
have an aggregate basis in their T stock of $85
immediately before the reorganization. The reor-
ganization qualifies as both a reverse triangular
merger and a reorganization under section
368(a)(1)(B). Under §1.358–6(c)(2)(ii), P may
determine its basis in its T stock either as if
§1.358–6(c)(2)(i) applied to the T stock acquired,
or as if P acquired the T stock from the former T
shareholders in a transaction in which P’s basis
in the T stock was determined under section
362(b). Accordingly, P may determine a basis in
its T stock of $60 (T’s net asset basis) or $85
(the T shareholders’ aggregate basis in the T
stock immediately before the reorganization).
(d)Allocable share in a reverse triangular
merger. The facts are the same as in paragraph
(a) of this Example 2, except that X, a 10%
shareholder of T, does not participate in the
transaction. The remaining T shareholders re-
ceive $10 cash from P and P stock worth $80 for
their T stock. P owns 90% of the T stock after
the transaction. Under 1.358–6(c)(2)(i)(A), P’s
basis in its T stock is P’s $110 basis in its S
stock before the reorganization, adjusted as if T
had merged into S in a forward triangular
merger. In such a case, P’s basis would have
been adjusted by the $60 basis in the T assets
deemed transferred. Under §1.358–6(c)(2)(i)(B),
however, the basis adjustment determined under
§1.358–6(c)(2)(i)(A) is reduced in proportion to
the percentage of T stock not acquired by P in
the transaction. The percentage of T stock not
acquired in the transaction is 10%. Therefore, P
reduces its $60 basis adjustment by 10%,
resulting in a net basis adjustment of $54.
Consequently, P has a $164 basis in its T stock
as a result of the transaction.
(e)P’s ownership of T stock. The facts are the
same as in paragraph (a) of this Example 2,
except that P owns 10% of the T stock before
the transaction. P’s basis in that T stock is $8.
All the T shareholders other than P surrender
their T stock for $10 cash from P and P stock
worth $80. P does not surrender the stock in the
transaction. Under §1.358–6(c)(2)(i)(C), P may
treat its T stock owned before the transaction as
acquired in the transaction or not. If P treats that
T stock as acquired in the transaction, P’s basis
in that T stock and the T stock actually acquired
in the transaction equals P’s $110 basis in its S
stock before the transaction, adjusted by the $60
basis of the T assets deemed transferred, for a
total basis of $170. If P treats its T stock as not
acquired, P retains its $8 pre-transaction basis in
that stock. P’s basis in its other T shares equals
P’s $110 basis in its S stock before the
transaction, adjusted by $54 (the $60 basis in the
T assets deemed transferred, reduced by 10%),
for a total basis of $164 in those shares. See
§1.358–6(c)(2)(i)(A) and (B). Consequently, if P
treats its T shares as not acquired, P’s total basis
in all of its T shares is $172.
Example 3. Triangular B reorganization. (a)
Facts. T has assets with a fair market value of
$100 and no liabilities. The T shareholders have
an aggregate basis in their T stock of $85
immediately before the reorganization. Pursuant
to a plan, P forms S with $5 cash and S acquires
all of the T stock in exchange for $100 of P
stock. The transaction is a reorganization to
which section 368(a)(1)(B) applies.
(b)Basis adjustment. Under §1.358–6(c)(3), P
adjusts its $5 basis in its S stock by treating P as
if it acquired the T stock acquired by S in the
reorganization directly from the T shareholders in
exchange for the P stock in a transaction in
which P’s basis in the T stock was determined
under section 362(b). Under section 362(b), P
would have an aggregate basis of $85 in the T
stock received by S in the reorganization. P is
then treated as if it transferred the T stock to S in
a transaction in which P’s basis in the S stock
was determined under section 358. Under section
358, P’s basis in its S stock would be increased
by the $85 basis in the T stock deemed trans-
ferred. Consequently, P has a $90 basis in its S
stock as a result of the reorganization.
(d)Special rule for consideration
not provided by P—(1) In general. The
amount of P’s adjustment to basis in its
S or T stock, as applicable, described in
paragraph (c) of this section is de-
creased by the fair market value of any
consideration (including P stock in
which gain or loss is recognized, see
§1.1032–2(c)) that is exchanged in the
reorganization and that is not provided
by P pursuant to the plan of reorgani-
zation. This paragraph (d) does not
apply to the amount of T liabilities
assumed by S or to which the T assets
acquired by S are subject under para-
graph (c)(1) of this section (or deemed
assumed or taken subject to by S under
paragraph (c)(2)(i) of this section).
(2)Limitation. P makes no adjust-
ment to basis under this section if the
decrease required under paragraph
(d)(1) of this section equals or exceeds
the amount of the adjustment described
in paragraph (c) of this section.
(3)Example. The rules of this para-
graph (d) are illustrated by the follow-
ing example. For purposes of this
example, P, S, and T are domestic
corporations, P and S do not file
consolidated returns, P owns all of the
only class of S stock, the P stock
exchanged in the transaction satisfies
the requirements of the applicable
triangular reorganization provisions,
and the facts set forth the only
corporate activity.
Example. (a) Facts. T has assets with an
aggregate basis of $60 and fair market value of
$100 and no liabilities. S is an operating
company with substantial assets that has been in
existence for several years. P has a $100 basis in
its S stock. Pursuant to a plan, T merges into S
and the T shareholders receive $70 of P stock
provided by P pursuant to the plan and $30 of
cash provided by S in exchange for their T stock.

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The transaction is a reorganization to which
sections 368(a)(1)(A) and (a)(2)(D) apply.
(b)Basis adjustment. Under §1.358–6(c)(1),
P’s $100 basis in its S stock is increased by the
$60 basis in the T assets deemed transferred.
Under §1.358–6(d)(1), the $60 adjustment is
decreased by the $30 of cash provided by S in
the reorganization. Consequently, P has a net
adjustment of $30 in its S stock, and P has a
$130 basis in its S stock as a result of the
reorganization.
(c)Appreciated asset. The facts are the same
as in paragraph (a) of this Example, except that
in the reorganization S provides an asset with a
$20 adjusted basis and $30 fair market value
instead of $30 of cash. The basis results are the
same as in paragraph (b) of this Example. In
addition, S recognizes $10 of gain under section
1001 on its disposition of the asset in the
reorganization.
(d)Depreciated asset. The facts are the same
as in paragraph (c) of this Example, except that S
has a $60 adjusted basis in the asset. The basis
results are the same as in paragraph (b) of this
Example. In addition, S recognizes $30 of loss
under section 1001 on its disposition of the asset
in the reorganization.
(e)P stock. The facts are the same as in
paragraph (a) of this Example, except that in the
reorganization S provides P stock with a fair
market value of $30 instead of $30 of cash. S
acquired the P stock in an unrelated transaction
several years before the reorganization. S has a
$20 adjusted basis in the P stock. The basis
results are the same as in paragraph (b) of this
Example. In addition, S recognizes $10 of gain
on its disposition of the P stock in the
reorganization. See §1.1032–2(c).
(e)Cross-reference. For rules relat-
ing to stock basis adjustments made as
a result of a triangular reorganization in
which P and S, or P and T, as
applicable, are, or become, members of
a consolidated group, see §1.1502–30.
For rules relating to stock basis adjust-
ments after a group structure change,
see §1.1502–31.
(f)Effective dates—(1) General rule.
Except as otherwise provided in this
paragraph (f), this section applies to
triangular reorganizations occurring on
or after December 23, 1994.
(2)Special rule for reverse triangu-
lar mergers. For a reverse triangular
merger occurring before December 23,
1994, P may—
(i)Determine the basis in its T stock
as if paragraph (c)(2)(i) of this section
applied; or
(ii)Determine the basis in its T
stock acquired as if P acquired such
stock from the former T shareholders in
a transaction in which P’s basis in the
T stock was determined under section
362(b).
Par. 4. Section 1.1032–2 is added to
read as follows:
§1.1032–2 Disposition by a
corporation of stock of a controlling
corporation in certain triangular
reorganizations.
(a)Scope. This section provides
rules for certain triangular reorganiza-
tions described in §1.358–6(b) when
the acquiring corporation (S) acquires
property or stock of another corpora-
tion (T) in exchange for stock of the
corporation (P) in control of S.
(b)General nonrecognition of gain
or loss. For purposes of §1.1032–1(a),
in the case of a forward triangular
merger, a triangular C reorganization,
or a triangular B reorganization (as
described in §1.358–6(b)), P stock
provided by P to S, or directly to T or
T’s shareholders on behalf of S, pur-
suant to the plan of reorganization is
treated as a disposition by P of shares
of its own stock for T’s assets or stock,
as applicable. For rules governing the
use of P stock in a reverse triangular
merger, see section 361.
(c)Treatment of S. S must recognize
gain or loss on its exchange of P stock
as consideration in a forward triangular
merger, a triangular C reorganization,
or a triangular B reorganization (as
described in §1.358–6(b)), if S did not
receive the P stock from P pursuant to
the plan of reorganization. See §1.358–
6(d) for the effect on P’s basis in its S
or T stock, as applicable. For rules
governing S’s use of P stock in a
reverse triangular merger, see section
361.
(d)Examples. The rules of this
section are illustrated by the following
examples. For purposes of these exam-
ples, P, S, and T are domestic corpora-
tions, P and S do not file consolidated
returns, P owns all of the only class of
S stock, the P stock exchanged in the
transaction satisfies the requirements of
the applicable reorganization provi-
sions, and the facts set forth the only
corporate activity.
Example 1. Forward triangular merger solely
for P stock. (a) Facts. T has assets with an
aggregate basis of $60 and fair market value of
$100 and no liabilities. Pursuant to a plan, P
forms S by transferring $100 of P stock to S and
T merges into S. In the merger, the T
shareholders receive, in exchange for their T
stock, the P stock that P transferred to S. The
transaction is a reorganization to which sections
368(a)(1)(A) and (a)(2)(D) apply.
(b)No gain or loss recognized on the use of P
stock. Under paragraph (b) of this section, the P
stock provided by P pursuant to the plan of
reorganization is treated for purposes of
§1.1032–1(a) as disposed of by P for the T assets
acquired by S in the merger. Consequently,
neither P nor S has taxable gain or deductible
loss on the exchange.
Example 2. Forward triangular merger solely
for P stock provided in part by S. (a) Facts. T
has assets with an aggregate basis of $60 and
fair market value of $100 and no liabilities. S is
an operating company with substantial assets that
has been in existence for several years. S also
owns P stock with a $20 adjusted basis and $30
fair market value. S acquired the P stock in an
unrelated transaction several years before the
reorganization. Pursuant to a plan, P transfers
additional P stock worth $70 to S and T merges
into S. In the merger, the T shareholders receive
$100 of P stock ($70 of P stock provided by P
to S as part of the plan and $30 of P stock held
by S previously). The transaction is a reorganiza-
tion to which sections 368(a)(1)(A) and (a)(2)(D)
apply.
(b)Gain or loss recognized by S on the use of
its P stock. Under paragraph (b) of this section,
the $70 of P stock provided by P pursuant to the
plan of reorganization is treated as disposed of
by P for the T assets acquired by S in the
merger. Consequently, neither P nor S has
taxable gain or deductible loss on the exchange
of those shares. Under paragraph (c) of this
section, however, S recognizes $10 of gain on
the exchange of its P stock in the reorganization
because S did not receive the P stock from P
pursuant to the plan of reorganization. See
§1.358–6(d) for the effect on P’s basis in its S
stock.
(e)Effective date. This section ap-
plies to triangular reorganizations oc-
curring on or after December 23, 1994.
Par. 5. Section 1.1502–30 is added
to read as follows:
§1.1502–30 Stock basis after certain
triangular reorganizations.
(a)Scope. This section provides
rules for determining the basis of the
stock of an acquiring corporation as a
result of a triangular reorganization.
The definitions and nomenclature con-
tained in §1.358–6 apply to this
section.
(b)General rules—(1) Forward tri-
angular merger, triangular C reorgani-
zation, or triangular B reorganization.
P adjusts its basis in the stock of S as a
result of a forward triangular merger,
triangular C reorganization, or triangu-
lar B reorganization under §1.358–6(c)
and (d), except that §1.358–6(c)(1)(ii)
and (d)(2) do not apply. Instead, P
adjusts such basis by taking into
account the full amount of—
(i)T liabilities assumed by S or the
amount of liabilities to which the T
assets acquired by S are subject, and
(ii)The fair market value of any
consideration not provided by P pur-
suant to the plan of reorganization.

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(2)Reverse triangular merger. If P
adjusts its basis in the T stock acquired
as a result of a reverse triangular
merger under §1.358–6(c)(2)(i) and (d),
§1.358–6(c)(1)(ii) and (d)(2) do not
apply. Instead, P adjusts such basis by
taking into account the full amount
of—
(i)T liabilities deemed assumed by S
or the amount of liabilities to which the
T assets deemed acquired by S are
subject, and
(ii)The fair market value of any
consideration not provided by P pur-
suant to the plan of reorganization.
(3)Excess loss accounts. Negative
adjustments under this section may
exceed P’s basis in its S or T stock.
The resulting negative amount is P’s
excess loss account in its S or T stock.
See §1.1502–19 for rules treating ex-
cess loss accounts as negative basis,
and treating references to stock basis as
including references to excess loss
accounts.
(4)Application of other rules of law.
The rules for this section are in
addition to other rules of law. See
§1.1502–80(d) for the non-application
of section 357(c) to P.
(5)Examples. The rules of this para-
graph (b) are illustrated by the following
examples. For purposes of these exam-
ples, P, S, and T are domestic corpora-
tions, P and S file consolidated returns,
P owns all of the only class of S stock,
the P stock exchanged in the transaction
satisfies the requirements of the applica-
ble triangular reorganization provisions,
the facts set forth the only corporate
activity, and tax liabilities are
disregarded.
Example 1. Liabilities. (a) Facts. T has assets
with an aggregate basis of $60 and fair market
value of $100. T’s assets are subject to $70 of
liabilities. Pursuant to a plan, P forms S with $5
of cash (which S retains), and T merges into S.
In the merger, the T shareholders receive P stock
worth $30 in exchange for their T stock. The
transaction is a reorganization to which sections
368(a)(1)(A) and (a)(2)(D) apply.
(b)Basis adjustment. Under §1.358–6, P
adjusts its $5 basis in the S stock as if P had
acquired the T assets with a carryover basis
under section 362 and transferred these assets to
S in a transaction in which P determines its basis
in the S stock under section 358. Under the rules
of this section, the limitation described in
§1.358–6(c)(1)(ii) does not apply. Thus, P
adjusts its basis in the S stock by –$10 (the
aggregate adjusted basis of T’s assets decreased
by the amount of liabilities to which the T assets
are subject). Consequently, as a result of the
reorganization, P has an excess loss account of
$5 in its S stock.
Example 2. Consideration not provided by P.
(a) Facts. T has assets with an aggregate basis of
$10 and fair market value of $100 and no
liabilities. S is an operating company with
substantial assets that has been in existence for
several years. P has a $5 basis in its S stock.
Pursuant to a plan, T merges into S and the T
shareholders receive $70 of P stock provided by
P pursuant to the plan of reorganization and $30
of cash provided by S in exchange for their T
stock. The transaction is a reorganization to
which sections 368(a)(1)(A) and (a)(2)(D) apply.
(b)Basis adjustment. Under §1.358–6, P
adjusts its $5 basis in the S stock as if P had
acquired the T assets with a carryover basis
under section 362 and transferred these assets to
S in a transaction in which P determines its basis
in the S stock under section 358. Under the rules
of this section, the limitation described in
§1.358–6(d)(2) does not apply. Thus, P adjusts
its basis in the S stock by –$20 (the aggregate
adjusted basis of T’s assets decreased by the fair
market value of the consideration provided by S).
As a result of the reorganization, P has an excess
loss account of $15 in its S stock.
(c)Appreciated asset. The facts are the same
as in paragraph (a) of this Example 2, except that
in the reorganization S provides an asset with a
$20 adjusted basis and $30 fair market value
instead of $30 cash. The basis is adjusted in the
same manner as in paragraph (b) of this Example
2. In addition, because S recognizes a $10 gain
from the asset under section 1001, P’s basis in
its S stock is increased under §1.1502–32(b) by
S’s $10 gain. Consequently, as a result of the
reorganization, P has an excess loss account of
$5 in its S stock. (The results would be the same
if the appreciated asset provided by S was P
stock with respect to which S recognized gain.
See §1.1032–2(c)).
Example 3. Reverse triangular merger. (a)
Facts. T has assets with an aggregate basis of
$60 and fair market value of $100. T’s assets are
subject to $70 of liabilities. P owns all of the
only class of S stock. P has a $5 basis in its S
stock. Pursuant to a plan, S merges into T with T
surviving. In the merger, the T shareholders
exchange their T stock for $2 cash from P and
$28 worth of P stock provided by P pursuant to
the plan. The transaction is a reorganization to
which sections 368(a)(1)(A) and (a)(2)(E) apply.
(b)Basis adjustment. Under §1.358–6, P’s
basis in the T stock acquired equals its $5 basis
in its S stock immediately before the transaction
adjusted by the $60 basis in the T assets deemed
transferred, and the $70 of liabilities to which
the T assets are subject. Under the rules of this
section, the limitation described in §1.358–
6(c)(1)(ii) does not apply. Consequently, P has
an excess loss account of $5 in its T stock as a
result of the transaction.
(c)Effective date. This section ap-
plies to reorganizations occurring on or
after December 21, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 12, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66077)

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Part III.Administrative, Procedural, and Miscellaneous
Mark to Market for Securities
Dealers: The Dealer-Customer
Relationship
Notice 96–12
This notice provides immediate guid-
ance, pending the issuance of proposed
regulations, concerning whether a tax-
payer’s transactions with related per-
sons, including members of the tax-
payer’s consolidated group, may be
transactions with customers for pur-
poses of §475 of the Internal Revenue
Code. This guidance will assist consoli-
dated groups in deciding whether or
not to make a separate-entity election
under §1.1221–2(d)(2) of the Income
Tax Regulations. One result of making
this election is that a group takes a
separate-entity perspective in determin-
ing whether a transaction reduces risk
for purposes of the definition of
hedging transaction in §1.1221–2(b).
Even when a group makes the sepa-
rate-entity election, however, an inter-
company transaction can be a hedging
transaction only if it is entered into
with a member that accounts for its
position in the intercompany transac-
tion by marking the position to market.
See § 1.1221–2(d)(2)(ii)(B). Section
475 of the Code requires dealers in
securities generally to use mark-to-
market accounting for the securities
that they hold. Thus, whether a member
of a consolidated group is a dealer in
securities under section 475 can affect
whether intercompany risk-shifting
transactions may be hedging trans-
actions.
Whether a taxpayer is a dealer in
securities depends on whether certain
of its transactions are entered into with
customers. Section 475(c)(1) defines a
dealer in securities as a taxpayer who:
(1) regularly purchases securities from,
or sells securities to, customers in the
ordinary course of a trade or business
(§475(c)(1)(A)); or (2) regularly offers
to enter into, assume, offset, assign, or
otherwise terminate positions in se-
curities with customers in the ordinary
course of a trade or business (§475(c)-
(1)(B)).
Under existing proposed regulations,
whether a taxpayer is transacting busi-
ness with customers is based on all of
the facts and circumstances. See
§ 1.475(c)–1(c) of the proposed Income
Tax Regulations, published in the Fed-
eral Register on January 4, 1995 (60
Fed. Reg. 397). Under §1.475(c)–1(c)-
(2) of the proposed regulations, the
term dealer in securities includes a
taxpayer that, in the ordinary course of
its trade or business, regularly holds
itself out as being willing and able to
enter into either side of a transaction
enumerated in §475(c)(1)(B).
EXPECTED ADDITIONAL
PROPOSED REGULATIONS
The Service expects to publish addi-
tional proposed regulations that address
the issue of whether a taxpayer is
transacting business with customers.
The proposed regulations are expected
to contain, in substance, the following
rules.
Transactions with related parties
A taxpayer’s transactions with mem-
bers of its consolidated group or with
other related persons may be transac-
tions with customers for purposes of
§ 475. Thus, a sale of a security to
another member of a consolidated
group is a sale to a customer if the
relationship between the parties is
consistent with that of a dealer in
securities transacting business with an
unrelated customer. Similarly, transac-
tions enumerated in §475(c)(1)(B) be-
tween members of a consolidated group
are transactions with customers if, in
the ordinary course of its business, the
taxpayer holds itself out as being
willing and able to engage in these
transactions on a regular basis and the
relationship between the parties is
consistent with that of a dealer in
securities transacting business with an
unrelated customer. A taxpayer may be
a dealer in securities within the mean-
ing of section 475(c)(1) even if its only
customer transactions are transactions
with other members of its consolidated
group.
The following example illustrates the
foregoing.
Facts: HC, a hedging center, pro-
vides interest rate hedges to all of the
members of its consolidated group.
Because of the efficiencies created by
having a centralized risk manager,
group policy prohibits members other
than HC from entering into derivative
interest rate positions with outside
parties. HC regularly holds itself out as
being willing and able to, and in fact
does, enter into either side of interest
rate swaps with its fellow members.
HC periodically computes its aggregate
position and hedges the net risk with
an unrelated party. HC does not other-
wise enter into interest rate positions
with persons that are not members of
the consolidated group. The terms of
the transactions between HC and its
fellow members are consistent with the
terms the members would obtain if they
entered into the transactions with an
unrelated swaps dealer.
Holding: Because the relationship
between HC and its fellow members is
consistent with that of a dealer in
securities transacting business with un-
related customers (see §1.475(c)–1(c)-
(2) of the proposed Income Tax Reg-
ulations), HC is a dealer in securities
for purposes of section 475(c)(1)(B),
and the other members are its
customers.
The preceding rules are expected to
be proposed to be effective for taxable
years beginning on or after February
20, 1996.
DRAFTING INFORMATION
The principal author of this notice is
Jo Lynn Ricks of the Office of
Assistant Chief Counsel (Financial In-
stitutions and Products). For further
information regarding this notice con-
tact Ms. Ricks on (202) 622-3920 (not
a toll-free call).
Certain Payments from the
Presidential Election Campaign Fund
Notice 96–13
This notice announces a change that
will be made to the Presidential Elec-
tion Campaign Fund Regulations for
certain payments made to Presidential
primary candidates from that Fund.
Section 9006(a) of the Internal Reve-
nue Code established the Presidential
Election Campaign Fund (Fund) on the
books of the U.S. Treasury. Section
9006(a) requires the Secretary of the
Treasury (Secretary) to transfer to the
Fund from time to time an amount
equal to the individual taxpayer desig-

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nations for the Fund under section
6096.
Section 701.9006–1(a) of the Presi-
dential Election Campaign Fund Regula-
tions requires the Secretary to determine
the amounts designated by individuals
for the Fund at least once a month.
Section 9037(a) requires the Secre-
tary to maintain within the Fund a
separate account known as the Presi-
dential Primary Matching Payment Ac-
count (Account). The Secretary is
required to deposit into the Account
amounts from the Fund after determin-
ing that certain other amounts are
available and set aside for certain other
payments. The amounts in the Account
are for Presidential primary candidates
who are certified for payments by the
F e d e r a l E l e c t i o n C o m m i s s i o n
(Commission).
Section 702.9037–2(a) provides that,
e x c e p t a s p r o v i d e d i n s e c t i o n
702.9037–2(c), promptly after the end
of each calendar month, but not before
the beginning of the calendar year of a
Presidential election, the Secretary shall
pay the amounts certified by the
Commission in the preceding calendar
month from the Account to the primary
candidates.
Section 702.9037–2(c) provides that
if the amount certified by the Commis-
sion for primary candidates in a calen-
dar month exceeds the balance in the
Account on the last day of the calendar
month, the amount paid to a candidate
for that month from the Account is
determined by multiplying the amount
certified by the Commission for the
candidate during that month by the
ratio of the balance in the Account on
the last day of the calendar month over
the total amount certified by the
Commission for all the candidates
during that month. Any amount cer-
tified by the Commission, but not paid
to a candidate because of the operation
of this shortfall rule, is treated as an
amount certified by the Commission
for that candidate during the succeed-
ing calendar month. Section 702.9037–
2(d) provides an example illustrating
the shortfall rule of section 702.9037–
2(c).
To provide additional payments from
the Account to certified primary candi-
dates in a more timely manner when
the Account is in a shortfall position,
Part 702 of the regulations will be
amplified. The revised regulations will
require the Secretary to make an
additional payment between regular
payment dates promptly after funds are
available. Such payment will be deter-
mined by multiplying the amount cer-
tified by the Commission for the
candidate in month 1 by the ratio of the
balance in the Account (but not to
exceed the shortfall) on the 15th day of
month 2 (or the first business day
thereafter if the 15th is not a business
day) over the total amount certified by
the Commission for all the candidates
in month 1.
The effective date of these amend-
ments to the regulations will be Febru-
ary 2, 1996.
DRAFTING INFORMATION
The principal author of this notice is
Joel Rutstein of the Office of the
Associate Chief Counsel (Domestic).
For further information regarding this
notice contact Mr. Rutstein on (202)
622-4530 (not a toll-free call).

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Part IV. Items of General Interest
Notice of Proposed Rulemaking
Loans to Plan Participants
EE–106–82
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rule-
making.
SUMMARY: This document contains
proposed Income Tax Regulations un-
der section 72(p) of the Internal Reve-
nue Code relating to loans made from a
qualified employer plan to plan partici-
pants or beneficiaries. Section 72(p)
was added by section 236 of the Tax
Equity and Fiscal Responsibility Act of
1982, and amended by the Technical
Corrections Act of 1982, the Deficit
Reduction Act of 1984, the Tax Re-
form Act of 1986 and the Technical
and Miscellaneous Revenue Act of
1988. These regulations provide guid-
ance to the public with respect to this
provision, and affect any plan partici-
pant or beneficiary who receives a loan
from a qualified employer plan.
DATES: Written comments and re-
quests for a public hearing must be
received by March 20, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (EE–106–82), At-
tention: Plan Loans Guidance, Room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to: CC:DOM:CORP:R (EE–106–82),
Courier’s Desk, Internal Revenue Serv-
ice, 1111 Constitution Avenue, NW,
Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Vernon S. Carter, of the
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Orga-
nizations), IRS, at (202) 622-6070 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) under section 72
of the Internal Revenue Code of 1986
(Code). These amendments are pro-
posed to conform the regulations to
section 236 of the Tax Equity and
Fiscal Responsibility Act of 1982
(TEFRA), which added section 72(p) to
the Code, and to the amendments to
section 72(p) made by the Technical
Corrections Act of 1982, the Deficit
Reduction Act of 1984, the Tax Re-
form Act of 1986 and the Technical
and Miscellaneous Revenue Act of
1988.
Explanation of provisions
Section 72(p) of the Code generally
provides that an amount received as a
loan from a qualified employer plan by
a participant or beneficiary is treated as
received as a distribution from the plan
for purposes of section 72 (a deemed
distribution), except to the extent cer-
tain conditions are satisfied. For pur-
poses of section 72, a qualified em-
ployer plan includes a plan that
qualifies under section 401 (relating to
qualified trusts), 403(a) (relating to
qualified annuities) or 403(b) (relating
to tax sheltered annuities), as well as a
plan (whether or not qualified) main-
tained by the United States, a State or a
political subdivision thereof, or an
agency or instrumentality thereof. A
qualified employer plan also includes a
plan which was (or was determined to
be) a qualified plan or a government
plan. A loan from a contract purchased
under a qualified employer plan is also
treated as a loan from the plan. Section
72(p) also provides that an assignment
or pledge of (or an agreement to assign
or pledge) any portion of a partici-
pant’s or beneficiary’s interest in a
qualified employer plan is to be treated
as a loan from the plan.
Under section 72(p), a loan from a
qualified employer plan to a participant
or beneficiary is not treated as a
distribution from the plan if the loan
satisfies certain requirements relating to
the terms of the loan and the repayment
schedule, and to the extent the loan
satisfies certain limitations on the
amount loaned. The proposed regula-
tions require that the loan be evidenced
by an enforceable agreement, set forth
in writing or in another form that is
approved by the Commissioner of
Internal Revenue, that includes terms
that satisfy the statutory requirements.
Thus, the agreement must specify the
amount of the loan, the term of the
loan, and the repayment schedule. The
agreement may be set forth in more
than one document.
If a loan fails to satisfy the repay-
ment requirements or the enforceable
agreement requirement, the proposed
regulations provide for the balance then
due under the loan to be treated as a
distribution from the plan. This may
occur at the time the loan is made or at
a later date if the loan is not repaid in
accordance with the repayment sched-
ule. If the loan satisfies the repayment
requirements and the enforceable agree-
ment requirement, but at the time the
loan is made the amount of the loan
exceeds the statutory limitation on the
amount that is permitted to be loaned,
the proposed regulations provide that
only the excess amount is a deemed
distribution.
One of the repayment requirements
is that the loan be repaid within five
years, unless the loan is used to acquire
a dwelling unit which within a reason-
able time is used as the principal
residence of the participant. The pro-
posed regulations provide that a princi-
pal residence has the same meaning as
under section 1034 (relating to the
taxation of a sale of a residence) and
that tracing rules established under
section 163(h)(3)(B) (relating to inter-
est deductions for indebtedness in-
curred with respect to the acquisition of
a principal residence) will be used to
determine whether the section 72(p)(2)-
(B)(ii) exception to the five-year repay-
ment requirement applies. (Notice 88–
74 (1988–2 C.B. 385), sets forth certain
standards applicable under section
163(h)(3).)
The Tax Reform Act of 1986
amended section 72(p) to require that, in
order for a loan to not be treated as a
distribution, the loan must be repaid in
substantially level installments (not less
frequently than quarterly) over the term
of the loan.
Section 72(p) authorizes regulations to
allow exceptions from this requirement.
Pursuant to this authorization, the pro-
posed regulations permit loan repay-
ments to be suspended during a leave of
absence of up to one year, if the
participant’s pay from the employer is
insufficient to service the debt, but only
if the loan is repaid by the latest date
permitted under section 72(p)(2)(B).

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If the repayment terms of a loan are
not satisfied after the loan has been
made due to a failure to make a sched-
uled loan repayment, the proposed
regulations provide for the balance then
due under the loan to be deemed to be
distributed. The proposed regulations
permit a grace period, to the extent the
grace period does not extend beyond
the end of the calendar quarter next
following the calendar quarter in which
the repayment was scheduled to be
made.
If a loan is treated as a distribution
under section 72(p), the proposed reg-
ulations state that the amount so dis-
tributed is to be treated as a taxable
distribution, subject to the normal rules
of section 72 if the participant’s
interest in the plan includes after-tax
contributions (or other tax basis). A
deemed distribution would also be a
distribution for purposes of the 10
percent tax in section 72(t) and the
excise tax on excess distributions under
section 4980A. However, a deemed dis-
tribution under section 72(p) is not
treated as an actual distribution for
purposes of the qualification require-
ments of section 401, the rollover and
income averaging provisions of section
402 and the distribution restrictions of
section 403(b).
By contrast, if a participant’s accrued
benefit is reduced (offset) in order to
repay a loan, an actual distribution
occurs for purposes of the provisions in
sections 401, 402 and 403(b) referred to
above. Thus, for example, a plan is
prohibited from enforcing its security
interest in a participant’s account bal-
ance attributable to amounts contributed
pursuant to an election under section
401(k) until a date on which distribution
is permitted under section 401(k).
The proposed regulations do not ad-
dress all issues arising under section
72(p). Comments are requested on
whether further guidance should be
provided on issues that are not ad-
dressed and how the issues should be
resolved, including the effect of a
deemed distribution on the tax treat-
ment of subsequent distributions from
the plan and the application of the
$50,000 limitation and the five year
repayment requirement to a refinancing
and to multiple loan arrangements.
Taxpayers may rely on these pro-
posed regulations for guidance pending
the issuance of final regulations. If, and
to the extent, future guidance is more
restrictive than the guidance in these
proposed regulations, the future guid-
ance will be applied without retroactive
effect.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory as-
sessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f), this notice of proposed rule-
making will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Request for Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the following address:
CC:DOM:CORP:R (EE–106-82)
Attention: Plan Loans Guidance,
Room 5228
Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044
All comments will be available for
public inspection and copying. A public
hearing may be scheduled if requested
in writing by any person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal author of these pro-
posed regulations is Vernon S. Carter,
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Orga-
nizations). However, other personnel
from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and rec-
ordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
Authority:26 U.S.C. 7805. * * *
Par. 2. Section 1.72–17A is amended
as follows:
1. Paragraphs (d)(1), (d)(2) and
(d)(3) are redesignated as paragraphs
(d)(2), (d)(3) and (d)(4), respectively.
2.New paragraph (d)(1) is added to
read as follows:
§1.72–17A Special rules applicable to
employee annuities and distributions
under deferred compensation plans to
self-employed individuals and owner-
employees.
******
(d)* * * (1) The references in this
paragraph (d) to section 72(m)(4) are to
that section as in effect on August 13,
1982. Section 236(b)(1) of the Tax
Equity and Fiscal Responsibility Act of
1982 repealed section 72(m)(4), gener-
ally effective for assignments, pledges
and loans made after August 13, 1982,
and added section 72(p). See section
72(p) and §1.72(p)–1 for rules govern-
ing the income tax treatment of certain
assignments, pledges and loans from
qualified employer plans made after
August 13, 1982.
******
Par. 3. Section 1.72(p)–1 is added to
read as follows:
§1.72(p)–1 Loans treated as
distributions.
The questions and answers in this
section provide guidance under section
72(p) pertaining to loans from qualified
employer plans (including government
plans and tax-sheltered annuities and
employer plans that were formerly
qualified).
ASSUMPTIONS FOR EXAMPLES
The examples included in the ques-
tions and answers in this section are

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based on the assumption that a bona
fide loan is made to a participant from
a qualified defined contribution plan
pursuant to an enforceable agreement
(in accordance with Q&A–3(b) of this
section), with adequate security and
with an interest rate and repayment
terms that are commercially reasonable.
(The particular interest rate used for
illustration in this section is 8.75
percent compounded annually.) In addi-
tion, unless the contrary is specified, it
is assumed in the examples that the
amount of the loan does not exceed 50
percent of the participant’s nonforfeita-
ble account balance, the participant has
no other outstanding loan (and had no
prior loan) from the plan or any other
plan maintained by the participant’s
employer or any other person required
to be aggregated with the employer
under section 414(b), (c) or (m), and
the loan is not excluded from section
72(p) as a loan made in the ordinary
course of an investment program as
described in Q&A–18 of this section.
No inference should be drawn from
these regulations or the examples
therein that a loan would not result in a
prohibited transaction under section
4975 or would be consistent with the
fiduciary standards of Title I of the
Employee Retirement Income Security
Act of 1974, as amended. See, for
example, 29 CFR §2550.408b–1 (inter-
preting the statutory prohibited transac-
tion exemption for loans to participants
and beneficiaries).
QUESTIONS AND ANSWERS
Q–1: In general, what does section
72(p) provide with respect to loans
from a qualified employer plan?
A–1: (a) Loans. Under section 72(p),
an amount received by a participant or
beneficiary as a loan from a qualified
employer plan is treated as having been
received as a distribution from the plan
(a deemed distribution), unless the loan
satisfies the requirements of Q&A–3 of
this section. For purposes of section
72(p), a loan made from a contract that
has been purchased under a qualified
employer plan (including a contract
that has been distributed to the partici-
pant or beneficiary) shall be considered
a loan made under a qualified employer
plan.
(b)Pledges and assignments. Under
section 72(p), if a participant or bene-
ficiary assigns or pledges (or agrees to
assign or pledge) any portion of his or
her interest in a qualified employer
plan as security for a loan, the portion
of the individual’s interest assigned or
pledged (or subject to an agreement to
assign or pledge) is treated as a loan
from the plan to the individual, with
the result that such portion is subject to
the deemed distribution rule described
in paragraph (a) of this Q&A–1. For
purposes of section 72(p), any assign-
ment or pledge of (or agreement to
assign or to pledge) by a participant or
beneficiary of any portion of his or her
interest in a contract that has been
purchased under a qualified employer
plan (including a contract that has been
distributed) shall be considered an
assignment or pledge of (or agreement
to assign or pledge) an interest in a
qualified employer plan. However, if
all or a portion of a participant’s or
beneficiary’s interest in a qualified
employer plan is pledged or assigned
as security for a loan from the plan to
the participant or the beneficiary, only
the amount of the loan received by the
participant or the beneficiary, not the
amount pledged or assigned, is treated
as a loan.
Q–2: What is a qualified employer
plan for purposes of section 72(p)?
A–2: For purposes of section 72(p),
a qualified employer plan means—
(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
section 403(a);
(c)A plan under which amounts
are contributed by an individual’s
employer for an annuity contract de-
scribed in section 403(b);
(d)Any plan, whether or not
qualified, established and maintained
for its employees by the United States,
by a State or political subdivision
thereof, or by an agency or
instrumentality of the United States, a
State or a political subdivision of a
State; or
(e)Any plan which was (or was
determined to be) described in para-
graph (a), (b), (c), or (d) of this Q&A–
2.
Q–3: What requirements must be
satisfied in order for a loan to a
participant or beneficiary from a
qualified employer plan not to be a
deemed distribution?
A–3: (a) In general. A loan to a
participant or beneficiary from a
qualified employer plan will not be a
deemed distribution to the participant
or beneficiary if the loan satisfies the
repayment term requirement of section
72(p)(2)(B), the level amortization re-
quirement of section 72(p)(2)(C), and
the enforceable agreement requirement
of paragraph (b) of this Q&A–3, but
only to the extent the loan satisfies the
a m o u n t l i m i t a t i o n s o f s e c t i o n
72(p)(2)(A).
(b)Enforceable agreement require-
ment. A loan does not satisfy the
requirements of this paragraph unless
the loan is evidenced by a legally
enforceable agreement (which may in-
clude more than one document) set
forth in writing or in such other form
as may be approved by the Commis-
sioner, and the terms of the agreement
demonstrate compliance with the re-
quirements of section 72(p)(2) and this
section. Thus, the agreement must
specify the amount of the loan, the
term of the loan, and the repayment
schedule.
Q–4: If a loan from a qualified
employer plan to a participant or
beneficiary fails to satisfy the require-
ments of Q&A-3 of this section, when
does a deemed distribution occur?
A–4: (a) Deemed distribution. For
purposes of section 72, a deemed
distribution occurs at the first time that
the requirements of Q&A–3 of this
section are not satisfied, in form or in
operation, with respect to that amount.
This may occur at the time the loan is
made or at a later date. If the terms of
the loan do not require repayments that
satisfy the repayment term requirement
of section 72(p)(2)(B) or the level
amortization requirement of section
72(p)(2)(C), or the loan is not evi-
denced by an enforceable agreement
satisfying the requirements of Q&A–
3(b) of this section, the entire amount
of the loan is a deemed distribution
under section 72(p) at the time the loan
is made. If the loan satisfies the
requirements of Q&A–3 of this section
except that the amount loaned exceeds
the limitations of 72(p)(2)(A), the
amount of the loan in excess of the
applicable limitation is a deemed dis-
tribution under section 72(p) at the
time the loan is made. If the loan
initially satisfies the requirements of
section 72(p)(2)(A), (B) and (C) and
the enforceable agreement requirement
of Q&A–3(b) of this section, but pay-
ments are not made in accordance with
the terms applicable to the loan, a
deemed distribution occurs as a result

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of the failure to make such payments.
See Q&A–10 of this section regarding
when such a deemed distribution oc-
curs and the amount thereof and Q&A–
11 of this section regarding the tax
treatment of a deemed distribution.
(b)Examples. The following ex-
amples illustrate the rules in paragraph
(a) of this Q&A–4 and are based upon
the assumptions described in ASSUMP-
TIONS FOR EXAMPLES:
Example 1. (a) A participant has a nonfor-
feitable account balance of $200,000 and re-
ceives $70,000 as a loan repayable in level
quarterly installments over five years.
(b)Under section 72(p), the participant has
a deemed distribution of $20,000 (the excess of
$70,000 over $50,000) at the time of the loan,
because the loan exceeds the $50,000 limit in
section 72(p)(2)(A)(i). The remaining $50,000 is
not a deemed distribution.
Example 2. (a) A participant with a nonfor-
feitable account balance of $30,000 borrows
$20,000 as a loan repayable in level monthly
installments over five years.
(b)Because the amount of the loan is
$5,000 more than 50% of the participant’s
nonforfeitable account balance, the participant
has a deemed distribution of $5,000 at the time
of the loan. The remaining $15,000 is not a
deemed distribution. (Note also that, if the loan
is secured solely by the participant’s account
balance, the loan may be a prohibited transaction
under section 4975 because the loan may not
satisfy 29 CFR §2550.408b–1(f)(2)).
Example 3. (a) The nonforfeitable account
balance of a participant is $100,000 and a
$50,000 loan is made to the participant repayable
in level quarterly installments over seven years.
The loan is not eligible for the section
72(p)(2)(B)(ii) exception for loans used to
acquire certain dwelling units.
(b)Because the repayment period exceeds
the maximum five-year period in section
72(p)(2)(B)(i), the participant has a deemed
distribution of $50,000 at the time the loan is
made.
Example 4. (a) On August 1, 1998, a
participant has a nonforfeitable account balance
of $45,000 and borrows $20,000 from a plan to
be repaid over five years in level monthly
installments due at the end of each month. After
making monthly payments through July 1999, the
participant fails to make any of the payments due
thereafter.
(b)As a result of the failure to satisfy the
requirement that the loan be repaid in level
monthly installments, the participant has a
deemed distribution. See Q&A–10(c) Example
of this section regarding when such a deemed
distribution occurs and the amount thereof.
Q–5: What is a principal residence
for purposes of the exception in section
72(p)(2)(B)(ii) from the requirement
that a loan be repaid in five years?
A–5: Section 72(p)(2)(B)(ii) provides
that the requirement in section 72(p)-
(2)(B)(i) that a plan loan be repaid
within five years does not apply to a
loan used to acquire a dwelling unit
which will within a reasonable time be
used as the principal residence of the
participant (a principal residence plan
loan). For this purpose, a principal
residence has the same meaning as a
principal residence under section 1034.
Q–6: In order to satisfy the require-
ments for a principal residence plan
loan, is a loan required to be secured
by the dwelling unit that will within a
reasonable time be used as the princi-
pal residence of the participant?
A–6: A loan is not required to be
secured by the dwelling unit that will
within a reasonable time be used as the
participant’s principal residence in
order to satisfy the requirements for a
principal residence plan loan.
Q–7: What tracing rules apply in
determining whether a loan qualifies as
a principal residence plan loan?
A–7: The tracing rules established
under section 163(h)(3)(B) apply in
determining whether a loan is treated
as for the acquisition of a principal
residence in order to qualify as a
principal residence plan loan.
Q–8: Can a refinancing qualify as a
principal residence plan loan?
A–8: (a) Refinancings. In general,
no. However, a loan from a qualified
employer plan used to repay a loan
from a third party will qualify as a
principal residence plan loan if the plan
loan qualifies as a principal residence
plan loan without regard to the loan
from the third party.
(b)Example. The following example
illustrates the rules in paragraph (a) of
this Q&A–8 and is based upon the as-
sumptions described in ASSUMP-
TIONS FOR EXAMPLES:
Example. (a) On July 1, 1999, a participant
requests a $50,000 plan loan to be repaid in level
monthly installments over 15 years. On August
1, 1999, the participant acquires a principal
residence and pays a portion of the purchase
price with a $50,000 bank loan. On September 1,
1999, the plan loans $50,000 to the participant,
which the participant uses to pay the bank loan.
(b)Because the plan loan satisfies the require-
ments to qualify as a principal residence plan
loan (taking into account the tracing rules of
section 163(h)(3)(B)), such plan loan qualifies
for the exception in section 72(p)(2)(B)(ii).
Q–9: Does the level amortization re-
quirement of section 72(p)(2)(C) apply
when a participant is on a leave of
absence without pay?
A–9: (a)Leave of absence. The
level amortization requirement of sec-
tion 72(p)(2)(C) does not apply for a
period, not longer than one year, that a
participant is on a leave of absence,
either without pay from the employer
or at a rate of pay (after income and
employment tax withholding) that is
less than the amount of the installment
payments required under the terms of
the loan. However, the loan must be
repaid by the latest date permitted
under section 72(p)(2)(B) and the in-
stallments due after the leave ends (or,
if earlier, after the first year of the
leave) must not be less than those
required under the terms of the original
loan.
(b)Example. The following exam-
ple illustrates the rules of paragraph (a)
of this Q&A-9 and is based upon the
assumptions described in ASSUMP-
TIONS FOR EXAMPLES:
Example. (a) On July 1, 1997, a participant
with a nonforfeitable account balance of $80,000,
borrows $40,000 to be repaid in level monthly
installments of $825 each over five years. The
loan is not a principal residence plan loan. The
participant makes nine monthly payments and
commences an unpaid leave of absence that lasts
for 12 months. Thereafter, the participant re-
sumes active employment and resumes making
repayments on the loan until the loan is repaid.
The amount of each monthly installment is
increased to $1,130 in order to repay the loan by
June 30, 2002.
(b)Because the loan satisfies the require-
ments of section 72(p)(2), the participant does
not have a deemed distribution. Alternatively,
section 72(p)(2) would be satisfied if the
participant continued the monthly installments of
$825 after resuming active employment and on
June 30, 2002 repaid the full balance remaining
due.
Q–10: If a participant fails to make
the installment payments required un-
der the terms of a loan that satisfied
the requirements of Q&A–3 of this sec-
tion when made, when does a deemed
distribution occur and what is the
amount of the deemed distribution?
A–10: (a) Timing of deemed distribu-
tion. Failure to make any installment
payment when due in accordance with
the terms of the loan violates section
72(p)(2)(C) and, accordingly, results in
a deemed distribution at the time of
such failure. However, the plan admin-
istrator may allow a grace period, and
section 72(p)(2)(C) will not be consid-
ered to have been violated until the last
day of the grace period. Any such
grace period shall be given effect for
purposes of section 72(p)(2)(C) only to
the extent it does not continue beyond
the last day of the calendar quarter
following the calendar quarter in which

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the required installment payment was
due.
(b)Amount of deemed distribu-
tion. If a loan satisfies Q&A–3 of this
section when made, but there is a
failure to pay the installment payments
required under the terms of the loan
(taking into account any grace period
allowed under the preceding paragraph
(a) of this Q&A–10), then the amount
of the deemed distribution equals the
entire outstanding balance of the loan
at the time of such failure.
(c)Example. The following exam-
ple illustrates the rules in Q&A–10(a)
and (b) of this section and is based
upon the assumptions described in
ASSUMPTIONS FOR EXAMPLES:
Example. (1) On August 1, 1998, a partici-
pant has a nonforfeitable account balance of
$45,000 and borrows $20,000 from a plan to be
repaid over five years in level monthly install-
ments due at the end of each month. After
making all monthly payments due through July
31, 1999, the participant fails to make the
payment due on August 31, 1999 or any other
monthly payments due thereafter. The plan
administrator allows a three-month grace period.
(2)As a result of the failure to satisfy the
requirement that the loan be repaid in level
installments pursuant to section 72(p)(2)(C), the
participant has a deemed distribution on Novem-
ber 30, 1999, which is the last day of the three-
month grace period for the August 31, 1999
installment. The amount of the deemed distribu-
tion is $17,157, which is the outstanding balance
on the loan at November 30, 1999. Alternatively,
if the plan administrator had allowed a grace
period through the end of the next calendar
quarter, there would be a deemed distribution on
December 31, 1999 equal to $17,282, which is
the outstanding balance of the loan at December
31, 1999.
Q–11: Do sections 72 and 4980A
apply to a deemed distribution as if it
were an actual distribution?
A–11: (a) Tax Basis. If the
employee’s account includes after-tax
contributions or other investment in the
contract under section 72(e), section 72
applies to a deemed distribution as if it
were an actual distribution, with the
result that all or a portion of the
deemed distribution may not be
taxable.
(b)Sections 72(t) and (m). Section
72(t) (which imposes a 10 percent tax
on certain early distributions) and
section 72(m)(5) (which imposes a
separate 10 percent tax on certain
amounts received by a 5-percent
owner) apply to a deemed distribution
under section 72(p) in the same manner
as if the deemed distribution were an
actual distribution.
(c)Section 4980A. For purposes
of section 4980A, a deemed distribu-
tion under section 72(p) is taken into
account in determining an individual’s
excess distributions, as provided in
§54.4981A–1T, Q&A a–8.
Q–12: Is a deemed distribution under
section 72(p) treated as an actual
distribution for purposes of the
qualification requirements of section
401, the distribution provisions of
section 402, or the distribution restric-
tions of section 401(k)(2)(B) or
403(b)(11)?
A–12: No. Thus, for example, if a
participant in a money purchase plan
who is an active employee has a
deemed distribution under section
72(p), the plan will not be considered
to have made an in-service distribution
to the participant in violation of the
qualification requirements applicable to
money purchase plans. Similarly, the
deemed distribution is not eligible to be
rolled over to an eligible retirement
plan and the participant is not eligible
to elect income averaging with respect
to the deemed distribution. See also
§§1.402(c)–2, Q&A–4(d) and §1.401-
(k)–1(d)(6)(ii).
Q–13: How does a reduction (offset)
of an account balance in order to repay
a plan loan differ from a deemed dis-
tribution?
A–13: (a) Difference between
deemed distribution and plan loan
offset amount. (1) Loans to a partici-
pant from a qualified employer plan
can give rise to two types of taxable
distributions—
(i)A deemed distribution pursuant
to section 72(p); and
(ii)A distribution of an offset
amount.
(2)As described in Q&A–4 of
this section, a deemed distribution
occurs when the requirements of Q&A–
3 of this section are not satisfied, either
when the loan is made or at a later
time. A deemed distribution is treated
as a distribution to the participant or
beneficiary only for certain tax pur-
poses and is not a distribution of the
accrued benefit. A distribution of a
plan loan offset amount (as defined in
§1.402(c)–2, Q&A–9(b)) occurs when,
under the terms governing a plan loan,
the accrued benefit of the participant or
beneficiary is reduced (offset) in order
to repay the loan (including the enfor-
cement of the plan’s security interest in
the accrued benefit). A distribution of a
plan loan offset amount could occur in
a variety of circumstances, such as
where the terms governing the plan
loan require that, in the event of the
participant’s request for a distribution,
a loan be repaid immediately or treated
as in default.
(b)Plan loan offset. In the event
of a plan loan offset, the amount of the
account balance that is offset against
the loan is an actual distribution for
purposes of the Internal Revenue Code,
not a deemed distribution under section
72(p). Accordingly, a plan may be pro-
hibited from making such an offset
under the provisions of section 401(a),
401(k)(2)(B) or 403(b)(11) prohibiting
or limiting distributions to an active
employee. See §1.402(c)–2, Q&A–9(c)
Example 6.
Q–14: How is the amount includible
in income as a result of a deemed
distribution under section 72(p) re-
quired to be reported?
A–14: The amount includible in
income as a result of a deemed
distribution under section 72(p) is
required to be reported on Form 1099–
R (or any other form prescribed by the
Commissioner).
Q–15: What withholding rules apply
to plan loans?
A–15: To the extent that a loan,
when made, is a deemed distribution or
an account balance is reduced (offset)
to repay a loan, the amount includible
in income is subject to withholding. If
a deemed distribution of a loan or a
loan repayment by benefit offset results
in income at a date after the date the
loan is made, withholding is required
only if a transfer of cash or property
(excluding employer securities) is made
to the participant or beneficiary from
the plan at the same time. See
§§35.3405–1(f)(4) and 31.3405(c)–1,
Q&A–9 and Q&A–11 of this chapter
for further guidance on withholding
rules.
Q–16: If a loan fails to satisfy the
requirements of Q&A–3 of this section
and is a prohibited transaction under
section 4975, is the deemed distribution
of the loan under section 72(p) a
correction of the prohibited transaction?
A–16: A deemed distribution is not a
correction of a prohibited transaction
under section 4975. See §§141.4975–13
and 53.4941(e)–1(c)(1) of this chapter
for guidance concerning correction of a
prohibited transaction.
Q–17: What are the income tax con-
sequences if an amount is transferred

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from a qualified employer plan to a
participant or beneficiary as a loan, but
there is an express or tacit understand-
ing that the loan will not be repaid?
A–17: If there is an express or tacit
understanding that the loan will not be
repaid, or, for any reason, the transac-
tion does not create a debtor-creditor
relationship, then the amount trans-
ferred is treated as an actual distribu-
tion from the plan for purposes of the
Internal Revenue Code, and is not
treated as a loan or as a deemed
distribution under section 72(p).
Q–18: If a qualified employer plan
maintains a program to invest in
residential mortgages, are loans made
pursuant to the investment program
subject to section 72(p)?
A–18: Residential mortgage loans
made by a plan in the ordinary course
of an investment program are not
subject to section 72(p) if the property
acquired with the loans is the primary
security for such loans and the amount
loaned does not exceed the fair market
value of the property. An investment
program exists only if the plan has
established, in advance of a specific
investment under the program, that a
certain percentage or amount of plan
assets will be invested in residential
mortgages available to persons purchas-
ing the property who satisfy commer-
cially customary financial criteria.
Loans will not be considered as made
under an investment program if the
loans are only made available to, or
any loan is earmarked for, any person
or persons who are participants or
beneficiaries in the plan, or if such
loans mature upon a participant’s ter-
mination from employment. In addi-
tion, no loan that benefits an officer,
director, or owner of the employer
maintaining the plan, or his or her
beneficiaries, will be treated as made
under an investment program. No in-
ference should be drawn that a transac-
tion under such an investment program
is not a prohibited transaction under
section 503 or 4975 or is not a viola-
tion of the applicable fiduciary stand-
ards for an employee benefit plan, so
that such a loan could be a prohibited
transaction if it does not satisfy the
requirements of 29 CFR §2550.408b–1.
Q–19: When is the effective date of
these regulations?
A–19: This section applies to assign-
ments, pledges, and loans made on or
after the date that is three months after
the date of publication of the final
regulations in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66233)

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Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified
public accountant, enrolled agent or en-
rolled actuary, in order to avoid the in-
stitution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue
Service, may offer his consent to
suspension from such practice. The
Director of Practice, in his discretion,
may suspend an attorney, certified
public accountant, enrolled agent or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public account-
ants, enrolled agents and enrolled actu-
aries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting
assistance from, being employed by,
or sharing fees with, any practi-
tioner disbarred or suspended from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attor-
ney, certified public accountant, en-
rolled agent or enrolled actuary and
date or period of suspension. This an-
nouncement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to
appear in the weekly Bulletins for five
successive weeks or for as many weeks
as is practicable for each attorney,
certified public accountant, enrolled
agent or enrolled actuary so suspended
and will be consolidated and published
in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Isdaner, Thomas M.Crofton, MDCPAOctober 31, 1995 to October 30, 1996
Cacciola, MarlenePittsburg, CAEnrolled
Agent
November 9, 1995 to May 8, 1996
Goldman, William D.Hot Springs, ARAttorneyNovember 9, 1995 to November 8, 1996
Armstrong, David L.Norman, OKCPAIndefinite from November 10, 1995
Heckathorn, BenRed Oak, TXCPA
Attorney
Indefinite from November 28, 1995
Tisdel, LindaSeattle, WAEnrolled
Agent
November 28, 1995 to May 27, 1997
Webb, Herbert M.Gainsville, FLAttorneyDecember 21, 1995 to June 20, 1997
Hipp, Robert J.Evanston, ILCPADecember 28, 1995 to April 27, 1996
Ruff, James M.Willmar, MNCPAJanuary 1, 1996 to March 31, 1996
Mulkerin, John J.Wheaton, ILCPAJanuary 5, 1996 to April 4, 1996
Redwitz, RobertIrvine, CACPAFebruary 15, 1996 to May 14, 1996
Lind, Stanley L.Milwaukee, WIAttorneyMarch 1, 1996 to February 28, 1997
Dais, Robert E.Plano, TXCPAMarch 1, 1996 to February 28, 1997
Under Section 330, Title 31 of the
United States Code, the Secretary of
the Treasury, after due notice and
opportunity for hearing, is authorized
to suspend or disbar from practice
before the Internal Revenue Service
any person who has violated the rules
and regulations governing the recogni-
tion of attorneys, certified public ac-
countants, enrolled agents or enrolled
actuaries to practice before the Internal
Revenue Service.
Attorneys, certified public account-
ants, enrolled agents, and enrolled
actuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by or
sharing fees with, any practitioner
disbarred or under suspension from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and
enrolled actuaries to identify such
disbarred or suspended practitioners,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent or enrolled actuary, and the date
of disbarment or period of suspension.
This announcement will appear in the
weekly Bulletin for five successive
weeks or as long as it is practicable for
each attorney, certified public account-
ant, enrolled agent or enrolled actuary
so suspended or disbarred and will be
consolidated and published in the
Cumulative Bulletin.
After due notice and opportunity
for hearing before an administrative
law judge, the following individuals
have been disbarred from further prac-
tice before the Internal Revenue
Service:

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NameAddressDesignationEffective Date
Muraskin, DavidNew York, NYAttorneyNovember 6, 1995
Kelsey, PatrickPoolesville, MDCPANovember 13, 1995
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
who, within five years, from the date
the expedited proceeding is instituted,
(1) has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for
cause; or (2) has been convicted of any
crime under title 26 of the United
States Code or, of a felony under title
18 of the United States Code involving
dishonesty or breach of trust.
Attorneys, certified public account-
ants, enrolled agents, and enrolled ac-
tuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by, or
sharing fees with, any practitioner
disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Serv-
ice, the Director of Practice will an-
nounce in the Internal Revenue Bulletin
the names and addresses of practition-
ers who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent, or enrolled actuary, and date or
period of suspension. This announce-
ment will appear in the weekly Bulletin
at the earliest practicable date after
such action and will continue to appear
in the weekly Bulletins for five succes-
sive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or
enrolled actuary so suspended and will
be consolidated and published in the
Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding
provisions of the applicable regulations:
NameAddressDesignationDate of Suspension
Trebatch, Henry T.Great Neck, NYCPAIndefinite from November 6, 1995
Roomberg, AlanMinersville, PACPAIndefinite from November 10, 1995
Elfenbein, Emanuel B.Miami, FLEnrolled
Agent
Indefinite from November 27, 1995
Cerullo, Louis, J.Boca Raton, FLCPAIndefinite from November 27, 1995
Fogel, HaroldSt. Paul, MNCPAIndefinite from December 13, 1995
Glover, Paul L.Downers Grove, ILAttorneyIndefinite from December 13, 1995
Miller, John R.Akron, OHAttorneyIndefinite from December 13, 1995
Pofahl, CharlesDallas, TXAttorneyIndefinite from December 18, 1995
Walburg, DouglasMahtomedi, MNCPAIndefinite from December 18, 1995
Hibler, Thomas M.Plymouth, MICPA
Attorney
Indefinite from December 18, 1995
Oringer, RonaldFlanders, NJCPAIndefinite from December 29, 1995
Butcher, FrederickStillwater, NJCPAIndefinite from December 29, 1995
Tokars, FredericAtlanta, GAAttorneyIndefinite from December 29, 1995
Atkins, Sanford I.Moreland Hills, OHAttorneyIndefinite from December 29, 1995

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39
Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion 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 princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but
not to B, and the new ruling holds that
it applies to both A and B, the prior
ruling is modified because it corrects a
published position. (Compare with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly 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 substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. 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
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes a situation where the substance
of a previously published 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
superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling
and that list is expanded by adding
further names in subsequent rulings.
After the original ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is used in rare situations
to show that the previous published
rulings will not be applied pending
some future action such as the issuance
of new or amended regulations, the
outcome of cases in litigation, or the
outcome of a Service study.
Abbreviations
The following abbreviations in current use and
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 Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of 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.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–9
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
96–5, 1996–4 I.R.B. 99
96–6, 1996–5 I.R.B. 43
96–7, 1996–5 I.R.B. 44
96–8, 1996–7 I.R.B. 56
96–9, 1996–8 I.R.B. 30
96–10, 1996–8 I.R.B. 30
96–11, 1996–9 I.R.B. 11
Delegations Orders:
232 (Rev. 2), 1996–7 I.R.B. 49
239 (Rev. 1), 1996–7 I.R.B. 49
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
96–4, 1996–4 I.R.B. 69
96–5, 1996–6 I.R.B. 22
96–6, 1996–5 I.R.B. 27
96–7, 1996–6 I.R.B. 22
96–8, 1996–6 I.R.B. 23
96–9, 1996–6 I.R.B. 26
96–10, 1996–7 I.R.B. 47
96–11, 1996–8 I.R.B. 19
Proposed Regulations:
DL–1–95, 1996–6 I.R.B. 28
EE–20–95, 1996–5 I.R.B. 15
EE–34–95, 1996–3 I.R.B. 49
EE–35–95, 1996–5 I.R.B. 19
EE–53–95, 1996–5 I.R.B. 23
IA–33–95, 1996–4 I.R.B. 99
INTL–3–95, 1996–6 I.R.B. 29
INTL–9–95, 1996–5 I.R.B. 25
PS–2–95, 1996–7 I.R.B. 50
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–8A, 1996–9 I.R.B. 10
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.
Revenue Procedures—Continued
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
96–17, 1996–4 I.R.B. 69
96–18, 1996–4 I.R.B. 73
96–19, 1996–4 I.R.B. 80
96–20, 1996–4 I.R.B. 88
96–21, 1996–4 I.R.B. 96
96–22, 1996–5 I.R.B. 27
96–23, 1996–5 I.R.B. 27
96–24, 1996–5 I.R.B. 28
96–25, 1996–8 I.R.B. 19
96–26, 1996–8 I.R.B. 22
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
96–8, 1996–4 I.R.B. 62
96–9, 1996–4 I.R.B. 5
96–10, 1996–4 I.R.B. 27
96–11, 1996–4 I.R.B. 28
96–12, 1996–9 I.R.B. 4
96–14, 1996–6 I.R.B. 20
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8632, 1996–4 I.R.B. 6
8633, 1996–4 I.R.B. 20
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8636, 1996–4 I.R.B. 64
8637, 1996–4 I.R.B. 29
8638, 1996–5 I.R.B. 5
8639, 1996–5 I.R.B. 12
8640, 1996–2 I.R.B. 10
8641, 1996–6 I.R.B. 4
8642, 1996–7 I.R.B. 4
8644, 1996–7 I.R.B. 16
8645, 1996–8 I.R.B. 4
8646, 1996–8 I.R.B. 10
8647, 1996–9 I.R.B. 7
8649, 1996–9 I.R.B. 5

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Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–1 through 1996–9
*Denotes entry since last publication
Delegation Orders:
232 (Rev. 1)
Superseded by
232 (Rev. 2), 1996–7 I.R.B. 49
239
Amended by
239 (Rev. 1), 1996–7 I.R.B. 49
Revenue Procedures:
65–17
Modified by
96–14, 1996–3 I.R.B. 41
66–49
Modified by
96–15, 1996–3 I.R.B. 41
88–32
Obsoleted by
96–15, 1996–3 I.R.B. 41
88–33
Obsoleted by
96–15, 1996–3 I.R.B. 41
89–19
Superseded by
96–17, 1996–4 I.R.B. 69
89–48
Superseded in part by
96–17, 1996–4 I.R.B. 69
91–22
Modified by
96–1, 1996–1 I.R.B. 8
91–22
Amplified by
96–13, 1996–3 I.R.B. 31
91–23
Superseded by
96–13, 1996–3 I.R.B. 31
91–24
Superseded by
96–14, 1996–3 I.R.B. 41
91–26
Superseded by
96–13, 1996–3 I.R.B. 31
92–20
Modified by
96–1, 1996–1 I.R.B. 8
1
A cumulative finding list for previously
published items mentioned in Internal Revenue
Bulletins 1995–27 through 1995–52 will be
found in Internal Revenue Bulletin 1996–1, dated
January 2, 1996.
Revenue Procedures—Continued
92–85
Modified by
96–1, 1996–1 I.R.B. 8
93–16
Superseded by
96–11, 1996–2 I.R.B. 18
93–46
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–18
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–59
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
95–1
Superseded by
96–1, 1996–1 I.R.B. 8
95–2
Superseded by
96–2, 1996–1 I.R.B. 60
95–3
Superseded by
96–3, 1996–1 I.R.B. 82
95–4
Superseded by
96–4, 1996–1 I.R.B. 94
95–5
Superseded by
96–5, 1996–1 I.R.B. 129
95–6
Superseded by
96–6, 1996–1 I.R.B. 151
95–7
Superseded by
96–7, 1996–1 I.R.B. 185
95–8
Superseded by
96–8, 1996–1 I.R.B. 187
95–13
Superseded by
96–20, 1996–4 I.R.B. 88
Revenue Procedures—Continued
95–20
Superseded by
96–24, 1996–5 I.R.B. 28
95–50
Superseded by
96–3, 1996–1 I.R.B. 82
96–3
Amplified by
96–12, 1996–3 I.R.B. 30
Revenue Rulings:
66–307
Obsoleted by
96–3, 1996–2 I.R.B. 14
72–437
Modified by
96–13, 1996–3 I.R.B. 31
80–80
Obsoleted by
96–3, 1996–2 I.R.B. 14
82–80
Modified by
96–14, 1996–3 I.R.B. 41
92–19
Supplemented in part
96–2, 1996–2 I.R.B. 5
92–75
Clarified by
96–13, 1996–3 I.R.B. 31
95–10
Supplemented and superseded by
96–4, 1996–3 I.R.B. 16
95–11
Supplemented and superseded by
96–5, 1996–3 I.R.B. 29

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INDEX
Internal Revenue Bulletins 1996–1
Through 1996–9
For index of items published during
the last six months of 1995, see
I.R.B. 1996–1, dated January 2,
1996.
The abbreviation and number in pa-
rentheses following the index entry
refer to the specific item; numbers
in roman and italic type following the
parentheses refer to the Internal
Revenue Bulletin in which the item
may be found and the page number
on which it appears.
Key to Abbreviations:
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAXES
Backup withholding:
Substitute Form W–9 (RP 26) 8, 22
Forms, electronic filing, magnetic
media, Form 1042–S (RP 11) 2, 18
Proposed regulations:
26 CFR 31.9999–0, added; effective
date of temporary backup with-
holding regs (IA–33–95) 4, 99
Partial withdrawal of proposed regula-
tions INTL–52–86 (Notice 4) 4, 69
Regulations:
2 6 C F R 3 1 . 3 4 0 2 ( r ) – 1 a d d e d ;
31.3402(r)–IT, removed; withhold-
ing on distributions of Indian
gaming profits to tribal members
(TD 8634) 3, 17
2 6 C F R 3 1 . 3 4 0 6 – 0 r e v i s e d ;
3 1 . 3 4 0 6 ( a ) – 1 — 3 1 . 3 4 0 6 ( i ) – 1 ,
31.6051–4, 31.6413(a)–3, added;
35a.9999.OT, 35a.3406–2, re-
moved; 301.6109–1, amended;
backup withholding statement
mailing requirements, and due dili-
gence (TD 8637) 4, 29
EMPLOYMENT TAXES—
Continued
Regulations—Continued
26 CFR 31.6051–1(d), 31.6071(a)–
1(a)(3), amended; 31.6051–2(c),
31.6081(a)–1(a)(3), 301.6011–
2(c)(4)(i), revised; time for fur-
nishing wage statements on termi-
nation of employer’s operations
(TD 8636) 4, 64
Proposed regulations:
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Regulations:
25 CFR 301.6109–1, amended (TD
8633) 4, 20
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
Returns:
Information, electronic filing; Form
941 (RP 19) 4, 80
Magnetic tape reporting: Forms 940,
941, and 945 (RP 18) 4, 73
Reporting agents, Form 8655 (RP
17) 4, 69
ESTATE & GIFT TAXES
ADMINISTRATIVE
Proposed regulations:
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Regulations:
26 CFR 301.6109–1, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage state-
m e n t s o n t e r m i n a t i o n o f
employer’s operations (TD 8636)
4, 64
ESTATE & GIFT TAXES—
Continued
ADMINISTRATIVE—Continued
Regulations—Continued
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
ESTATE TAXES
Annuities, valuation, terminally ill
measured life (RR 3) 1, 14
Regulations:
26 CFR 20.7520–3, amended; ac-
turial tables exceptions (TD 8630)
3, 19
26 CFR Part 26, revised; 301.9100–
7T, amended; generation-skipping
transfer tax (TD 8644) 7, 16
Tax conventions, competent authority
procedures (RP 13) 3, 31
GIFT TAXES
Annuities, valuation, terminally ill
measured life (RR 3) 1, 14
Regulations:
26 CFR 25.2522(c)–3, 25.7520–3
amended; actuarial tables excep-
tions (TD 8630) 3, 19
26 CFR 25.2702–3, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20
Tax conventions, competent authority
procedures (RP 13) 3, 31
EXCISE TAXES
Proposed regulations:
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28

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EXCISE TAXES—Continued
Regulations:
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
26 CFR 53.4941(d)–2, amended;
self-dealing for private foundations
(TD 8639) 5, 12
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage state-
ments on termination of em-
ployer’s operations (TD 8636) 4,
64
26 CFR 301.6109–1, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
INCOME TAX
Administration:
Advance valuation of art (RP 15) 3,
41
Delegation of authority:
Authority of Taxpayer Ombuds-
man (DO 239 [Rev. 1]) 7, 49
Authority to modify or rescind
TAO (DO 232 [Rev. 2]) 7, 49
Unagreed issues, referral to Appeals
(RP 9) 2, 15
Annuities and pensions, valuation, ter-
minally ill measured life (RR 3) 2,
14
Automobiles:
Owners and lessees, limitations on
depreciation (RP 25) 8, 19
Books and records:
Imaging systems (Notice 10) 7, 47
Capital expenditures (Notice 7) 6, 22
Consolidated returns, single-entity elec-
tion (RP 21) 4, 96
Credit against tax:
Enpowerment zone employment, in-
tent to issue regulations (Notice 1)
3, 30
Employee plans:
Administrative, COBRA premium is-
sues (RR 8) 4, 62
Determination letters (RP 6) 1, 51
Funding:
Full funding limitations, weighted
average interest rate, Dec. 1995
(Notice 2) 2, 15
INCOME TAX—Continued
Employee plans—Continued
Funding—Continued
Full funding limitations, weighted
average interest rate, Jan. 1996
(Notice 9) 6, 26; Feb. 1996
(Notice 11) 8, 19
Mortality tables (RR 7) 3, 12
Single sum distributions amounts,
cash balance plans (Notice 8) 6,
23
Estimate tax payments for individ-
uals (Notice 5) 6, 22
Estate and trusts:
Valuations, transfers to pooled in-
come funds (RR 1) 1, 7
Foreign insurance companies, domes-
tic asset/liability and investment
yield (RP 23) 5, 27
Forms:
Substitute Forms W–2 and W–3,
specifications (RP 24) 5, 28
Insurance companies:
Life, interest rate tables (RR 2) 2, 5
Interest:
Investment:
Federal short-term, mid-term and
long-term rates, Jan. 1996 (RR
6) 2, 8
Federal short-term, mid-term, and
long-term rates, February 1966
(RR 14) 6, 20
Inventories:
LIFO:
Price indexes, department stores,
Nov. 1995 (RR 9) 4, 5; Dec.
1995 (RR 12) 9, 4
Investment:
Inflation adjustment for 1996 (RR 4)
3, 16
Loans:
CPI adjustment for below market
loans—1996 (RR 5) 3, 29
Partnerships:
Charitable contribution of property
(RR 11) 4, 28
Sales between partners, basis (RR
10) 4, 27
Proposed regulations:
26 CFR 1.125–3, added; effect of
Family and Medical Leave Act of
1993 on the operation of cafeteria
plans (EE–20–95) 5, 15
26 CFR 1.367–9, added (INTL–9–
95) 5, 24
INCOME TAX—Continued
Proposed regulations—Continued
26 CFR 1.411(c)–1, amended; alloca-
tion of accrued benefits between
employer and employee contribu-
tions (EE–20–95) 5, 15
26 CFR 1.411(d)(6), added (EE–34–
95) 3, 49
26 CFR 1.501(c)(5)–1, amended;
requirements for tax-exempt orga-
nizations (EE–53–95) 5, 23
26 CFR 1.731–2, added; distribution
of marketable securities by a part-
nership (PS–2–95) 7, 50
26 CFR 1.863–0, added; 1.863–1, –2,
–3, revised; 1.863–4, amended;
1.863–5, removed; source of in-
come from sales of inventory and
natural resources produced in one
jurisdicion and sold in another
(INTL–3–95) 6, 29
2 6 C F R 1 . 1 2 5 4 – 0 , 1 . 1 2 5 4 – 4 ,
amended; treatment of gain from
the disposition of interest in cer-
tain natural resource recapture
property by S corporations and
their shareholders (PS–7–89) 8, 24
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Regulations:
26 CFR 1.367(a)–3T, amended; cer-
tain transfers of domestic stock or
securities by U.S. persons to for-
eign corporations (TD 8638) 5, 5
26 CFR 1.401–12(n) redesignated
1.408–2(e); 1.401–12T, removed;
1.401(f)–1, 1.408–2, amended;
nonbank trustee net worth require-
ments (TD 8635) 3, 5
26 CFR 1.411(d)–6T, added; notice
of significant reduction in the rate
of future benefit accrual (TD
8631) 3, 7
26 CFR 1.469–0, 1.469–4, 1.469–11,
amended; 1.469.9, revised; rules
for certain rental real estate ac-
tivities (TD 8645) 8, 4
26 CFR 1.482–0, 301.7701–3,
amended; 1.482–7, added; 1.482–
7T, removed; section 482 cost
sharing arrangements (TD 8632) 4,
6
26 CFR 1.508–1, 1.6033–2 amended;
exempt organization not required
to file annual returns, integrated
auxiliaries of churches (TD 8640)
2, 10

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INCOME TAX—Continued
Regulations—Continued
26 CFR 1.597–1—1.597–7, added;
301.7507–1, 301.7507–9, amended;
treatment of acquisition of certain
financial institutions (TD 8641) 6, 4
26 CFR 1.671–4, revised; 1.6012–3,
301.6109–1, amended; grantor
trust reporting requirements (TD
8633) 4, 20
26 CFR 1.704–4, 1.737–1 through
1.737–5, added; recognition of gain
or loss by contributing partner on
distribution of contributed property
or other property (TD 8642) 7, 4
26 CFR 1.861–8, amended; 1.861–17,
added; allocation and apportion-
ment of research and experimental
expenditures (TD 8646) 8, 10
26 CFR 1.1258–1, added; conversion
transactions (TD 8649) 9, 5
26 CFR 1.1445–1, 1.1445–8(c)(2)(i),
revised; 1.1445–5, amended; with-
holding of tax on dispositions of
U.S. real property interests by
foreign persons (TD 8647) 9, 7
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage statements
upon termination of employer’s
operations (TD 8636) 4, 64
26 CFR 1.6042–4, 1.6044–5, revised;
1.6049–6, 301.6109–1, amended;
1.6050N–1, added Backup with-
holding, statement mailing require-
ments and due diligence (TD 8637)
4, 29
INCOME TAX—Continued
Regulations—Continued
26 CFR 1.7520–3, amended; actu-
arial tables exceptions (TD 8630)
3, 19
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
Returns:
Form 990, church affiliated organiza-
tions exempt from filing (RP 10)
2, 17
On-line service electronic filing pro-
gram; Form 1040 (RP 20) 4, 88
Rulings:
Areas in which advance rulings
willing to be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(Employee Benefits and Exempt
Organizations) (RP 3) 1, 86
Associate Chief Counsel (Interna-
tional ) (RP 7) 1, 185
Areas in which rulings will not be
issued, transfers, life insurance
policies to nonincorporated entities
(RP 12) 3, 30
Employee plans and exempt organi-
zations user fees correction (RP
8A) 9, 10
Letter rulings, determination letters,
and information letters, Associate
Chief Counsel (Domestic), Associ-
ate Chief Counsel (Employee Ben-
INCOME TAX—Continued
Rulings—Continued
efits and Exempt Organizations),
Associate Chief Counsel (Enforce-
ment Litigation) and Associate
Chief Counsel (International) (RP
1) 1, 8
No-rule provision, combining trans-
actions (RP 22) 5, 27 (Notice 6) 5,
27
Tax-exempt bonds, issuance pro-
cedrues (RP 16) 3, 45
Technical advice, employee plans
and exempt organizations (RP 5)
1, 129
Technical advice to the District
Directors and Chiefs, Appeals Of-
fices, from the Associate Chief
Counsel (Domestic), Associate
Chief Counsel (Employee Benefits
and Exempt Organizations), Asso-
ciate Chief Counsel (Enforcement
Litigation), and Associate Chief
Counsel (International) (RP 2) 1,
60
Rulings and determination letters, issu-
ance procedures (RP 4) 1, 94
Tax conventions:
Competent authority procedure (RP
13) 3, 31
Relief in treaty cases (RP 14) 3, 41
User fees for employee plans and
exempt organizations (RP 8) 1, 187

SEQ 0104 JOB B35-053-007 PAGE-0045 INDEX
REVISED 28MAY96 AT 11:42 BY LR DEPTH: 65.01 PICAS WIDTH 32.10 PICAS
COMPOSITE COLOR
778/20047/28MAY96/B35-053
45
NOTES

SEQ 0105 JOB B35-053-007 PAGE-0046 INDEX
REVISED 28MAY96 AT 11:42 BY LR DEPTH: 65.01 PICAS WIDTH 32.10 PICAS
COMPOSITE COLOR
778/20047/28MAY96/B35-053
46
NOTES

SEQ 0106 JOB B35-053-007 PAGE-0047 INDEX
REVISED 28MAY96 AT 11:42 BY LR DEPTH: 65.01 PICAS WIDTH 32.10 PICAS
COMPOSITE COLOR
778/20047/28MAY96/B35-053
47
NOTES