Internal Revenue Bulletin 1996-29 (PDF rendition): IRS Revenue Procedures

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

INCOME TAX
T.D. 8675, page 5.
Final regulations under section 1001 of the Code relate
to the modification of debt instruments.
EXEMPT ORGANIZATIONS
Announcement 96–63, page 18.
Internal Revenue Service processing of most information
and tax returns filed by tax-exempt organizations is
being centralized into the Ogden Service Center. The
announcement specifies the returns covered and the
timetable for the change.
Announcement 96–66, page 19.
A list is given of organizations now classified as private
foundations.
EMPLOYMENT TAX
Page 14.
Railroad retirement; rate determination; quarterly.
The Railroad Retirement Board has determined that the
rate of tax imposed by section 3221(c) of the Code shall
be thirty-four cents for the quarter beginning July 1,
1996.
ADMINISTRATIVE
Rev. Proc. 96–37, page 16.
Qualified mortgage bonds; mortgage credit certifi-
cates; national median gross income.Guidance is
provided concerning the use of the national and area
median gross income figures by issuers of qualified
mortgage bonds and mortgage credit certificates in
determining the housing cost/income ratio described in
section 143(f)(5) of the Code. Rev. Proc. 95–32 is
obsolete except as provided in section 5.02 of this
revenue procedure.
Announcement 96–64, page 18.
T.D. 8659, 1996–16 I.R.B. 4, relating to the taxes on
gasoline and diesel fuel, is corrected.
Announcement 96–65, page 18.
INTL–0054–95, 1996–14 I.R.B. 39, relating to the
determination of the interest expense deduction of
foreign corporations and the branch profits tax, is
corrected.
Finding Lists begin on page 24.
Announcement Relating to Court Decisions begins on page 4.
Announcement of Disbarments and Suspensions begins on page 21.
Bulletin No. 1996–29
July 15, 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.

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.
2

Introduction
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Inter-
nal Revenue Service and for publishing Treasury Deci-
sions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superin-
tendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semi-
annually 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. Proce-
dures 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 Ser-
vice 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 unwar-
ranted 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 consid-
ered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administra-
tive Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforce-
ment).
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 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.
3

Announcement Relating to Court Decisions
It is the policy of the Internal Rev-
enue 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 an-
nouncement. An Action on Decision will
be issued at the discretion of the Service
only on unappealed issues decided ad-
verse 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 Regu-
lation or a Revenue Ruling, an Action
on Decision is not an affirmative state-
ment of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different.
Moreover, the recommendation in the
Action on Decision may be superseded
by new legislation, regulations, rulings,
cases, or Actions on Decisions.
Prior to 1991, the Service published
acquiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be
helpful. 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 deciding the case, the recom-
mendation of any Action on Decision
will be published in the Internal Rev-
enue Bulletin.
The recommendation in every Action
on Decision will be summarized as
acquiescence, acquiescence in result
only, or nonacquiescence. Both ‘‘acqui-
escence’’ and ‘‘acquiescence in result
only’’ mean that the Service accepts the
holding of the court in a case and that
the Service will follow it in disposing of
cases with the same controlling facts.
However, ‘‘acquiescence’’ indicates nei-
ther approval nor disapproval of the
reasons assigned by the court for its
conclusions; whereas, ‘‘acquiescence in
result only’’ indicates disagreement or
concern with some or all of those
reasons. Nonacquiescence signifies that,
although no further review was sought,
the Service does not agree with the
holding of the court and, generally, will
not follow the decision in disposing of
cases involving other taxpayers. In refer-
ence 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 Bulletins are
consolidated semiannually and annually.
The semiannual consolidation 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 Cumulative
Bulletin for the last half of the year.
The Commissioner ACQUIESCES in
the following decisions:
Alan K. Lauckner v. United States,
1
68 F.3d 69 (3d Cir. 1995)
Tele-Communications, Inc. v. Com-
missioner,
2
12 F.3d 1005 (10th Cir. 1993)
William H. Murphy v. Commissioner,
3
103 T.C. 111 (1994)
Clack, Est. of v. Commissioner,
4
106 T.C. 6 (1996)
Cristofani, Est. of Maria, Deceased,
Frank Cristofani, Executor v. Com-
missioner,
5
97 T.C. 74 (1991)
The Commissioner does NOT AC-
QUIESCE in the following decisions:
Fisher v. Commissioner,
6
45 F.3d 396 (10th Cir. 1995)
Richard L. and Fiona Simon v. Com-
missioner,
7
68 F.3d 41 (2d Cir. 1995)
1
Acquiescence relating to whether assessments of
the trust fund recovery penalty (TFRP) under
section 6672 of the Code are subject to the 3-year
statute of limitations contained in section 6501(a)
of the Code.
2
Acquiescence relating to whether cable television
franchises issued by local governments are fran-
chises within the meaning of section 1253 of the
Code.
3
Acquiescence relating to whether the nonrecogni-
tion provision of section 1034 of the Code for a
divorced or separated taxpayer may compute the
gain on a jointly owned residence, by taking into
account only his or her allowable share of the
basis and net proceeds from the sale of the jointly
owned residence when the taxpayer’s former
spouse has not met the section 1034 requirements
for deferral.
4
Acquiescence in result relating to whether the
surviving spouse has a ‘‘qualifying income interest
for life’’ in property where (1) the extent of the
surviving spouse’s income interest is contingent on
the executor’s qualified terminable interest prop-
erty (QTIP) election and where (2) any part (or
all) of the property for which QTIP treatment is
not elected will go to someone other than the
surviving spouse.
5
Acquiescence in result relating to whether trans-
fers of property to a trust, whose contingent
remainder beneficiaries have the right to withdraw
an amount not exceeding the section 2503(b)
exclusion within 15 days following such transfers,
constitute gifts of present interests in property
within the meaning of section 2503(b) of the
Code.
6
Nonacquiescence relating to whether the United
States Court of Appeals for the Tenth Circuit erred
in determining that the Commissioner abused her
discretion by not waiving the substantial under-
statement additions to tax under section 6661(c) of
the Code.
7
Nonacquiescence relating to whether professional
musicians are entitled, under section 168 of the
Code, to depreciate their antique musical instru-
ments used in their trade or business, notwith-
standing that the instruments have no determinable
useful lives.
4

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 25.—Interest on Certain
Home Mortgages
26 CFR 1.25-4T: Qualified mortgage credit certifi-
cate program (temporary).
Guidance is provided for the use of the national
and area median gross income figures by issuers
of qualified mortgage bonds and mortgage credit
certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code.
See Rev. Proc. 96–37, page 16.
Section 103.—State and Local
Bonds
26 CFR 1.103-1: Interest upon obligations of a
State, Territory, etc.
Guidance is provided for the use of the national
and area median gross income figures by issuers
of qualified mortgage bonds and mortgage credit
certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code.
See Rev. Proc. 96–37, page 16.
Section 143.—Mortgage Revenue
Bonds: Qualified Mortgage Bond
and Qualified Veterans’ Mortgage
Bond
26 CFR 6a.103A-2: Qualified mortgage bond.
Guidance is provided for the use of the national
and area median gross income figures by issuers
of qualified mortgage bonds and mortgage credit
certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code.
See Rev. Proc. 96–37, page 16.
Section 1001.—Determination of
Amount of and Recognition of Gain
or Loss
26 CFR 1.1001–3: Modifications of debt instru-
ments.
T.D. 8675
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
RIN 1545–AR04
Modifications of Debt Instruments
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the modifi-
cation of debt instruments. The regula-
tions govern when a modification is
treated as an exchange of the original
debt instrument for a modified instru-
ment. The regulations provide needed
guidance to issuers and holders of debt
instruments.
DATES: These regulations are effective
September 24, 1996.
For dates of applicability of these
regulations, see § 1.1001–3(h).
FOR FURTHER INFORMATION CON-
TACT: Thomas J. Kelly, (202) 622–
3930 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 2, 1992, proposed
amendments to 26 CFR part 1 were
published in theFederal Register(57
FR 57034 [FI–31–92, 1992–2 C.B.
683]) to provide guidance under
§ 1.1001–3. The proposed regulations
relate to the modification of debt instru-
ments. On February 17, 1993, the IRS
held a public hearing on the proposed
regulations. In addition, the IRS re-
ceived numerous written comments on
the proposed regulations. The proposed
regulations, with certain changes made
in response to comments, are adopted in
this Treasury decision as final regula-
tions. The principal changes to the regu-
lations, as well as the major comments
and suggestions, are discussed below.
Explanation of Provisions
A. General
The preamble to the proposed regula-
tions states that the proposed regulations
are intended to address the uncertainty
concerning when the modification of a
debt instrument results in a deemed
exchange of the old debt instrument for
a new instrument. Some of this uncer-
tainty resulted from the possible impact
of the decision of the Supreme Court in
Cottage Savings Ass’n v. Commissioner,
499 U.S. 554 (1991). The preamble
invites comments with respect to
whether it is desirable to provide rules
for the modification of debt instruments
as well as comments with respect to
what those rules should be.
Although the IRS received many
comments on the proposed regulations,
relatively few commentators addressed
the question of whether regulations on
the modification of debt instruments are
desirable. A few commentators argued
against the promulgation of regulations
on this subject. A number of other
commentators were supportive of the
attempt to provide certainty through a
series of specific rules. Some commen-
tators suggested that the regulations
adopt a facts and circumstances ap-
proach with safe harbors under which
certain modifications would not be
treated as exchanges. In contrast, other
commentators suggested using additional
bright-line rules to provide more cer-
tainty with respect to when a modifica-
tion is, and is not, treated as an ex-
change of the old debt instrument for a
new instrument. Most commentators,
however, limited their comments to the
specific rules of the proposed regula-
tions.
The IRS and Treasury considered
adopting a single, general rule instead of
several detailed rules. That approach,
while providing less guidance, would
have the advantage of reducing com-
plexity and avoiding anomalies that can
result from bright- line rules (for ex-
ample, different results for economically
similar transactions). Nevertheless, after
considering that approach the IRS and
Treasury concluded that both taxpayers
and the IRS would benefit from regula-
tions specifically addressing the treat-
ment of certain modifications. A debt
modification that results in an exchange
may have a variety of consequences,
and parties contemplating a change to a
debt instrument should be able to deter-
mine whether that change will result in
an exchange.
Accordingly, the final regulations re-
tain the basic structure of the proposed
regulations. Thus, an alteration of the
terms of a debt instrument is first tested
to determine whether the alteration is a
‘‘modification.’’ If there is a modifica-
tion, the modification is then tested to
determine whether it is a ‘‘significant
modification.’’ A significant modifica-
tion results in an exchange of the origi-
nal debt instrument for a modified in-
strument that differs materially either in
kind or in extent within the meaning of
§ 1.1001–1(a).
Although the final regulations gener-
ally follow the approach of the proposed
regulations, certain rules have been
added or modified to address a number
of issues noted by commentators. For
example, in one instance the final regu-
lations provide a general rule with re-
spect to a particular type of modification
together with a safe harbor for certain
changes that will not result in ex-
changes. In other instances, the final
regulations retain the bright-line ap-
proach of the proposed regulations. The
IRS and Treasury invite comments on
5

the operation of the final regulations and
will consider providing additional guid-
ance as appropriate.
B. Other instruments
In the preamble to the proposed regu-
lations, the IRS invites comments with
respect to whether the regulations
should be expanded to address modifica-
tions of financial instruments other than
debt instruments. In response, several
commentators argued that a dealer’s as-
signment of its position in an interest
rate swap contract or other notional
principal contract should not result in an
exchange under section 1001 for the
nonassigning counterparty. In response
to these comments, the IRS and Trea-
sury are issuing proposed and temporary
regulations that provide a special rule
for dealer assignments of notional prin-
cipal contracts. However, those tempo-
rary and proposed regulations and these
final regulations do not address whether
particular instruments are debt instru-
ments for Federal income tax purposes.
With the exception of those temporary
and proposed regulations, the final regu-
lations have not been expanded to cover
the modification of financial instruments
other than debt instruments. The modifi-
cation of other instruments is less com-
mon than the modification of debt
instruments, and the rules for modifica-
tions of debt instruments would not
necessarily work well or be appropriate
in determining whether modifications of
other instruments result in exchanges
under section 1001. For equity instru-
ments in particular, the IRS and Trea-
sury believe that the application of cer-
tain rules in these regulations would be
inappropriate. Similarly, for contracts
that are not debt instruments, the final
regulations do not limit or otherwise
affect the application of the ‘‘fundamen-
tal change’’ concept articulated in Rev.
Rul. 90–109 (1990–2 C.B. 191), in
which the IRS concluded that the exer-
cise by a life insurance policyholder of
an option to change the insured under
the policy changed ‘‘the fundamental
substance’’ of the contract, and thus was
a disposition under section 1001.
C. Modifications
The final regulations retain the gen-
eral rule of the proposed regulations that
a modification includes any alteration of
a legal right or obligation of the issuer
or holder. The final regulations, how-
ever, do not adopt the rule of the
proposed regulations that a unilateral
waiver of a right that does not rise to
the level of a settlement of terms be-
tween the parties is not a modification
of the original instrument. Commenta-
tors noted that it often is impossible to
distinguish between a unilateral waiver
of a right and a workout agreed to by
the parties in which only the holder of
the instrument makes meaningful con-
cessions. Moreover, in the case of a
prepayable debt instrument, the holder’s
waiver of rights may be an inducement
to the obligor not to terminate the debt
instrument.
In defining when an alteration is a
modification, the final regulations also
generally retain the rule that a change in
a term of a debt instrument that occurs
by operation of the terms of a debt
instrument is not a modification. A
change may occur by operation of the
terms of an instrument at a specified
time, as a result of a contingency speci-
fied in the instrument, or upon the
exercise of an option provided for in the
instrument to change a term.
The final regulations limit the appli-
cation of the rule for changes that occur
by operation of the terms of a debt
instrument in three respects. First, the
final regulations retain the rule of the
proposed regulations that any alteration
that results in an instrument or property
right that is not debt for federal income
tax purposes is a modification, even if
the alteration occurs by operation of the
terms of the instrument (unless the alter-
ation occurs pursuant to a holder’s op-
tion under the terms of the instrument to
convert the instrument into equity of the
issuer). Second, the final regulations
also provide that any alteration that
results in a substitution of a new obli-
gor, the addition or deletion of a co-
obligor, or a change in the recourse
nature of an instrument is a modifica-
tion. The IRS and Treasury believe that
these changes may be so fundamental
that they should be considered modifica-
tions even if they occur by operation of
the terms of an instrument. Thus, these
modifications always must be tested for
significance to determine whether they
result in exchanges.
Third, the final regulations provide
that alterations resulting from the exer-
cise of either of two categories of
options are modifications. These two
categories of options are (i) those that
are not unilateral (defined essentially in
the same manner as in the proposed
regulations) and (ii) holder options the
exercise of which results in a deferral or
a reduction in any scheduled payment of
interest or principal. Because alterations
resulting from the exercise of such op-
tions typically involve either negotia-
tions between an issuer and holder or a
workout, the IRS and Treasury believe it
is appropriate to treat them as modifica-
tions and test for significance. In this
regard, the rule for holder options result-
ing in deferrals or reductions of pay-
ments addresses more specifically the
concerns underlying the proposed regu-
lations’ rule discussed above regarding
unilateral waivers that rise to the level
of a settlement of the terms.
Many commentators argued that the
proposed regulations are overly restric-
tive in recognizing only temporary non-
performance by the issuer and tempo-
rary waivers of default rights by holders
as not being modifications. In particular,
commentators expressed concern about
an example in the proposed regulations
that illustrates the temporary waiver rule
with a situation in which the waiver is
only for a 3-month period. The IRS and
Treasury recognize that parties may
need a period of time to modify the
terms of a debt instrument following an
issuer’s default and that a holder’s
waiver or nonenforcement of default
rights may not itself evidence an agree-
ment with respect to new terms.
The final regulations respond to these
comments in two respects. First, the
regulations provide that nonperformance
by the issuer is not, in and of itself, a
modification. Second, the regulations
provide a limited exception to the rule
that a waiver of rights is a modification.
Under this exception, absent an actual
written or oral agreement by the issuer
and the holder to alter other terms of the
instrument, an agreement by the holder
to stay collection or temporarily waive
an acceleration clause or similar default
right is not a modification for a period
of two years following the issuer’s non-
performance, or for a longer period
(after the initial two-year period) during
which the parties conduct good faith
negotiations or during the pendency of
bankruptcy proceedings. Once the par-
ties agree to new terms, however, there
is a modification of the instrument.
As under the proposed regulations, a
modification is tested when the parties
agree to a change even if the change is
not immediately effective, but the final
regulations add exceptions for a change
in a term that is agreed to by the parties
but is subject to reasonable closing
conditions or that occurs as a result of
bankruptcy proceedings. In these cases,
a modification occurs on the date the
change in the term becomes effective.
6

Thus, if the conditions do not occur
(and the change in the term does not
become effective), a modification does
not occur.
D. Significant modifications
The final regulations retain the struc-
ture of the proposed regulations for
determining whether a modification is
significant, but change a number of the
specific rules for particular types of
modifications. The final regulations also
add a new general rule for types of
modifications for which specific rules
are not provided. Under this general rule
(the general significance rule), a modifi-
cation is significant if, based on all the
facts and circumstances, the legal rights
or obligations being changed and the
degree to which they are being changed
are economically significant. The gen-
eral significance rule also applies to a
type of modification for which specific
rules are provided if the modification is
effective upon the occurrence of a sub-
stantial contingency. Moreover, the gen-
eral significance rule will apply for
certain types of modifications that are
effective on a substantially deferred ba-
sis. When testing a modification under
the general significance rule, all modifi-
cations made to the instrument (other
than those for which specific bright-line
rules are provided) are considered col-
lectively. Thus, a series of related modi-
fications, each of which independently is
not significant under the general signifi-
cance rule, may together constitute a
significant modification.
With the addition of the general sig-
nificance rule, certain specific rules of
the proposed regulations have not been
included in the final regulations. For
example, under the proposed regula-
tions, whether the addition or deletion of
a put or call right is a significant
modification depends on the value of
the put or call. The significance of an
alteration of a put or call right depends
on whether the alteration significantly
affects the value of the right. The pro-
posed regulations provide similar rules
for the addition, deletion, or alteration
of a conversion or exchange right. Un-
der the proposed regulations, certain
changes in the types of payments under
a debt instrument (for example, a
change from a fixed rate debt instrument
to a variable rate or contingent payment
debt instrument) are significant modifi-
cations. These rules have not been in-
cluded in the final regulations because
the general significance rule provides
adequate guidance.
For changes in the yield of a debt
instrument, the final regulations provide
that a change in yield is significant if
the change exceeds the greater of 25
basis points or five percent of the
original yield on the instrument. This
rule was modified in response to com-
ments that a change of more than 25
basis points should be permitted in the
case of debt instruments issued with
high interest rates. The final regulations
also limit this change-of-yield bright-
line rule to fixed rate and variable rate
debt instruments. Because of the diffi-
culties in developing appropriate mecha-
nisms for measuring changes in the
yield of other debt instruments (for
example, contingent payment debt in-
struments), the final regulations provide
that the significance of changes in the
yield of those other instruments is deter-
mined under the general significance
rule. The final regulations also incorpo-
rate other technical changes to clarify
the application of the change-in-yield
rules.
The final regulations do not adopt the
suggestion of some commentators that a
reduction in the principal amount of a
debt instrument should not be consid-
ered a modification. As under the pro-
posed regulations, for purposes of deter-
mining if there is a significant
modification, the yield on the modified
instrument is computed by reference to
the adjusted issue price immediately
before the modification. A reduction in
principal reduces the total payments on
the modified instrument and often re-
sults in a significantly reduced yield on
the instrument. Thus, these rules give
the same weight to changes in the
principal amount as to changes in the
interest payments. The IRS and Treasury
believe that the tax consequences of a
change in the yield that results from a
change in the amounts payable should
not differ because of the characterization
of the payments that are reduced as
principal rather than interest.
For changes in the timing of pay-
ments (including any resulting change in
the amount of payments), the proposed
regulations contain a rule that an exten-
sion of the final maturity of an instru-
ment for the lesser of five years or 50
percent of the original term of the
instrument is not a significant modifica-
tion. Any other change in the timing of
payments is subject to two rules. Under
the first rule, any material deferral of
payments is a significant modification.
Under the second rule, any change in
terms designed to avoid the application
of the rules for original issue discount is
a significant modification. Commenta-
tors objected to both of these rules
because they do not provide bright-line
rules for determining whether a modifi-
cation is significant. In addition, the
commentators argued that an example in
the proposed regulations that concerns
the deferral of interim payments is in-
consistent with the rule for an extension
of final maturity.
The final regulations combine the
rules for extensions of final maturity
and other changes in the timing and/or
amounts of payments. While adopting
the material deferral rule generally, the
final regulations also allow the deferral
of payments within a safe-harbor period
(the lesser of five years or 50 percent of
the original term of the instrument) if
the deferred amounts are unconditionally
payable at the end of that period. The
final regulations do not contain the rule
that the Commissioner may treat any
deferral of payments made with a prin-
cipal purpose of avoiding the time value
of money rules, including the rules for
original issue discount, as a significant
modification. The concerns addressed by
this rule in the proposed regulations
have been resolved in final regulations
recently issued under section 1275. See
§ 1.1275–2(j).
For a change in the obligor on an
instrument, the final regulations retain
the general rule in the proposed regula-
tions that changing the obligor on a
recourse debt instrument is significant.
In addition to the exception for section
381(a) transactions in the proposed
regulations, the final regulations include
an exception for transactions in which
the new obligor acquires substantially
all of the assets of the original obligor.
Each exception must meet two require-
ments. First, other than the substitution
of a new obligor, the transaction must
not result in any alteration that would be
a significant modification but for the
fact that it occurs by operation of the
terms of the instrument. Second, the
transaction must not result in a change
in payment expectations. The final regu-
lations also provide that the substitution
of a new obligor on a tax-exempt bond
is not a significant modification if the
new obligor is a related entity to the
original obligor and the collateral secur-
ing the instrument continues to include
the original collateral.
A change in payment expectations
occurs if there is a substantial enhance-
ment or impairment of the obligor’s
capacity to meet its payment obligations
7

under the instrument and the enhance-
ment or impairment results in a change
to an adequate capacity from a specula-
tive capacity or vice versa. There is no
change in payment expectations, how-
ever, if the obligor has at least an
adequate capacity to meet its payment
obligations both before and after the
modification.
The final regulations also apply the
payment expectations test to determine
whether the addition or deletion of a
co-obligor is a significant modification.
Similarly, the final regulations provide
that whether certain other modifications
are significant is determined by refer-
ence to whether the modifications result
in a change in payment expectations.
Those modifications include (i) the re-
lease, substitution, or addition of collat-
eral as security for a recourse debt, (ii)
the addition, deletion, or alteration of a
guarantee or other credit enhancement,
and (iii) a change in the priority of a
debt instrument. As under the proposed
regulations, a modification that releases,
substitutes, or adds a substantial amount
of collateral as security for a
nonrecourse debt instrument is a signifi-
cant modification.
A number of commentators raised
questions regarding the circumstances
under which the modification of a debt
instrument will require a determination
of whether the modified instrument is
debt or equity. Many expressed concern
that a deterioration in the financial con-
dition of the issuer between the date of
original issuance and the date of the
modification could lead to a determina-
tion that the modified instrument is not
debt for tax purposes. The final regula-
tions address this concern by providing
a rule that for purposes of this regula-
tion, unless there is a substitution of a
new obligor, any deterioration in the
financial condition of the issuer is not
considered in determining whether the
modified instrument is properly charac-
terized as debt.
The final regulations also modify the
rules pertaining to the significance of
changes in the method under which
payments are calculated. The proposed
regulations provide that a modification
is significant if it results in a change
between the categories of fixed rate,
variable rate, and contingent payment
instruments or if it changes the currency
in which payment under the debt instru-
ment is made. The Treasury and the IRS
determined that such an approach was
both too broad and too narrow (i.e.,
certain changes involving economically
insignificant adjustments would be char-
acterized as significant, while other
more economically dramatic changes
would not be characterized as signifi-
cant). Accordingly, the final regulations
do not provide any bright-line rules so
that the significance of any change in
the method under which payments are
calculated is determined under the gen-
eral significance rule.
The final regulations adopt the rule of
the proposed regulations that a change
in the recourse nature of an instrument
is a significant modification, but limit
this specific rule to changes from sub-
stantially all recourse to substantially all
nonrecourse, or vice versa. If an instru-
ment is not substantially all recourse or
not substantially all nonrecourse either
before or after a modification, the sig-
nificance of the modification is deter-
mined under the general significance
rule. The final regulations also provide
two exceptions. First, a modification
that changes a recourse debt instrument
to a nonrecourse debt instrument is not
a significant modification if the instru-
ment continues to be secured only by
the original collateral and the modifica-
tion does not result in a change in
payment expectations. Second, a
defeasance of a tax-exempt bond permit-
ted by the terms of the instrument
generally is not a significant modifica-
tion.
E. Rules of application
The rules of application in the final
regulations are similar to those in the
proposed regulations. In general, the
final regulations treat a series of
changes of an instrument over time as a
single change. To avoid the need to
retain information for all modifications
that affect yield over the life of the debt
instrument, however, the final regula-
tions add a rule that, for changes in the
yield, modifications occurring more than
five years earlier are disregarded.
The final regulations do not adopt the
suggestion of commentators that the
rules in § 1.1001–3 should not apply to
tax-exempt bonds. These commentators
stated that, as a result of an intervening
change in the Internal Revenue Code
(Code) or regulations, a significant
modification could result in bonds that
were tax-exempt when issued ceasing to
be tax-exempt bonds. Because many
changes in the Code and regulations
have been made applicable to refunding
bonds, it is appropriate that changes to
outstanding tax-exempt bonds that are,
in substance, the equivalent of refund-
ings be treated as such. The IRS and
Treasury believe that the standards used
under § 1.1001–3 generally are appro-
priate for this purpose.
In response to other comments, a
number of changes have been made to
better coordinate the final regulations
with municipal financing practices. The
regulations clarify that state and local
bonds (other than those financing con-
duit loans) are treated as recourse obli-
gations for purposes of determining
whether a modification is significant.
State and local bonds financing conduit
loans are nonrecourse only if there is no
recourse to either the actual issuer or the
conduit borrower. In the case of bonds
financing conduit loans, the final regula-
tions clarify that the obligor of a tax-
exempt bond is the entity that issues the
bond and not the conduit borrower. The
regulations note, however, that a trans-
action between a holder of a tax-exempt
bond and a conduit borrower may result
in an indirect modification of the tax-
exempt bond.
F. Other matters
The preamble to the proposed regula-
tions indicates that Notice 88–130
(1988–2 C.B. 543), which provides spe-
cial rules for qualified tender bonds, will
continue to apply. The final regulations
continue this approach, and thus do not
apply for purposes of determining
whether tax-exempt bonds that are
qualified tender bonds are reissued for
purposes of sections 103 and 141
through 150. The IRS and Treasury are
reviewing the rules of Notice 88–130
and intend to issue proposed regulations
on this subject under section 150. When
the final regulations are issued under
section 150, the exclusion for qualified
tender bonds in § 1.1001–3 will be
revised or eliminated as appropriate.
Also, as noted in the preamble to the
proposed regulations, a modification of
a debt instrument that results in an
exchange under section 1001 does not
determine if there has been an exchange
or other disposition of an installment
obligation under section 453B. Whether
or not there has been an exchange or
other disposition of an installment obli-
gation is determined under the cases and
rulings applicable to section 453B. Simi-
larly, the fact that an alteration does not
constitute a modification or a significant
modification does not preclude other tax
consequences.
Simultaneously with the issuance of
these final regulations, the IRS and
Treasury are issuing temporary and pro-
8

posed regulations under section 166.
Those regulations allow taxpayers, in
certain limited situations, to claim a
deduction for a partially worthless debt
when the terms of a debt instrument are
modified. Commentators on the pro-
posed regulations noted that section 166
permits a deduction for a partially
worthless debt only in the year that the
taxpayer makes a partial charge-off for
book accounting purposes. A significant
modification of a debt instrument that
has been partially charged off may result
in the recognition of gain and an in-
creased tax basis in the instrument.
Because the book charge-off is not re-
versed, however, the taxpayer cannot
take another charge-off, and thus the
taxpayer cannot meet the requirement
for a deduction for a partially worthless
debt under section 166. In this situation,
the temporary and proposed regulations
deem the charge-off to have occurred at
the time of the significant modification
if certain requirements are met.
Effective Dates
The final regulation applies to alter-
ations of the terms of a debt instrument
on or after September 24, 1996. Taxpay-
ers, however, may rely on this section
for alterations of the terms of a debt
instrument after December 2, 1992, and
before September 24, 1996.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply to these regula-
tions, and, therefore, a Regulatory Flex-
ibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Rev-
enue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Small Business
Administration for comment on its im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Thomas J. Kelly, Office of
Assistant Chief Counsel (Financial Insti-
tutions & Products), IRS. However,
other personnel from the IRS and the
Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1001–3 is added to
read as follows:
§ 1.1001–3 Modifications of debt in-
struments.
(a)Scope—(1)In general.This sec-
tion provides rules for determining
whether a modification of the terms of a
debt instrument results in an exchange
for purposes of § 1.1001–1(a). This sec-
tion applies to any modification of a
debt instrument, regardless of the form
of the modification. For example, this
section applies to an exchange of a new
instrument for an existing debt instru-
ment, or to an amendment of an existing
debt instrument. This section also ap-
plies to a modification of a debt instru-
ment that the issuer and holder accom-
plish indirectly through one or more
transactions with third parties. This sec-
tion, however, does not apply to ex-
changes of debt instruments between
holders.
(2)Qualified tender bonds.This sec-
tion does not apply for purposes of
determining whether tax-exempt bonds
that are qualified tender bonds are reis-
sued for purposes of sections 103 and
141 through 150.
(b)General rule.For purposes of
§ 1.1001–1(a), a significant modifica-
tion of a debt instrument, within the
meaning of this section, results in an
exchange of the original debt instrument
for a modified instrument that differs
materially either in kind or in extent. A
modification that is not a significant
modification is not an exchange for
purposes of § 1.1001–1(a). Paragraphs
(c) and (d) of this section define the
termmodificationand contain examples
illustrating the application of the rule.
Paragraphs (e) and (f) of this section
provide rules for determining when a
modification is a significant modifica-
tion. Paragraph (g) of this section con-
tains examples illustrating the applica-
tion of the rules in paragraphs (e) and
(f) of this section.
(c)Modification defined—(1)In gen-
eral—(i)Alteration of terms.A modifi-
cation means any alteration, including
any deletion or addition, in whole or in
part, of a legal right or obligation of the
issuer or a holder of a debt instrument,
whether the alteration is evidenced by
an express agreement (oral or written),
conduct of the parties, or otherwise.
(ii)Alterations occurring by opera-
tion of the terms of a debt instrument.
Except as provided in paragraph (c)(2)
of this section, an alteration of a legal
right or obligation that occurs by opera-
tion of the terms of a debt instrument is
not a modification. An alteration that
occurs by operation of the terms may
occur automatically (for example, an
annual resetting of the interest rate
based on the value of an index or a
specified increase in the interest rate if
the value of the collateral declines from
a specified level) or may occur as a
result of the exercise of an option
provided to an issuer or a holder to
change a term of a debt instrument.
(2)Exceptions.The alterations de-
scribed in this paragraph (c)(2) are
modifications, even if the alterations
occur by operation of the terms of a
debt instrument.
(i)Change in obligor or nature of
instrument.An alteration that results in
the substitution of a new obligor, the
addition or deletion of a co-obligor, or a
change (in whole or in part) in the
recourse nature of the instrument (from
recourse to nonrecourse or from
nonrecourse to recourse) is a modifica-
tion.
(ii)Property that is not debt.An
alteration that results in an instrument or
property right that is not debt for federal
income tax purposes is a modification
unless the alteration occurs pursuant to a
holder’s option under the terms of the
instrument to convert the instrument into
equity of the issuer (notwithstanding
paragraph (c)(2)(iii) of this section).
(iii)Certain alterations resulting from
the exercise of an option.An alteration
that results from the exercise of an
option provided to an issuer or a holder
to change a term of a debt instrument is
a modification unless—
(A) The option is unilateral (as de-
fined in paragraph (c)(3) of this sec-
tion); and
(B) In the case of an option exercis-
able by a holder, the exercise of the
option does not result in (or, in the case
of a variable or contingent payment, is
not reasonably expected to result in) a
deferral of, or a reduction in, any sched-
uled payment of interest or principal.
(3)Unilateral option.For purposes of
this section, an option is unilateral only
9

if, under the terms of an instrument or
under applicable law—
(i) There does not exist at the time
the option is exercised, or as a result of
the exercise, a right of the other party to
alter or terminate the instrument or put
the instrument to a person who is re-
lated (within the meaning of section
267(b) or section 707(b)(1)) to the is-
suer;
(ii) The exercise of the option does
not require the consent or approval of—
(A) The other party;
(B) A person who is related to that
party (within the meaning of section
267(b) or section 707(b)(1)), whether or
not that person is a party to the instru-
ment; or
(C) A court or arbitrator; and
(iii) The exercise of the option does
not require consideration (other than
incidental costs and expenses relating to
the exercise of the option), unless, on
the issue date of the instrument, the
consideration is a de minimis amount, a
specified amount, or an amount that is
based on a formula that uses objective
financial information (as defined in
§ 1.446–3(c)(4)(ii))/
(4)Failure to perform—(i)In gen-
eral.The failure of an issuer to perform
its obligations under a debt instrument is
not itself an alteration of a legal right or
obligation and is not a modification.
(ii)Holder’s temporary forbearance.
Notwithstanding paragraph (c)(1) of this
section, absent a written or oral agree-
ment to alter other terms of the debt
instrument, an agreement by the holder
to stay collection or temporarily waive
an acceleration clause or similar default
right (including such a waiver following
the exercise of a right to demand pay-
ment in full) is not a modification
unless and until the forbearance remains
in effect for a period that exceeds—
(A) Two years following the issuer’s
initial failure to perform; and
(B) Any additional period during
which the parties conduct good faith
negotiations or during which the issuer
is in a title 11 or similar case (as
defined in section 368(a)(3)(A)).
(5)Failure to exercise an option.If a
party to a debt instrument has an option
to change a term of an instrument, the
failure of the party to exercise that
option is not a modification.
(6)Time of modification—(i)In gen-
eral.Except as provided in this para-
graph (c)(6), an agreement to change a
term of a debt instrument is a modifica-
tion at the time the issuer and holder
enter into the agreement, even if the
change in the term is not immediately
effective.
(ii)Closing conditions.If the parties
condition a change in a term of a debt
instrument on reasonable closing condi-
tions (for example, shareholder, regula-
tory, or senior creditor approval, or
additional financing), a modification oc-
curs on the closing date of the agree-
ment. Thus, if the reasonable closing
conditions do not occur so that the
change in the term does not become
effective, a modification does not occur.
(iii)Bankruptcy proceedings.If a
change in a term of a debt instrument
occurs pursuant to a plan of reorganiza-
tion in a title 11 or similar case (within
the meaning of section 368(a)(3)(A)), a
modification occurs upon the effective
date of the plan. Thus, unless the plan
becomes effective, a modification does
not occur.
(d)Examples.The following ex-
amples illustrate the provisions of para-
graph (c) of this section:
Example 1. Reset bond.A bond provides for the
interest rate to be reset every 49 days through an
auction by a remarketing agent. The reset of the
interest rate occurs by operation of the terms of
the bond and is not an alteration described in
paragraph (c)(2) of this section. Thus, the reset of
the interest rate is not a modification.
Example 2. Obligation to maintain collateral.
The original terms of a bond provide that the bond
must be secured by a certain type of collateral
having a specified value. The terms also require
the issuer to substitute collateral if the value of the
original collateral decreases. Any substitution of
collateral that is required to maintain the value of
the collateral occurs by operation of the terms of
the bond and is not an alteration described in
paragraph (c)(2) of this section. Thus, such a
substitution of collateral is not a modification.
Example 3. Alteration contingent on an act of a
party.The original terms of a bond provide that
the interest rate is 9 percent. The terms also
provide that, if the issuer files an effective regis-
tration statement covering the bonds with the
Securities and Exchange Commission, the interest
rate will decrease to 8 percent. If the issuer
registers the bond, the resulting decrease in the
interest rate occurs by operation of the terms of
the bond and is not an alteration described in
paragraph (c)(2) of this section. Thus, such a
decrease in the interest rate is not a modification.
Example 4. Substitution of a new obligor occur-
ring by operation of the terms of the debt
instrument.Under the original terms of a bond
issued by a corporation, an acquirer of substan-
tially all of the corporation’s assets may assume
the corporation’s obligations under the bond. Sub-
stantially all of the corporation’s assets are ac-
quired by another corporation and the acquiring
corporation becomes the new obligor on the bond.
Under paragraph (c)(2)(i) of this section, the
substitution of a new obligor, even though it
occurs by operation of the terms of the bond, is a
modification.
Example 5. Defeasance with release of cov-
enants.(i) A corporation issues a 30-year, recourse
bond. Under the terms of the bond, the corporation
may secure a release of the financial and restric-
tive covenants by placing in trust government
securities as collateral that will provide interest
and principal payments sufficient to satisfy all
scheduled payments on the bond. The corporation
remains obligated for all payments, including the
contribution of additional securities to the trust if
necessary to provide sufficient amounts to satisfy
the payment obligations. Under paragraph (c)(3) of
this section, the option to defease the bond is a
unilateral option.
(ii) The alterations occur by operation of the
terms of the debt instrument and are not described
in paragraph (c)(2) of this section. Thus, such a
release of the covenants is not a modification.
Example 6. Legal defeasance.Under the terms
of a recourse bond, the issuer may secure a release
of the financial and restrictive covenants by plac-
ing in trust government securities that will provide
interest and principal payments sufficient to satisfy
all scheduled payments on the bond. Upon the
creation of the trust, the issuer is released from
any recourse liability on the bond and has no
obligation to contribute additional securities to the
trust if the trust funds are not sufficient to satisfy
the scheduled payments on the bond. The release
of the issuer is an alteration described in para-
graph (c)(2)(i) of this section, and thus is a
modification.
Example 7. Exercise of an option by a holder
that reduces amounts payable.(i) A financial
institution holds a residential mortgage. Under the
original terms of the mortgage, the financial
institution has an option to decrease the interest
rate. The financial institution anticipates that, if
market interest rates decline, it may exercise this
option in lieu of the mortgagor refinancing with
another lender.
(ii) The financial institution exercises the option
to reduce the interest rate. The exercise of the
option results in a reduction in scheduled pay-
ments and is an alteration described in paragraph
(c)(2)(iii) of this section. Thus, the change in
interest rate is a modification.
Example 8. Conversion of adjustable rate to
fixed rate mortgage.(i) The original terms of a
mortgage provide for a variable interest rate, reset
annually based on the value of an objective index.
Under the terms of the mortgage, the mortgagor
may, upon the payment of a fee equal to a
specified percentage of the outstanding principal
amount of the mortgage, convert to a fixed rate of
interest as determined based on the value of a
second objective index. The exercise of the option
does not require the consent or approval of any
person or create a right of the holder to alter the
terms of, or to put, the instrument.
(ii) Because the required consideration to exer-
cise the option is a specified amount fixed on the
issue date, the exercise of the option is unilateral
as defined in paragraph (c)(3) of this section. The
conversion to a fixed rate of interest is not an
alteration described in paragraph (c)(2) of this
section. Thus, the change in the type of interest
rate occurs by operation of the terms of the
instrument and is not a modification.
Example 9. Holder’s option to increase interest
rate.(i) A corporation issues an 8-year note to a
bank in exchange for cash. Under the terms of the
note, the bank has the option to increase the rate
of interest by a specified amount upon a certain
decline in the corporation’s credit rating. The
bank’s right to increase the interest rate is a
unilateral option as described in paragraph (c)(3)
of this section.
(ii) The credit rating of the corporation declines
below the specified level. The bank exercises its
option to increase the rate of interest. The increase
10

in the rate of interest occurs by operation of the
terms of the note and does not result in a deferral
or a reduction in the scheduled payments or any
other alteration described in paragraph (c)(2) of
this section. Thus, the change in interest rate is not
a modification.
Example 10. Issuer’s right to defer payment of
interest.A corporation issues a 5-year note. Under
the terms of the note, interest is payable annually
at the rate of 10 percent. The corporation, how-
ever, has an option to defer any payment of
interest until maturity. For any payments that are
deferred, interest will compound at a rate of 12
percent. The exercise of the option, which results
in the deferral of payments, does not result from
the exercise of an option by the holder. The
exercise of the option occurs by operation of the
terms of the debt instrument and is not a modifica-
tion.
Example 11. Holder’s option to grant deferral of
payment.(i) A corporation issues a 10-year note to
a bank in exchange for cash. Interest on the note
is payable semi-annually. Under the terms of the
note, the bank may grant the corporation the right
to defer all or part of the interest payments. For
any payments that are deferred, interest will
compound at a rate 150 basis points greater than
the stated rate of interest.
(ii) The corporation encounters financial diffi-
culty and is unable to satisfy its obligations under
the note. The bank exercises its option under the
note and grants the corporation the right to defer
payments. The exercise of the option results in a
right of the corporation to defer scheduled pay-
ments and, under paragraph (c)(3)(i) of this sec-
tion, is not a unilateral option. Thus, the alteration
is described in paragraph (c)(2)(iii) of this section
and is a modification.
Example 12. Alteration requiring consent.The
original terms of a bond include a provision that
the issuer may extend the maturity of the bond
with the consent of the holder. Because any
extension pursuant to this term requires the con-
sent of both parties, such an extension does not
occur by the exercise of a unilateral option (as
defined in paragraph (c)(3) of this section) and is
a modification.
Example 13. Waiver of an acceleration clause.
Under the terms of a bond, if the issuer fails to
make a scheduled payment, the full principal
amount of the bond is due and payable immedi-
ately. Following the issuer’s failure to make a
scheduled payment, the holder temporarily waives
its right to receive the full principal for a period
ending one year from the date of the issuer’s
default to allow the issuer to obtain additional
financial resources. Under paragraph (c)(4)(ii) of
this section, the temporary waiver in this situation
is not a modification. The result would be the
same if the terms provided the holder with the
right to demand the full principal amount upon the
failure of the issuer to make a scheduled payment
and, upon such a failure, the holder exercised that
right and then waived the right to receive the
payment for one year.
(e)Significant modifications.Whether
the modification of a debt instrument is
a significant modification is determined
under the rules of this paragraph (e).
Paragraph (e)(1) of this section provides
a general rule for determining the sig-
nificance of modifications not otherwise
addressed in this paragraph (e). Para-
graphs (e)(2) through (6) of this section
provide specific rules for determining
the significance of certain types of
modifications. Paragraph (f) of this sec-
tion provides rules of application, in-
cluding rules for modifications that are
effective on a deferred basis or upon the
occurrence of a contingency.
(1)General rule.Except as otherwise
provided in paragraphs (e)(2) through
(e)(6) of this section, a modification is a
significant modification only if, based
on all facts and circumstances, the legal
rights or obligations that are altered and
the degree to which they are altered are
economically significant. In making a
determination under this paragraph
(e)(1), all modifications to the debt
instrument (other than modifications
subject to paragraphs (e)(2) through (6)
of this section) are considered collec-
tively, so that a series of such modifica-
tions may be significant when consid-
ered together although each
modification, if considered alone, would
not be significant.
(2)Change in yield—(i)Scope of
rule.This paragraph (e)(2) applies to
debt instruments that provide for only
fixed payments, debt instruments with
alternative payment schedules subject to
§ 1.1272–1(c), debt instruments that
provide for a fixed yield subject to
§ 1.1272–1(d) (such as certain demand
loans), and variable rate debt instru-
ments. Whether a change in the yield of
other debt instruments (for example, a
contingent payment debt instrument) is a
significant modification is determined
under paragraph (e)(1) of this section.
(ii)In general.A change in the yield
of a debt instrument is a significant
modification if the yield computed un-
der paragraph (e)(2)(iii) of this section
varies from the annual yield on the
unmodified instrument (determined as of
the date of the modification) by more
than the greater of—
(A) ¼ of one percent (25 basis
points); or
(B) 5 percent of the annual yield of
the unmodified instrument (.05 x annual
yield).
(iii)Yield of the modified instru-
ment—(A)In general.The yield com-
puted under this paragraph (e)(2)(iii) is
the annual yield of a debt instrument
with—
(1) an issue price equal to the ad-
justed issue price of the unmodified
instrument on the date of the modifica-
tion (increased by any accrued but un-
paid interest and decreased by any ac-
crued bond issuance premium not yet
taken into account, and increased or
decreased, respectively, to reflect pay-
ments made to the issuer or to the
holder as consideration for the modifica-
tion); and
(2) payments equal to the payments
on the modified debt instrument from
the date of the modification.
(B)Prepayment penalty.For purposes
of this paragraph (e)(2)(iii), a commer-
cially reasonable prepayment penalty for
a pro rata prepayment (as defined in
§ 1.1275–2(f)) is not consideration for a
modification of a debt instrument and is
not taken into account in determining
the yield of the modified instrument.
(iv)Variable rate debt instruments.
For purposes of this paragraph (e)(2),
the annual yield of a variable rate debt
instrument is the annual yield of the
equivalent fixed rate debt instrument (as
defined in § 1.1275–5(e)) which is con-
structed based on the terms of the
instrument (either modified or unmodi-
fied, whichever is applicable) as of the
date of the modification.
(3)Changes in timing of payments—
(i)In general.A modification that
changes the timing of payments (includ-
ing any resulting change in the amount
of payments) due under a debt instru-
ment is a significant modification if it
results in the material deferral of sched-
uled payments. The deferral may occur
either through an extension of the final
maturity date of an instrument or
through a deferral of payments due prior
to maturity. The materiality of the defer-
ral depends on all the facts and circum-
stances, including the length of the
deferral, the original term of the instru-
ment, the amounts of the payments that
are deferred, and the time period be-
tween the modification and the actual
deferral of payments.
(ii)Safe-harbor period.The deferral
of one or more scheduled payments
within the safe-harbor period is not a
material deferral if the deferred pay-
ments are unconditionally payable no
later than at the end of the safe-harbor
period. The safe-harbor period begins on
the original due date of the first sched-
uled payment that is deferred and ex-
tends for a period equal to the lesser of
five years or 50 percent of the original
term of the instrument. For purposes of
this paragraph (e)(3)(ii), the term of an
instrument is determined without regard
to any option to extend the original
maturity and deferrals of de minimis
payments are ignored. If the period
during which payments are deferred is
less than the full safe-harbor period, the
unused portion of the period remains a
11

safe-harbor period for any subsequent
deferral of payments on the instrument.
(4)Change in obligor or security—
(i)Substitution of a new obligor on
recourse debt instruments—(A)In gen-
eral.Except as provided in paragraph
(e)(4)(i)(B), (C), or (D) of this section,
the substitution of a new obligor on a
recourse debt instrument is a significant
modification.
(B)Section 381(a) transaction.The
substitution of a new obligor is not a
significant modification if the acquiring
corporation (within the meaning of sec-
tion 381) becomes the new obligor
pursuant to a transaction to which sec-
tion 381(a) applies, the transaction does
not result in a change in payment expec-
tations, and the transaction (other than a
reorganization within the meaning of
section 368(a)(1)(F)) does not result in a
significant alteration.
(C)Certain asset acquisitions.The
substitution of a new obligor is not a
significant modification if the new obli-
gor acquires substantially all of the
assets of the original obligor, the trans-
action does not result in a change in
payment expectations, and the transac-
tion does not result in a significant
alteration.
(D)Tax-exempt bonds.The substitu-
tion of a new obligor on a tax-exempt
bond is not a significant modification if
the new obligor is a related entity to the
original obligor as defined in section
168(h)(4)(A) and the collateral securing
the instrument continues to include the
original collateral.
(E)Significant alteration.For pur-
poses of this paragraph (e)(4), a signifi-
cant alteration is an alteration that
would be a significant modification but
for the fact that the alteration occurs by
operation of the terms of the instrument.
(F)Section 338 election.For pur-
poses of this section, an election under
section 338 following a qualified stock
purchase of an issuer’s stock does not
result in the substitution of a new
obligor.
(G)Bankruptcy proceedings.For pur-
poses of this section, the filing of a
petition in a title 11 or similar case (as
defined in section 368(a)(3)(A)) by itself
does not result in the substitution of a
new obligor.
(ii)Substitution of a new obligor on
nonrecourse debt instruments.The sub-
stitution of a new obligor on a
nonrecourse debt instrument is not a
significant modification.
(iii)Addition or deletion of co-
obligor.The addition or deletion of a
co-obligor on a debt instrument is a
significant modification if the addition
or deletion of the co-obligor results in a
change in payment expectations. If the
addition or deletion of a co-obligor is
part of a transaction or series of related
transactions that results in the substitu-
tion of a new obligor, however, the
transaction is treated as a substitution of
a new obligor (and is tested under
paragraph (e)(4)(i)) of this section rather
than as an addition or deletion of a
co-obligor.
(iv)Change in security or credit en-
hancement—(A)Recourse debt instru-
ments.A modification that releases, sub-
stitutes, adds or otherwise alters the
collateral for, a guarantee on, or other
form of credit enhancement for a re-
course debt instrument is a significant
modification if the modification results
in a change in payment expectations.
(B)Nonrecourse debt instruments.A
modification that releases, substitutes,
adds or otherwise alters a substantial
amount of the collateral for, a guarantee
on, or other form of credit enhancement
for a nonrecourse debt instrument is a
significant modification. A substitution
of collateral is not a significant modifi-
cation, however, if the collateral is
fungible or otherwise of a type where
the particular units pledged are unimpor-
tant (for example, government securities
or financial instruments of a particular
type and rating). In addition, the substi-
tution of a similar commercially avail-
able credit enhancement contract is not
a significant modification, and an im-
provement to the property securing a
nonrecourse debt instrument does not
result in a significant modification.
(v)Change in priority of debt.A
change in the priority of a debt instru-
ment relative to other debt of the issuer
is a significant modification if it results
in a change in payment expectations.
(vi) Change in payment expecta-
tions—(A)In general.For purposes of
this section, a change in payment expec-
tations occurs if, as a result of a transac-
tion—
(1)
There is a substantial enhance-
ment of the obligor’s capacity to meet
the payment obligations under a debt
instrument and that capacity was prima-
rily speculative prior to the modification
and is adequate after the modification; or
(2) There is a substantial impairment
of the obligor’s capacity to meet the
payment obligations under a debt instru-
ment and that capacity was adequate
prior to the modification and is prima-
rily speculative after the modification.
(B)Obligor’s capacity.The obligor’s
capacity includes any source for pay-
ment, including collateral, guarantees, or
other credit enhancement.
(5)Changes in the nature of a debt
instrument—(i)Property that is not
debt.A modification of a debt instru-
ment that results in an instrument or
property right that is not debt for federal
income tax purposes is a significant
modification. For purposes of this para-
graph (e)(5)(i), any deterioration in the
financial condition of the obligor be-
tween the issue date of the unmodified
instrument and the date of modification
(as it relates to the obligor’s ability to
repay the debt) is not taken into account
unless, in connection with the modifica-
tion, there is a substitution of a new
obligor or the addition or deletion of a
co-obligor.
(ii)Change in recourse nature—(A)
In general.Except as provided in para-
graph (e)(5)(ii)(B) of this section, a
change in the nature of a debt instru-
ment from recourse (or substantially all
recourse) to nonrecourse (or substan-
tially all nonrecourse) is a significant
modification. Thus, for example, a legal
defeasance of a debt instrument in
which the issuer is released from all
liability to make payments on the debt
instrument (including an obligation to
contribute additional securities to a trust
if necessary to provide sufficient funds
to meet all scheduled payments on the
instrument) is a significant modification.
Similarly, a change in the nature of the
debt instrument from nonrecourse (or
substantially all nonrecourse) to recourse
(or substantially all recourse) is a sig-
nificant modification. If an instrument is
not substantially all recourse or not
substantially all nonrecourse either be-
fore or after a modification, the signifi-
cance of the modification is determined
under paragraph (e)(1) of this section.
(B)
Exceptions—(1)Defeasance of
tax-exempt bonds.A defeasance of a
tax-exempt bond is not a significant
modification even if the issuer is released
from any liability to make payments
under the instrument if the defeasance
occurs by operation of the terms of the
original bond and the issuer places in
trust government securities or tax-exempt
government bonds that are reasonably
expected to provide interest and principal
payments sufficient to satisfy the pay-
ment obligations under the bond.
(2)Original collateral.A modifica-
tion that changes a recourse debt instru-
ment to a nonrecourse debt instrument is
not a significant modification if the
12

instrument continues to be secured only
by the original collateral and the modifi-
cation does not result in a change in
payment expectations. For this purpose,
if the original collateral is fungible or
otherwise of a type where the particular
units pledged are unimportant (for ex-
ample, government securities or finan-
cial instruments of a particular type and
rating), replacement of some or all units
of the original collateral with other units
of the same or similar type and aggre-
gate value is not considered a change in
the original collateral.
(6)Accounting or financial cov-
enants.A modification that adds, de-
letes, or alters customary accounting or
financial covenants is not a significant
modification.
(f)Rules of application—(1)Testing
for significance—(A)In general.
Whether a modification of any term is a
significant modification is determined
under each applicable rule in paragraphs
(e)(2) through (6) of this section and, if
not specifically addressed in those rules,
under the general rule in paragraph
(e)(1) of this section. For example, a
deferral of payments that changes the
yield of a fixed rate debt instrument
must be tested under both paragraphs
(e)(2) and (3) of this section.
(B)Contingent modifications.If a
modification described in paragraphs
(e)(2) through (5) of this section is
effective only upon the occurrence of a
substantial contingency, whether or not
the change is a significant modification
is determined under paragraph (e)(1) of
this section rather than under paragraphs
(e)(2) through (5) of this section.
(C)Deferred modifications.If a
modification described in paragraphs
(e)(4) and (5) of this section is effective
on a substantially deferred basis,
whether or not the change is a signifi-
cant modification is determined under
paragraph (e)(1) of this section rather
than under paragraphs (e)(4) and (5) of
this section.
(2)Modifications that are not signifi-
cant.If a rule in paragraphs (e)(2)
through (4) of this section prescribes a
degree of change in a term of a debt
instrument that is a significant modifica-
tion, a change of the same type but of a
lesser degree is not a significant modifi-
cation under that rule. For example, a
20 basis point change in the yield of a
fixed rate debt instrument is not a
significant modification under paragraph
(e)(2) of this section. Likewise, if a rule
in paragraph (e)(4) of this section re-
quires a change in payment expectations
for a modification to be significant, a
modification of the same type that does
not result in a change in payment expec-
tations is not a significant modification
under that rule.
(3)Cumulative effect of modifica-
tions.Two or more modifications of a
debt instrument over any period of time
constitute a significant modification if,
had they been done as a single change,
the change would have resulted in a
significant modification under paragraph
(e) of this section. Thus, for example, a
series of changes in the maturity of a
debt instrument constitutes a significant
modification if, combined as a single
change, the change would have resulted
in a significant modification. The sig-
nificant modification occurs at the time
that the cumulative modification would
be significant under paragraph (e) of
this section. In testing for a change of
yield under paragraph (e)(2) of this
section, however, any prior modification
occurring more than 5 years before the
date of the modification being tested is
disregarded.
(4)Modifications of different terms.
Modifications of different terms of a
debt instrument, none of which sepa-
rately would be a significant modifica-
tion under paragraphs (e)(2) through (6)
of this section, do not collectively con-
stitute a significant modification. For
example, a change in yield that is not a
significant modification under paragraph
(e)(2) of this section and a substitution
of collateral that is not a significant
modification under paragraph (e)(4)(iv)
of this section do not together result in a
significant modification. Although the
significance of each modification is de-
termined independently, in testing a par-
ticular modification it is assumed that
all other simultaneous modifications
have already occurred.
(5)Definitions.For purposes of this
section:
(i)Issuerandobligorare used inter-
changeably and mean the issuer of a
debt instrument or a successor obligor.
(ii)Variable rate debt instrumentand
contingent payment debt instrument
have the meanings given those terms in
section 1275 and the regulations there-
under.
(iii)Tax-exempt bondmeans a state
or local bond that satisfies the require-
ments of section 103(a).
(iv)Conduit loanandconduit bor-
rowerhave the same meanings as in
§ 1.150–1(b).
(6)Certain rules for tax-exempt
bonds—(i)Conduit loans.For purposes
of this section, the obligor of a tax-
exempt bond is the entity that actually
issues the bond and not a conduit bor-
rower of bond proceeds. In determining
whether there is a significant modifica-
tion of a tax-exempt bond, however,
transactions between holders of the tax-
exempt bond and a borrower of a con-
duit loan may be an indirect modifica-
tion under paragraph (a)(1) of this
section. For example, a payment by the
holder of a tax-exempt bond to a con-
duit borrower to waive a call right may
result in an indirect modification of the
tax-exempt bond by changing the yield
on that bond.
(ii)Recourse nature—(A)In general.
For purposes of this section, a tax-
exempt bond that does not finance a
conduit loan is a recourse debt instru-
ment.
(B)Proceeds used for conduit loans.
For purposes of this section, a tax-
exempt bond that finances a conduit
loan is a recourse debt instrument unless
both the bond and the conduit loan are
nonrecourse instruments.
(C)Government securities as collat-
eral.Notwithstanding paragraphs
(f)(6)(ii)(A) and (B) of this section, for
purposes of this section a tax-exempt
bond that is secured only by a trust
holding government securities or tax-
exempt government bonds that are rea-
sonably expected to provide interest and
principal payments sufficient to satisfy
the payment obligations under the bond
is a nonrecourse instrument.
(g)Examples.The following ex-
amples illustrate the provisions of para-
graphs (e) and (f) of this section:
Example 1. Modification of call right.(i) Under
the terms of a 30-year, fixed-rate bond, the issuer
can call the bond for 102 percent of par at the end
of ten years or for 101 percent of par at the end of
20 years. At the end of the eighth year, the holder
of the bond pays the issuer to waive the issuer’s
right to call the bond at the end of the tenth year.
On the date of the modification, the issuer’s credit
rating is approximately the same as when the bond
was issued, but market rates of interest have
declined from that date.
(ii) The holder’s payment to the issuer changes
the yield on the bond. Whether the change in yield
is a significant modification depends on whether
the yield on the modified bond varies from the
yield on the original bond by more than the
change in yield as described in paragraph (e)(2)(ii)
of this section.
(iii) If the change in yield is not a significant
modification, the elimination of the issuer’s call
right must also be tested for significance. Because
the specific rules of paragraphs (e)(2) through
(e)(6) of this section do not address this modifica-
tion, the significance of the modification must be
determined under the general rule of paragraph
(e)(1) of this section.
Example 2. Extension of maturity and change in
yield.(i) A zero-coupon bond has an original
13

maturity of ten years. At the end of the fifth year,
the parties agree to extend the maturity for a
period of two years without increasing the stated
redemption price at maturity (i.e., there are no
additional payments due between the original and
extended maturity dates, and the amount due at
the extended maturity date is equal to the amount
due at the original maturity date).
(ii) The deferral of the scheduled payment at
maturity is tested under paragraph (e)(3) of this
section. The safe-harbor period under paragraph
(e)(3)(ii) of this section starts with the date the
payment that is being deferred is due. For this
modification, the safe-harbor period starts on the
original maturity date, and ends five years from
this date. All payments deferred within this period
are unconditionally payable before the end of the
safe-harbor period. Thus, the deferral of the pay-
ment at maturity for a period of two years is not a
material deferral under the safe-harbor rule of
paragraph (e)(3)(ii) of this section and thus is not
a significant modification.
(iii) Even though the extension of maturity is
not a significant modification under paragraph
(e)(3)(ii) of this section, the modification also
decreases the yield of the bond. The change in
yield must be tested under paragraph (e)(2) of this
section.
Example 3. Change in yield resulting from
reduction of principal.(i) A debt instrument issued
at par has an original maturity of ten years and
provides for the payment of $100,000 at maturity
with interest payments at the rate of 10 percent
payable at the end of each year. At the end of the
fifth year, and after the annual payment of interest,
the issuer and holder agree to reduce the amount
payable at maturity to $80,000. The annual interest
rate remains at 10 percent but is payable on the
reduced principal.
(ii) In applying the change in yield rule of
paragraph (e)(2) of this section, the yield of the
instrument after the modification (measured from
the date that the parties agree to the modification
to its final maturity date) is computed using the
adjusted issue price of $100,000. With four annual
payments of $8,000, and a payment of $88,000 at
maturity, the yield on the instrument after the
modification for purposes of determining if there
has been a significant modification under para-
graph (e)(2)(i) of this section is 4.332 percent.
Thus, the reduction in principal is a significant
modification.
Example 4. Deferral of scheduled interest pay-
ments.(i) A 20-year debt instrument issued at par
provides for the payment of $100,000 at maturity
with annual interest payments at the rate of 10
percent. At the beginning of the eleventh year, the
issuer and holder agree to defer all remaining
interest payments until maturity with compound-
ing. The yield of the modified instrument remains
at 10 percent.
(ii) The safe-harbor period of paragraph
(e)(3)(ii) of this section begins at the end of the
eleventh year, when the interest payment for that
year is deferred, and ends at the end of the
sixteenth year. However, the payments deferred
during this period are not unconditionally payable
by the end of that 5-year period. Thus, the deferral
of the interest payments is not within the safe-
harbor period.
(iii) This modification materially defers the
payments due under the instrument and is a
significant modification under paragraph (e)(3)(i)
of this section.
Example 5. Assumption of mortgage with in-
crease in interest rate.(i) A recourse debt instru-
ment with a 9 percent annual yield is secured by
an office building. Under the terms of the instru-
ment, a purchaser of the building may assume the
debt and be substituted for the original obligor if
the purchaser has a specified credit rating and if
the interest rate on the instrument is increased by
one-half percent (50 basis points). The building is
sold, the purchaser assumes the debt, and the
interest rate increases by 50 basis points.
(ii) If the purchaser’s acquisition of the building
does not satisfy the requirements of paragraphs
(e)(4)(i)(B) or (C) of this section, the substitution
of the purchaser as the obligor is a significant
modification under paragraph (e)(4)(i)(A) of this
section.
(iii) If the purchaser acquires substantially all of
the assets of the original obligor, the assumption
of the debt instrument will not result in a signifi-
cant modification if there is not a change in
payment expectations and the assumption does not
result in a significant alteration.
(iv) The change in the interest rate, if tested
under the rules of paragraph (e)(2) of this section,
would result in a significant modification. The
change in interest rate that results from the
transaction is a significant alteration. Thus, the
transaction does not meet the requirements of
paragraph (e)(4)(i)(E) of this section and is a
significant modification under paragraph
(e)(4)(i)(A) of this section.
Example 6. Assumption of mortgage.(i) A
recourse debt instrument is secured by a building.
In connection with the sale of the building, the
purchaser of the building assumes the debt and is
substituted as the new obligor on the debt instru-
ment. The purchaser does not acquire substantially
all of the assets of the original obligor.
(ii) The transaction does not satisfy any of the
exceptions set forth in paragraph (e)(4)(i)(B) or
(C) of this section. Thus, the substitution of the
purchaser as the obligor is a significant modifica-
tion under paragraph (e)(4)(i)(A) of this section.
(iii) Section 1274(c)(4), however, provides that
if a debt instrument is assumed in connection with
the sale or exchange of property, the assumption is
not taken into account in determining if section
1274 applies to the debt instrument unless the
terms and conditions of the debt instrument are
modified in connection with the sale or exchange.
Because the purchaser assumed the debt instru-
ment in connection with the sale of property and
the debt instrument was not otherwise modified,
the debt instrument is not retested to determine
whether it provides for adequate stated interest.
Example 7. Substitution of a new obligor in
section 381(a) transaction.(i) The interest rate on
a 30-year debt instrument issued by a corporation
provides for a variable rate of interest that is reset
annually on June 1st based on an objective index.
(ii) In the tenth year, the issuer merges (in a
transaction to which section 381(a) applies) into
another corporation that becomes the new obligor
on the debt instrument. The merger occurs on June
1st, at which time the interest rate is also reset by
operation of the terms of the instrument. The new
interest rate varies from the previous interest rate
by more than the greater of 25 basis points and 5
percent of the annual yield of the unmodified
instrument. The substitution of a new obligor does
not result in a change in payment expectations.
(iii) The substitution of the new obligor occurs
in a section 381(a) transaction and does not result
in a change in payment expectations. Although the
interest rate changed by more than the greater of
25 basis points and 5 percent of the annual yield
of the unmodified instrument, this alteration did
not occur as a result of the transaction and is not a
significant alteration under paragraph (e)(4)(i)(E)
of this section. Thus, the substitution meets the
requirements of paragraph (e)(4)(i)(B) of this
section and is not a significant modification.
Example 8. Substitution of credit enhancement
contract.(i) Under the terms of a recourse debt
instrument, the issuer’s obligations are secured by
a letter of credit from a specified bank. The debt
instrument does not contain any provision allow-
ing a substitution of a letter of credit from a
different bank. The specified bank, however, en-
counters financial difficulty and rating agencies
lower its credit rating. The issuer and holder agree
that the issuer will substitute a letter of credit from
another bank with a higher credit rating.
(ii) Under paragraph (e)(4)(iv)(A) of this sec-
tion, the substitution of a different credit enhance-
ment contract is not a significant modification of a
recourse debt instrument unless the substitution
results in a change in payment expectations. While
the substitution of a new letter of credit by a bank
with a higher credit rating does not itself result in
a change in payment expectations, such a substitu-
tion may result in a change in payment expecta-
tions under certain circumstances (for example, if
the obligor’s capacity to meet payment obligations
is dependent on the letter of credit and the
substitution substantially enhances that capacity
from primarily speculative to adequate).
Example 9. Improvement to collateral securing
nonrecourse debt.A parcel of land and its im-
provements, a shopping center, secure a
nonrecourse debt instrument. The obligor expands
the shopping center with the construction of an
additional building on the same parcel of land.
After the construction, the improvements that
secure the nonrecourse debt include the new
building. The building is an improvement to the
property securing the nonrecourse debt instrument
and its inclusion in the collateral securing the debt
is not a significant modification under paragraph
(e)(4)(iv)(B) of this section.
(h)Effective date.This section ap-
plies to alterations of the terms of a debt
instrument on or after September 24,
1996. Taxpayers, however, may rely on
this section for alterations of the terms
of a debt instrument after December 2,
1992, and before September 24, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
June 25, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 26, 1996, 61
F.R. 32926)
Section 3221.—Rate of Tax
Determination of Quarterly Rate of
Excise Tax for Railroad Retirement
Supplemental Annuity Program
In accordance with directions in Sec-
tion 3221(c) of the Railroad Retirement
Tax Act (26 U.S.C. 3221(c)), the Rail-
road Retirement Board has determined
that the excise tax imposed by such
14

Section 3221(c) on every employer, with
respect to having individuals in his
employ, for each work-hour for which
compensation is paid by such employer
for services rendered to him during the
quarter beginning July 1, 1996, shall be
at the rate of 34 cents.
In accordance with directions in Sec-
tion 15(a) of the Railroad Retirement Act
of 1974, the Railroad Retirement Board
has determined that for the quarter begin-
ning July 1, 1996, 33.4 percent of the
taxes collected under Sections 3211(b)
and 3221(c) of the Railroad Retirement
Tax Act shall be credited to the Railroad
Retirement Account and 66.6 percent of
the taxes collected under such Sections
3211(b) and 3221(c) plus 100 percent of
the taxes collected under Section 3221(d)
of the Railroad Retirement Tax Act shall
be credited to the Railroad Retirement
Supplemental Account.
Dated May 29, 1996.
Beatrice Ezerski,
Secretary to the Board.
(Filed by the Office of the Federal Register on
June 5, 1996, 8:45 a.m., and published in the issue
of the Federal Register for June 6, 1996, 61 F.R.
28911)
15

Part III . Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination
letters.
(Also Part I, Sections 25, 103, 143; 1.25–4T,
1.103–1, 6a.103A–2.)
Rev. Proc. 96–37
SECTION 1. PURPOSE
This revenue procedure provides
guidance concerning the United States
and area median gross income figures
that are to be used by issuers of quali-
fied mortgage bonds, as defined in
§ 143(a) of the Internal Revenue Code,
and issuers of mortgage credit certifi-
cates, as defined in § 25(c), in comput-
ing the housing cost/income ratio de-
scribed in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross
income does not include interest on any
state or local bond. Section 103(b)(1)
provides that § 103(a) shall not apply to
any private activity bond that is not a
‘‘qualified bond’’ within the meaning of
§ 141. Section 141(e) provides that the
term ‘‘qualified bond’’ includes any pri-
vate activity bond that (1) is a qualified
mortgage bond, (2) meets the volume
cap requirements under § 146, and (3)
meets the applicable requirements under
§ 147.
.02 Section 143(a)(1) provides that
the term ‘‘qualified mortgage bond’’
means a bond that is issued as part of a
‘‘qualified mortgage issue’’. Section
143(a)(2)(A) provides that the term
‘‘qualified mortgage issue’’ means an
issue of one or more bonds by a state or
political subdivision thereof, but only if
(i) all proceeds of the issue (exclusive
of issuance costs and a reasonably re-
quired reserve) are to be used to finance
owner- occupied residences; (ii) the is-
sue meets the requirements of subsec-
tions (c),(d),(e),(f),(g),(h),(i), and (m)(7)
of § 143; (iii) the issue does not meet
the private business tests of paragraphs
(1) and (2) of § 141(b); and (iv) with
respect to amounts received more than
10 years after the date of issuance,
repayments of $250,000 or more of
principal on financing provided by the
issue are used not later than the close of
the first semi-annual period beginning
after the date the prepayment (or com-
plete repayment) is received to redeem
bonds that are part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financ-
ing may be provided by qualified mort-
gage bonds. Section 25(c)(2)(A)(iii)(IV)
provides that recipients of mortgage
credit certificates must meet the income
requirements of § 143(f). Generally, un-
der § § 143(f)(1) and 25(c)(2)(A)(iii)-
(IV), these income requirements are met
only if all owner-financing under a
qualified mortgage bond and all certified
indebtedness amounts under a mortgage
credit certificate program are provided
to mortgagors whose family income is
115 percent or less of the applicable
median family income. Under
§ 143(f)(6), the income limitation is
reduced to 100 percent of the applicable
median family income if there are fewer
than three individuals in the family of
the mortgagor.
.04 Section 143(f)(4) provides that
the term ‘‘applicable median family in-
come’’ means the greater of (A) the area
median gross income for the area in
which the residence is located or (B) the
statewide median gross income for the
state in which the residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limita-
tions in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area
median gross income bears to the me-
dian gross income for the United States.
The applicable housing price ratio is the
new housing price ratio (new housing
average purchase price for the area
divided by the new housing average
purchase price for the United States) or
the existing housing price ratio (existing
housing average area purchase price
divided by the existing housing average
purchase price for the United States),
whichever results in the housing cost/
income ratio being closer to 1. This
income adjustment applies only to bonds
issued and nonissued bond amounts
elected after December 31, 1988.
.06 The Department of Housing and
Urban Development (HUD) has com-
puted the median gross income for the
United States, the states, and statistical
areas within the states. The income
information was released to the HUD
regional offices on December 14, 1995,
and may be obtained by calling the
HUD reference service at 1–800–245–
2691, or, in the Washington, D.C., area,
at 301–251–5154. The Internal Revenue
Service annually publishes only the me-
dian gross income for the United States.
.07 The most recent nationwide aver-
age purchase prices and average area
purchase price safe harbor limitations
were published on September 6, 1994,
in Rev. Proc. 94–55, 1994–2 C.B. 716.
SECTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use
$41,600 as the median gross income for
the United States. See section 2.06 of
this revenue procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures re-
leased by HUD on December 14, 1995.
See section 2.06 of this revenue proce-
dure.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 95–32, 1995–28 I.R.B.
6, is obsolete except as provided in
section 5.02 of this revenue procedure.
.02 This revenue procedure does not
affect the effective date provisions of
Rev. Rul. 86–124, 1986–2 C.B. 27.
Those effective date provisions will re-
main operative at least until the Service
publishes a new revenue ruling that
conforms the approach to effective dates
set forth in Rev. Rul. 86–124 to the
general approach taken in this revenue
procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specified in section 3 of this revenue
procedure for commitments to provide
financing that are made, or (if the
purchase precedes the financing commit-
ment) for residences that are purchased,
in the period that begins on December
14, 1995, the date HUD released the
income figures, and ends on the date
when these United States and area me-
dian gross income figures are rendered
obsolete by a new revenue procedure.
.02 Notwithstanding section 5.01 of
this revenue procedure, issuers may con-
tinue to rely on the United States and
area median gross income figures speci-
fied in Rev. Proc. 95–32 with respect to
16

bonds originally sold and nonissued
bond amounts elected not later than
August 14, if the commitments or pur-
chases described in section 5.01 are
made not later than October 14, 1996.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Patricia M. Monahan of
the Office of Assistant Chief Counsel
(Financial Institutions and Products).
For further information regarding this
revenue procedure contact Ms.
Monahan on (202) 622–3219 (not a
toll-free call).
17

Part IV. Items of General Interest
Processing of Returns Filed by
Exempt Organizations to be
Centralized in the Ogden Service
Center
Announcement 96–63
Internal Revenue Service return pro-
cessing of information and tax returns
filed by tax-exempt organizations is be-
ing centralized into the Ogden Service
Center. The centralization will be in two
stages. Beginning July 1, 1996, the
Ogden Service Center will assume the
responsibility for processing exempt or-
ganization returns normally filed in the
Fresno and Cincinnati Service Centers.
Also beginning July 1, 1996, the Ogden
Service Center will assume responsibil-
ity for printing and monitoring the
Supplemental Group Ruling Information
listings, which are sent to parent organi-
zations to assist them in notifying the
Service of changes to their subordinate
groups as required by Revenue Proce-
dure 80–27, 1980–1 C.B. 677.
Beginning January 1, 1997, the
Ogden Service Center will assume the
responsibility for processing exempt or-
ganization returns normally filed in all
other service centers. The forms that are
being centralized in the Ogden Service
Center are Form 990, Form 990–C,
Form 990–EZ, Form 990–PF, Form
990–T, Form 1041–A, Form 4720, Form
5227, Form 5578, and Form 5768.
Forms 990–BL and 6069 will con-
tinue to be filed and processed in the
Cincinnati Service Center. Any form not
listed above should be filed at the
service center listed in the form’s in-
struction as the appropriate service cen-
ter for the area in which the exempt
organization is located.
Exempt organizations that normally
file any of the covered forms at the
Fresno or Cincinnati Service Centers
should, though they are not required to,
file at the Ogden Service Center begin-
ning July 1, 1996, using the following
address: Internal Revenue Service,
Ogden, UT 84201. Exempt organization
returns that are filed at the Fresno or
Cincinnati Service Centers between July
1, 1996, and January 1, 1997, will be
forwarded to the Ogden Service Center.
Exempt organization forms and instruc-
tions will contain the new submission
address when the 1996 editions of the
forms and instructions are printed.
The principal author of this announce-
ment is Thomas J. Miller of the Exempt
Organizations Division, Projects Branch
1. For further information regarding this
announcement contact Mr. Miller on
(202) 622–7867 (not a toll-free call).
Gasoline and Diesel Fuel Excise
Tax; Registration Requirements;
Correction
Announcement 96–64
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regula-
tions.
SUMMARY: This document contains
corrections to final regulations (TD
8659 [1996–16 I.R.B. 4]) which were
published in the Federal Register for
Thursday, March 14, 1996 (61 FR
10450). The final regulations relate to
the taxes on gasoline and diesel fuel
reflecting and implementing certain
changes made by the Omnibus Budget
Reconciliation Act of 1993.
EFFECTIVE DATE: March 14, 1996.
FOR FURTHER INFORMATION
CONTACT: Frank Boland (202) 622–
3130 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are subject
to these corrections are under sections
4081 and 4101 of the Internal Revenue
Code.
Need for Correction
As published, [TD 8659] contains
errors that are in need of clarification.
Correction of Publication
Accordingly, the publication of final
regulations which are the subject of FR
Doc. 96–5586 is corrected as follows:
§ 48.4101–1 [Corrected]
On page 10460, column 2, paragraph
(f)(3)(ii)(D), lines 4 and 5 are corrected
by merging the two lines to read ‘‘para-
graph (j) of this section, without regard
to’’.
Cynthia E. Grigsby,
Chief, Regulations Unit
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
June 3, 1996, 8:45 a.m., and published in the issue
of the Federal Register for June 4, 1996, 61 F.R.
28053)
Proposed Amendments to the
Regulations on the Determination
of Interest Expense Deduction of
Foreign Corporations and Branch
Profits Tax; Correction
Announcement 96–65
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking.
SUMMARY: This document contains a
correction to the notice of proposed
rulemaking (INTL–0054–95 [1996–14
I.R.B. 39]) which was published in the
Federal Register for Friday, March 8,
1996 (61 FR 9377). The notice of
proposed rulemaking relate to the deter-
mination of the interest expense deduc-
tion of foreign corporations, and the
branch profits tax.
FOR FURTHER INFORMATION
CONTACT: Ahmad Pirasteh or Richard
Hoge (202) 622–3870 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking
that is subject to these corrections are
under sections 882 and 884 of the
Internal Revenue Code.
Need for Correction
As published, the proposed rulemak-
ing contains errors that are in need of
clarification.
Correction of Publication
Accordingly, the publication of the
proposed rulemaking which is the sub-
ject of FR Doc. 96–5264 is corrected as
follows:
1. On page 9378, in the preamble
under column 2, following the paragraph
heading‘‘B. Hedging transactions’’, line
6, the language ‘‘case may be, the
amount of their U.S.’’ is corrected to
read ‘‘case may be, the amount of its
U.S.’’.
§ 1.882–5 [Corrected]
2. On page 9379, column 3,
§ 1.882–5 (d)(6),Example 4.(i), line 18,
181996–29 I.R.B.

the language ‘‘liabilities of 90x U.S.
dollars and 1000 x’’ is corrected to read
‘‘liabilities of 90x U.S. dollars and
1000x’’.
§ 1.884–1 [Corrected]
3. On page 9380, column 3,
§ 1.884–1 (d)(2)(xi),Example 8., last
line, the language ‘‘from securities) of
the value of the securities.’’ is corrected
to read ‘‘from securities) of the amount
of the securities.’’.
Cynthia E. Grigsby,
Chief, Regulations Unit
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
June 3, 1996, 8:45 a.m., and published in the issue
of the Federal Register for June 4, 1996, 61 F.R.
28118)
Foundations Status of Certain
Organizations
Announcement 96–66
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Alternatives for Area Youth, P.O. Box
571, Manistee, MI
American Friends of Machon Hasbara,
940 Leader Bldg., Cleveland, OH
Awakenings, Inc., Southgate, MI
Blanchester Friends Housing, Inc.,
Wilmington, OH
Christian Koinonia, Inc., Miami, FL
Chrysalis Systems, Inc., Oakland, MI
City Lutherans in Action, Chicago, IL
Clinton County Family Resource Center,
Inc., Saint John, MI
Columbus Metro Soccer Association,
Dublin, OH
Covenant Blu Community Development,
St. Louis, MO
Dentistry for Friends in Need Inc.,
Beavercreek, OH
Euclid Black Caucus, Euclid, OH
Family Planning Council of Nebraska,
Inc., Grand Island, NE
Fayette County Drug Alliance Families
in Action Inc., Somerville, TN
Fighting Chance for Children Inc.,
Omaha, NE
Flint Police Athletic League (PAL),
Flint, MI
Forty for the Future Inc., Research Tri-
angle Park, NC
Friends of David Walker Inc.,
Wilmington, NC
Gastonia Sister Cities Committee Inc.,
Gastonia, NC
Gentry High School Academic Booster
Club, Gentry, AR
Great Lakes Aquarium & Research Cen-
ter Inc., Muskegon, MI
Greater Atlanta Billy Graham Crusade
Inc., Atlanta, GA
Greater Mount Airy Emergency Rescue
Squad Inc., Mount Airy, NC
Greater White Stone Missionary Baptist
Church Fdn Inc., Memphis, TN
Gresham Environmental Center Inc.,
Knoxville, TN
Hamilton County Leadership Academy
Inc., Carmel, IN
Heavens Grocery Store Inc., Lithonia,
GA
Hiwassee Dam Eagle Booster Club,
Murphy, NC
Holland Village, Inc., Jersey City, NJ
Hopkinsville Christian Cty Youth
League, Inc., Hopkinsville, KY
HOW Inc., Toledo, OH
Howard University Alumni Association-
Atlanta Club, Atlanta, GA
Human Growth Corporation, Nashville,
TN
International Photographic Arts Founda-
tion Inc., Camden, ME
Iowa Education Coalition, Newton, IA
Johnston County Finance Corp.,
Smithfield, NC
Kentuckians for Informed Decisions,
Inc., Frankfort, KY
Kentucky World Organization of China
Painters, Inc., Nicholasville, KY
Kids for Progress Inc., Mobile, AL
Kimberly House, High Point, NC
Lawrence Kiwanis Sunrise Inc. Scholar-
ship Foundation, Lawrence, IN
Learning Care, Inc., Lansing, MI
Life Management Inc., Cleveland, TN
Lonesome Pine Special Trail Corp,
Bristol, VA
LSAA, Marquette, MI
Marcel Moyse Society Inc., Baltimore,
MD
Massillon ASA Girls Softball Associa-
tion, Massillon, OH
Matawan-Aberdeen Baseball League,
Matawan, NJ
Memorial Day Weekend Salute to Veter-
ans Celebration, Columbia, MO
Mental Health Programs Inc. VII, Cam-
bridge, MA
Miracle on Caney Creek, Inc., Lexing-
ton, KY
Montgomery Area Sports Hall of Fame
Inc., Montgomery, AL
Mount Zion Institute for New Growth,
Lansing, MI
Mountain View Parent Teacher Organi-
zation PTO, Morganton, NC
Muncie Urban Enterprises Assocation,
Inc., Muncie, IN
Nashville Waldorf Assoc., Nashville, TN
Neuse River Community Development
Corp Inc., New Bern, NC
New Charlotte Corp., Charlotte, NC
New Horizons of Tennessee, Nashville,
TN
New Writers Forum Inc., Lexington
Park, MD
North Carolina Assoc. of Colleges and
Universities Inc., Greensboro, NC
North Rowan High Booster Club, Spen-
cer, NC
Nova Vida, Inc., Charlotte, MI
Oxford Area Foundation for the En-
hancement of Public Education, Ox-
ford, MI
Ozark Depot Area Museum Inc.,
Charleston, AR
Options for Community Living,
Kalamazoo, MI
Page Band Boosters Inc., Greensboro,
NC
Paradigm Counseling Center of West
Michigan, Inc., Manistee, MI
Partners in Parenting, Oxford, NC
Patton Homes, Inc., Grosse Pointe, MI
Plainfield Pee-Wee Association, Inc.,
Plainfield, IN
Professional Medical Education Assoca-
tion, Inc., Grove City, OH
Project Outreach of Cumberland County
Inc., Crossville, TN
Prophetic Christian Ministries Associa-
tion, Inc., Toledo, OH
Quail Unlimited Inc., Laurinburg, NC
Raintree Home, Inc., Canton, MI
Raishis Chochma, Lakewood, NJ
Recovery Systems Inc., Chattanooga,
TN
Rhode Island AFC Inc., Detroit, MI
Richmond County Health Foundation
Inc., Rockingham, NC
Robert P. Kellam Scholarship Founda-
tion Inc., Owings Mills, MD
Rotary Club of Effingham Foundation
Inc., Rincon, GA
191996–29 I.R.B.

Saint Luke Outreach Inc., Laurinburg,
NC
S C O G Child Development Center,
Chicago, IL
Scouts Center, Inc., Converse, IN
Shoreview Arden Hills Loins Club
School District 621 Fdtn, Fridley, MN
Sociedad Biblica De Puerto Rico E Islas
Virgenes Inc., Bayamon, PR
Southern Michigan Association for the
Education Of Young Children, Jack-
son, MI
SRI-Lanka Ranga Kala Kavaya, Wash-
ington, DC
Steps to Potentials, Ludington, MI
Stone Creek Ministries, Creal Springs,
IL
Teamster Retiree Housing of St. Louis,
Inc., Beachwood, OH
Tiffin Area Babe Ruth League, Inc.,
Tiffin, OH
Time Corners Optimist Foundation of
Fort Wayne Indiana, Inc., Fort Wayne,
IN
Vegan Action Incorporated, Madison,
WI
War Cloud—Lone Wolf Foundation,
Inc., Cleveland, OH
We Care Network, Inc., Columbus, OH
Whitely Productions Inc., Mentor, OH
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contribu-
tors may thereafter rely upon such rul-
ing or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classi-
fication of foundation status in the Inter-
nal Revenue Bulletin.
201996–29 I.R.B.

Announcement of the Disbarment, Suspension, and 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 pub-
lic accountant, enrolled agent or enrolled
actuary, in order to avoid the institution
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 accoun-
tants, enrolled agents and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by, or shar-
ing 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 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 attorney, certified public
accountant, enrolled agent or enrolled
actuary and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent or enrolled actuary so sus-
pended 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
Bruender, LawrenceLesueur, MNAttorneyIndefinite from April 18, 1996
Pallman, James J.New Haven, CTCPAApril 19, 1996 to October 18, 1996
Pribble Jr., William C.Minneapolis, MNAttorneyIndefinite from May 1, 1996
Pyburn, Richard E.Downers Grove, ILCPAMay 1, 1996 to October 31, 1997
Scalise, James J.New Britain, CTAttorneyMay 1, 1996 to July 31, 1996
Kieldaisch, Dale W.Manteno, ILCPAMay 1, 1996 to October 31, 1996
Ogorek, Charolotte F.Park Ridge, ILCPAMay 3, 1996 to July 2, 1996
Korman, Steven B.Mulford, CTCPAMay 3, 1996 to February 2, 1997
Myers, Donald L.Olney, MDCPAMay 7, 1996 to May 6, 1998
Sharrett, William R.Paradise, CAEnrolled AgentMay 8, 1996 to November 7, 1996
Cornwell, Douglas S.Norwalk, CTCPAMay 10, 1996 to November 9, 1996
Chang, Sun KunMcLean, VAEnrolled AgentMay 13, 1996 to July 12, 1996
Cariveau, StewartMinneapolis, MNCPAMay 30, 1996 to August 29, 1996
Carter, Gary E.Ashdown, ARCPAJune 1, 1996 to August 31, 1996
Underwood, Wendell L.Sedalia, MOCPAJune 1, 1996 to July 31, 1996
Candiloro, James A.Glastonbury, CTCPAJune 1, 1996 to November 30, 1996
Schwartz, Leonard J.Danbury, CTEnrolled AgentJune 1, 1996 to February 28, 1997
Forrester, Donald F.Fairfield, OHCPAIndefinite from June 4, 1996
Shade, Stephen E.Clearwater, FLEnrolled AgentJune 8, 1996 to May 7, 1997
Woods, James G.Huntington, CTCPAJuly 1, 1996 to June 30, 1997
Grove, Michael J.Alliance, OhCPAJuly 1, 1996 to June 30, 1997
Jenkins, FrankMontgomery, ALCPAJuly 1, 1996 to December 31, 1996
Brewton III, George W.Greenville, MSCPAJuly 1, 1996 to September 30, 1996
Fischer, Randall E.Lombard, ILCPAJuly 1, 1996 to September 30, 1996
Rhoney, BrianWheaton, ILCPAJuly 1, 1996 to Decemer 31, 1996
Devereux, Michael J.Florissant, MOCPAJuly 1, 1996 to March 31, 1997
Cranston, Robert S.Saugerties, NYCPAJuly 1, 1996 to December 31, 1996
Miller, Dwight W.Overland Pk, KSCPAJuly 1, 1996 to June 30, 1997
Beck, Clyde E.Salina, KSCPAJuly 1, 1996 to October 31, 1996
Seal, Ernest E.Cleveland, MSCPAAugust 1, 1996 to July 31, 1998
Dicker, Joseph W.Minneapolis, MNAttorneyAugust 1, 1996 to October 31, 1996
21

Under Section 330, Title 31 of the
United States Code, the Secretary of the
Treasury, after due notice and opportu-
nity for hearing, is authorized to sus-
pend or disbar from practice before the
Internal Revenue Service any person
who has violated the rules and regula-
tions governing the recognition of attor-
neys, certified public accountants, en-
rolled agents or enrolled actuaries to
practice before the Internal Revenue
Service.
Attorneys, certified public accoun-
tants, enrolled agents and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by or shar-
ing fees with, any practitioner disbarred
or under suspension from practice be-
fore the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify such dis-
barred 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 announce-
ment will appear in the weekly Bulletin
for five successive weeks or as long as
it is practicable for each attorney, certi-
fied public accountant, enrolled agent or
enrolled actuary so suspended or dis-
barred 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 practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Bushta, Patrick C.Sacramento, CACPAApril 18, 1996
Hart, Joel S.Beaumont, TXCPAApril 19, 1996
Riggs, Patricia A.Stockton, CAEnrolled AgentApril 19, 1996
Hammontree, Richard F.Ogunquit, MECPAApril 27, 1996
Otto, Judith M.Tucson, AZEnrolled AgentMay 18, 1996
22

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplifieddescribes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is ampli-
fied. (Compare withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an es-
sential difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above.)
Obsoleteddescribes a previously pub-
lished ruling that is not considered de-
terminative with respect to future trans-
actions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted be-
cause of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regu-
lations subsequently adopted.
Revokeddescribes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Supersededdescribes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previ-
ously published over a period of time in
separate rulings. If the new ruling does
more than restate the substance of a
prior ruling, a combination of terms is
used. For example,modifiedandsuper-
sededdescribes a situation where the
substance of a previously published rul-
ing 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 su-
perseded.
Supplementedis used in situations in
which a list, such as a list of the names
of countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published in
the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance 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.
23

Numerical Finding List
1
Bulletins 1996–27 through 1996–28
Announcements:
96–61, 1996–27 I.R.B.72
96–62, 1996–28 I.R.B.55
Notices:
96–36, 1996–27 I.R.B.11
Proposed Regulations:
IA-292-84, 1996–28 I.R.B.38
Revenue Procedures:
96–36, 1996–27 I.R.B.11
Revenue Rulings:
96–33, 1996–27 I.R.B.4
96–34, 1996–28 I.R.B.4
Tax Conventions:
1996–28 I.R.B. 36
Treasury Decisions:
8673, 1996–27 I.R.B.4
8674, 1996–28 I.R.B.7
1
A cumulative list of all Revenue Rulings, Rev-
enue Procedures, Treasury Decisions, etc., pub-
lished in Internal Revenue Bulletins 1996–1
through 1996–26 will be found in Internal Rev-
enue Bulletin 1996–27, dated July 1, 1996.
24

Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–27 through 1996–28
*Denotes entry since last publication
Revenue Procedures:
95–29
Superseded by
96–36, 1996–27 I.R.B.11
95–29A
Superseded by
96–36, 1996–27 I.R.B.11
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–1 through 1996–26 will be found in Internal
Revenue Bulletin 1996–27, dated July 1, 1996.
25