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Internal Revenue Bulletin No.

2001–11
March 12, 2001

bulletin
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX T.D. 8937, page 806.


Final regulations under section 367(b) of the Code address
distributions with respect to, or a disposition of, certain
Rev. Rul. 2001–12, page 811. stock that was subject to prior temporary regulations under
Federal rates; adjusted federal rates; adjusted feder-
section 367(b).
al long-term rate; and the long-term exempt rate. For
purposes of sections 382, 1274, 1288, and other sections REG–106030–98, page 820.
of the Code, tables set forth the rates for March 2001. Proposed regulations under sections 863(a), (d), and (e) of
the Code provide rules for sourcing income of U.S. and for-
T.D. 8927, page 807.
eign persons from space and ocean activity and from com-
Final regulations under section 985 of the Code relate to
munications activity. A public hearing is scheduled for March
U.S. taxpayers operating, investing, or otherwise con-
28, 2001.
ducting business in the currencies of certain European
countries that replace their national currencies with a sin- Notice 2001–21, page 818.
gle, multinational currency called the euro. These regula- Low-income housing tax credit. This notice reproduces
tions provide rules relating to adjustments required for the proper population figures to be used for determining the
qualified business units operating in such currencies and 2001 calendar year population-based component of the
rules relating to the tax effect of holding such currencies, state housing credit ceiling under section 42(h) of the Code
or financial instruments or contracts denominated in such and the 2001 calendar year volume cap under section 146
currencies. of the Code.
T.D. 8932, page 813. Announcement 2001–26, page 896.
Final regulations under section 7502 of the Code extend the This document contains corrections to final regulations (T.D.
timely-mailing-treated-as-timely-filing rule to electronically 8913, 2001–3 I.R.B. 300) providing guidance on recognition
filed documents. The regulations also provide that under cer- of gain on certain distributions of stock or securities.
tain circumstances a claim for credit or refund made on a
late-filed original tax return will be treated as filed on the
postmark date for purposes of determining the timeliness of EMPLOYEE PLANS
the claim.

T.D. 8933, page 794. REG–130477–00 and REG–130481–00,


Final regulations under section 132(f) of the Code provide page 865.
guidance on qualified transportation fringe benefits (van- Proposed regulations under sections 457 and 403(b) of the
pooling, transit passes, and qualified parking) provided by Code provide comprehensive rules for determining required
employers to their employees. Notice 94–3 modified. minimum distributions for qualified plans, tax-sheltered annu-
Announcement 2000–78 obsolete. ities, and individual retirement plans. This is the corrected

(Continued on the next page)

Finding Lists begin on page ii.

Department of the Treasury


Internal Revenue Service
version of the proposed regulations published in the Federal eral standards of practice before the Service and would
Register on January 17, 2001. A public hearing is scheduled modify the standards for providing advice regarding tax shel-
for June 1, 2001. ters. A public hearing is scheduled for May 2, 2001.

Notice 2001–20, page 818. REG–126100–00, page 862.


Weighted average interest rate update. The weighted Guidance is provided on the reporting requirements for inter-
average interest rate for February 2001 and the resulting est on deposits maintained at the U.S. office of certain finan-
permissible range of interest rates used to calculate current cial institutions and paid to nonresident alien individuals.
liability for purposes of the full funding limitation of section These proposed regulations affect persons making pay-
412(c)(7) of the Code are set forth. ments of interest with respect to such a deposit. A public
hearing is scheduled for March 21, 2001.

ESTATE AND GIFT TAXES Announcement 2001–22, page 895.


Advance valuation of art. This announcement informs tax-
payers who wish to request from the Service a Statement of
Announcement 2001–22, page 895.
Value under Rev. Proc. 96–15, 1996–1 C.B. 627, for use in
Advance valuation of art. This announcement informs tax-
substantiating the value of art for income, estate, and gift
payers who wish to request from the Service a Statement of
tax purposes of a change of address for submission of such
Value under Rev. Proc. 96–15, 1996–1 C.B. 627, for use in
requests. Rev. Proc. 96–15 modified.
substantiating the value of art for income, estate, and gift
tax purposes of a change of address for submission of such Announcement 2001–25, page 895.
requests. Rev. Proc. 96–15 modified. This document contains corrections to Rev. Proc. 2001–3,
2001–1 I.R.B. 111, relating to issues on which the Service
will not issue letter rulings or determination letters.
ADMINISTRATIVE
Announcement 2001–27, page 897.
REG–111835–99, page 834. Proposed regulations (REG–116048–99, 2000–6 I.R.B.
Proposed regulations relate to practice before the Internal 584) that relate to an election available to certain taxpayers
Revenue Service (Circular 230). These regulations would under section 367(b) of the Code are withdrawn. The with-
affect individuals who are eligible to practice before the drawal corresponds to the upcoming expiration of the avail-
Service. The proposed modifications would clarify the gen- ability of the election.

March 12, 2001 2001–11 I.R.B.


The IRS Mission

Provide America’s taxpayers top quality service by help- and by applying the tax law with integrity and fairness to
ing them understand and meet their tax responsibilities all.

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

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2001–11 I.R.B. March 12, 2001


Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-income 1995 (44 U.S.C. 3507) under control ulations, including the question and
Housing Credit number 1545–1676. Responses to this answer format and a variety of examples
collection of information are mandatory illustrating the substance of the final reg-
The adjusted applicable federal short-term, mid- to obtain the benefit described under sec- ulations. However, commentators made a
term, and long-term rates are set forth for the month
of March 2001. See Rev. Rul. 2001–12, page 811.
tion 132(f). number of specific recommendations for
An agency may not conduct or sponsor, modifications and clarifications of the
and a person is not required to respond to, regulations. In response to these com-
a collection of information unless it dis- ments, the final regulations incorporate
Section 132.—Certain Fringe
plays a valid control number assigned by the modifications and clarifications
Benefits the Office of Management and Budget. described below.
26 CFR 1.132-9: Qualified transportation fringes. The estimated average annual record-
keeping burden per recordkeeper is 26.5 A. Whether Vouchers are Readily
T.D. 8933 hours. The estimated annual reporting Available
burden per respondent is .8 hours. Section 132(f)(3) provides that quali-
DEPARTMENT OF THE TREASURY Comments concerning the accuracy of fied transportation fringes include cash
Internal Revenue Service (IRS) this burden estimate and suggestions for reimbursement for transit passes “only if a
26 CFR Parts 1 and 602 reducing this burden should be sent to the voucher or similar item which may be
Internal Revenue Service, Attn: IRS exchanged only for a transit pass is not
Qualified Transportation Fringe Reports Clearance Officer, W:CAR: readily available for direct distribution by
Benefits MP:FP:S:O, Washington, DC 20224, and the employer to the employee.” Thus, if
to the Office of Management and vouchers are readily available, the
AGENCY: Internal Revenue Service Budget, Attn: Desk Officer for the employer must use vouchers and cash
(IRS), Treasury. Department of the Treasury, Office of reimbursement of a mass transit expense
Information and Regulatory Affairs, would not be a qualified transportation
ACTION: Final regulation.
Washington, DC 20503. fringe.
SUMMARY: This document contains Books or records relating to a collec- Most of the comments received
final regulations relating to qualified tion of information must be retained as addressed the issue of whether vouchers
transportation fringe benefits. These final long as their contents might become mate- are “readily available.” Commentators
regulations provide rules to ensure that rial in the administration of any internal representing employers generally favored
transportation benefits provided to revenue law. Generally, tax returns and rules permitting cash reimbursement.
employees are excludable from gross tax return information are confidential, as Commentators representing transit opera-
income. These final regulations reflect required by 26 U.S.C. 6103. tors and voucher providers generally
changes to the law made by the Energy favored rules not permitting cash reim-
Policy Act of 1992, the Taxpayer Relief Background
bursement. The following discusses three
Act of 1997, and the Transportation issues raised by commentators: first,
This document contains amendments to
Equity Act for the 21st Century. These whether the proposed regulations’ 1 per-
26 CFR part 1 (Income Tax Regulations).
final regulations affect employers that cent safe harbor should be retained; sec-
On January 27, 2000, a proposed regula-
offer qualified transportation fringes and ond, whether internal administrative costs
tion (REG–113572–99, 2000–7 I.R.B.
employees who receive these benefits. should be considered in applying the 1
624) relating to qualified transportation
DATES: Effective Date: These regula- fringes was published in the Federal percent test; and third, whether other non-
tions are effective January 11, 2001. Register (65 FR 4388). A public hearing financial restrictions should be considered
Applicability Date: For dates of applic- was held on June 1, 2000. Written or elec- in determining whether vouchers are read-
ability, see §1.132–9(b), Q/A–25. tronic comments responding to the notice ily available.
of proposed rulemaking were received.
FOR FURTHER INFORMATION CON- 1. The 1 percent safe harbor
After consideration of all the comments,
TACT: John Richards, (202) 622-6040
the proposed regulations are adopted as
(not a toll-free number). Under Notice 94–3, 1994–1 C.B. 327,
amended by this Treasury decision. The
and the proposed regulations, a voucher is
SUPPLEMENTARY INFORMATION: revisions are discussed below.
readily available if an employer can
Paperwork Reduction Act Explanation of Provisions and obtain it on terms no less favorable than
Summary of Comments those available to an individual employee
The collection of information contained and without incurring a significant admin-
in these final regulations has been In general, comments received on the istrative cost. Under the proposed regula-
reviewed and approved by the Office of proposed regulations were favorable and, tions, administrative costs relate only to
Management and Budget in accordance accordingly, the final regulations retain fees paid to fare media providers, and the
with the Paperwork Reduction Act of the general structure of the proposed reg- determination of whether obtaining a

March 12, 2001 794 2001–11 I.R.B.


voucher would result in a significant use requirement would result in fewer each system for purposes of determining
administrative cost is made with respect employers adopting transit pass programs, whether the voucher provider fees cause
to each transit system voucher. The pro- thus frustrating the purpose of section vouchers to not be readily available.
posed regulations provide a rule under 132(f) to increase the use of mass transit.
which administrative costs are treated as The final regulations retain the 1 per- 2. Internal administrative costs
significant if the average monthly admin- cent test. The 1 percent test, applicable
Several commentators representing
istrative costs incurred by the employer for years beginning after December 31,
employers recommended that, in addition
for a voucher (disregarding delivery 2003, is appropriate in light of the rule
to fare media provider fees, internal admin-
charges imposed by the fare media (discussed below) that only voucher
istrative costs, especially security and dis-
provider to the extent not in excess of $15 provider fees are considered in determin-
tribution costs, should be considered in
per order) are more than 1 percent of the ing availability. It is intended that the
determining whether vouchers are readily
average monthly value of the vouchers for delayed application of this rule would
available. These commentators noted that
a system. provide sufficient time for those affected
administrative costs are increased when an
Commentators, in particular those rep- by this rule to modify their systems and
employer must maintain both a voucher
resenting fare media providers and transit procedures appropriately. The 1 percent
operators, suggested that the fare media threshold, coupled with the exclusion of system and a reimbursement system to pro-
provider fee percentage causing vouchers internal administrative costs from the vide qualified transportation fringes. For
to not be readily available should be readily available determination, repre- example, the employer may maintain a
raised because many fare media providers sents a balanced approach that will pro- cash reimbursement system for transporta-
charge fees in excess of the 1 percent limit mote the growth of voucher programs in tion in a commuter highway vehicle and
and, thus, under this test, transit vouchers most transportation areas. In addition, qualified parking, and also maintain a
would not be considered readily available raising the percentage threshold could voucher system for transit passes. In addi-
in some large metropolitan areas. These curtail the growth in transit benefit pro- tion, several commentators suggested that
commentators assert that the 1 percent test grams, which would be contrary to the the increased costs and administrative bur-
is therefore contrary to the intent of the goal of increasing the use of mass transit. den for employers that maintain offices in
statute. Commentators suggested that the Finally, in cases where cash reimburse- multiple cities should also be considered in
1 percent test, particularly if combined ment is allowed, adequate substantiation determining whether vouchers are readily
with inadequate cash reimbursement sub- requirements will ensure that transit pass available.
stantiation requirements, may result in benefits will actually go toward mass The final regulations retain the test con-
taxpayer abuse, with the result that the transportation usage. In this regard, the sidering only fees paid to voucher
benefit might not be used for the purpose proposed regulations provide that providers in determining availability
for which it is intended, which is to employers must implement reasonable based on a plain reading of the terms of
increase the use of mass transit. In addi- procedures to ensure that an amount equal the statute. The language “readily avail-
tion, commentators testified at the public to the reimbursement was incurred for able for direct distribution by the employ-
hearing that the mandatory use of vouch- transit passes. For example, the final reg- er to the employee” under section
ers (with no ability to use cash reimburse- ulations clarify that in circumstances 132(f)(3) in its plain, ordinary sense
ment if vouchers are readily available) when employee certification is a reason- means that vouchers are easily obtainable
would increase the use of vouchers and able reimbursement procedure, it must for direct distribution to the employer’s
promote the development of advanced occur after the expense is incurred. employees. The determination of avail-
technologies that minimize the burden on The final regulations also clarify the ability bears no relationship with costs
employers while ensuring that the benefit application of the 1 percent rule if multi- that may be incurred after vouchers have
is used for mass transit. These new tech- ple vouchers for a transit system are avail- been obtained. The service fees charged
nologies might allow an employer to able for distribution by an employer to by voucher providers and delivery costs
make payment directly to the transit oper- employees, and if multiple transit system can reasonably be viewed as affecting
ator, who in turn credits fare to the vouchers are required in an area to meet whether vouchers are easily obtainable;
employee’s magnetic media fare card, the transit needs of an employer’s an employer’s internal costs of subse-
thus eliminating the need for employers to employees. The final regulations provide quently administering a voucher program
incur the expense of distributing vouch- that if multiple transit system vouchers would not. Thus, based upon the plain
ers. are available for direct distribution to language of section 132(f), internal
Other commentators, in particular employees, the employer must consider administrative costs do not affect whether
groups representing employers, generally the lowest cost voucher for purposes of vouchers are readily available.
favored the 1 percent test, but suggested determining whether the voucher provider Moreover, the test considering only
that internal costs be considered in apply- fees cause vouchers to not be readily voucher provider fees is a comparatively
ing the test (discussed below). These available. However, if multiple vouchers simple bright line test. A test that depends
commentators took the position that an are required in an area to meet the transit on the employer’s internal administrative
increase in the percentage might affect the needs of the individual employees in that costs would necessarily be complex,
market charge for such services. There area, the employer has the option of aver- requiring complex rules that would be dif-
was also a concern that a strict voucher- aging the costs applied to vouchers from ficult for employers to apply.

2001–11 I.R.B. 795 March 12, 2001


3. Other nonfinancial restrictions employment terminates before the begin- vided in kind to an employee that is
ning of the last month of the period for excludable from the employee’s gross
Commentators representing employers which the transit passes were provided, income as a working condition fringe
suggested that nonfinancial factors should the employer must include in the employ- under section 132(a)(3). Thus, if the
be considered in determining whether ee’s wages, for income and for employ- exclusion at §1.62–2 or section 132(a)(3)
vouchers are readily available. They sug- ment tax purposes (FICA, FUTA, and is available (even if not reimbursed by the
gested that factors such as whether there income tax withholding), the value of the employer), then section 132(f) does not
are reasonable advance purchase and min- passes provided for those month(s) begin- apply.
imum purchase requirements, and ning after the employee’s employment Whether a reimbursement for local
whether vouchers can be purchased in terminates to the extent the employer does transportation expenses, including parking
appropriate denominations, should be not recover those transit passes or the at a work location away from the employ-
considered in determining availability. value of those passes. The announcement ee’s permanent work location, is exclud-
The final regulations adopt this sugges- provides that pending the issuance of able from the employee’s gross income
tion because nonfinancial restrictions these final regulations, employers may under §1.62–2, or whether parking provid-
would reasonably affect whether vouchers rely on the announcement. ed in kind to an employee is excludable
are available for distribution by an The final regulations differ from the from the employee’s gross income under
employer to an employee. announcement in one respect. In any case section 132(a)(3), is determined based
The final regulations provide guidance in which transit passes are provided in upon whether the parking expenses would
on the types of nonfinancial restrictions advance for a period of no more than three be deductible if paid or incurred by the
that cause vouchers to not be readily months (such as for a calendar quarter), employee under section 162(a) as an
available. The final regulations provide but the recipient ceases to be an employee expense incurred in the employee’s trade
that certain nonfinancial restrictions, such before the beginning of the last month in or business of being an employee for the
as a voucher provider not making vouch- that period, the final regulations provide employer. §§1.62–2(d); 1.132–5(a)(2).
ers available for purchase at reasonable that the value of a transit pass provided in Revenue Ruling 99–7 (1999–1 C.B. 361)
intervals or failing to provide the vouch- advance for a month is excluded from addresses under what circumstances daily
ers within a reasonable period after wages for employment tax (FICA, FUTA, transportation expenses, including park-
receiving payment for the voucher, cause and income tax withholding) purposes ing, incurred by a taxpayer in going
vouchers to not be readily available. In (but not for income tax purposes) unless between the taxpayer’s residence and a
addition, if a voucher provider does not at the time the transit passes were distrib- work location are deductible by the tax-
provide vouchers in reasonably appropri- uted there was an established termination payer under section 162(a).
ate quantities, or in reasonably appropri- date that was before the beginning of the The final regulations provide the mini-
ate denominations, vouchers may not be last month of that period and the employ- mum requirements to ensure that trans-
readily available. ee does in fact terminate employment portation benefits are qualified transporta-
When and as the standards in these before the beginning of the last month of tion fringes under section 132(f). An
final regulations go into effect, they will that period. employer may have a transit benefit pro-
supercede the current law standards in gram that is more restrictive than a pro-
Notice 94–3. C. Qualified Parking gram meeting the minimum requirements
The final regulations address whether under the regulations. In addition, these
B. Advance Transit Passes
reimbursement paid to an employee for regulations do not affect the application of
Commentators suggested that the parking at a work location away from the authorities outside the Internal Revenue
administrability of transit pass programs employee’s permanent work location is Code which may restrict a transportation
would be improved if vouchers were per- excludable from wages for income and benefit program. Federal Government
mitted to be distributed in advance for employment tax purposes under section agencies, for example, may be required by
more than one month. The final regula- 132(f). Section 132(f)(5)(C) defines qual- other federal law to implement restric-
tions adopt this suggestion. ified parking, in part, as “parking provid- tions beyond those required under these
In October of this year, the IRS issued ed to an employee on or near the business regulations.
Announcement 2000–78 (2000–43 I.R.B. premises of the employer . . . .” The final D. Applicability Date
428) to notify taxpayers that, when final- regulations provide that qualified parking
ized, the regulations will clarify that tran- includes parking on or near a work loca- The regulations are generally applica-
sit passes may be distributed in advance tion at which the employee performs ser- ble for taxable years beginning after
for more than one month (such as for a vices for the employer. However, quali- December 31, 2001. However, in order to
calendar quarter) by taking into account fied parking does not include provide a transition period for those
the monthly limits for all months for reimbursement for parking that is other- affected by the 1 percent rule (described
which the transit passes are distributed. wise excludable from gross income as a under “The 1 percent safe harbor” in this
The announcement further provides, how- reimbursement treated as paid under an preamble), that rule is applicable for tax-
ever, that if an employee receives advance accountable plan under §1.62–2 of the able years beginning after December 31,
transit passes, and the employee’s Income Tax Regulations, or parking pro- 2003.

March 12, 2001 796 2001–11 I.R.B.


Effect on Other Documents Whether an arrangement constitutes a This rule provides that (1) there are no
bona fide reimbursement arrangement substantiation requirements if the employ-
The following document is obsolete as
varies depending on the facts and circum- er distributes transit passes in kind; (2) a
of January 11, 2001:
stances, including the method or methods compensation reduction election may be
Announcement 2000–78 (2000–43 I.R.B.
of payment utilized within a mass transit made electronically; (3) an election to
428).
system. An employee certification in reduce compensation may be automatical-
The following document is modified as
either written or electronic form may be ly renewed; (4) an employer may provide
of the date these regulations become
sufficient depending upon the facts and for deemed compensation reduction elec-
applicable (see Q/A–25):
circumstances. For example, if receipts tions under its qualified transportation
Notice 94–3 (1994–1 C.B. 327).
are not provided in the ordinary course of fringe benefit plan; and (5) a requirement
Special Analyses business, such as with respect to metered that a voucher be distributed in-kind by
parking or used transit passes that cannot the employer is satisfied if the voucher is
It has been determined that this be returned to the user, an employee cer- distributed by the employer or by another
Treasury Decision is not a significant reg- tification that expenses have been person on behalf of the employer (for
ulatory action as defined in Executive incurred constitutes a reasonable reim- example, if a transit operator credits
Order 12866. Therefore, a regulatory bursement procedure. A certification that amounts to the employee’s fare card as a
assessment is not required. It also has expenses will be incurred in the future, by result of payments made to the operator
been determined that section 553(b) of the itself, is not a reasonable reimbursement by the employer).
Administrative Procedure Act (5 U.S.C. procedure. There are no particular pro-
chapter 5) does not apply to these regula- fessional skills required to maintain these Drafting Information
tions. A final regulatory flexibility analy- records. The principal author of these regula-
sis has been prepared for the collection of In addition, section 132(f)(4) provides tions is John Richards, Office of the As-
information in this Treasury decision that an employee may choose between sistant Chief Counsel (Exempt Organiza-
under 5 U.S.C. 604. A summary of the cash compensation and qualified trans- tions/Employment Tax/Government
analysis is set forth in this preamble under portation fringes. This rule provides that Entities). However, other personnel from
the heading “Summary of Final an employer may allow an employee the the IRS and Treasury Department partici-
Regulatory Flexibility Analysis.” choice to receive either a fixed amount of pated in their development.
cash compensation at a specified future * * * * *
Summary of Final Regulatory
date or a fixed amount of qualified trans-
Flexibility Analysis
portation fringes to be provided for a Adoption of Amendments to the
This analysis is required under the specified future period (such as qualified Regulations
Regulatory Flexibility Act (5 U.S.C. parking to be used during a future calen-
chapter 6). The collection of information dar month). This rule provides that Accordingly, 26 CFR parts 1 and 602
under this rule is based upon the require- employers must keep records with are amended as follows:
ments under section 132(f). We estimate respect to employee compensation reduc- PART I—INCOME TAXES
that approximately 265,000 employers tion elections. An employee’s election
that provide qualified transportation must be in writing or some other perma- Paragraph 1. The authority citation for
fringes to their employees will be affected nent and verifiable form, and include the part 1 continues to read in part as follows:
by the recordkeeping requirements of this date of the election, the amount of com- Authority: 26 U.S.C. 7805 * * *
rule. None of the comments received in pensation to be reduced, and the period Par. 2. Section 1.132–0 is amended by:
response to the notice of proposed rule- for which the qualified transportation 1. Adding an entry for §1.132–5(p)(4)
making specifically addressed the initial fringes will be provided. The objective 2. Adding entries for §1.132–9.
regulatory flexibility analysis. of this rule is to ensure against recharac- The additions read as follows:
Section 132(f)(3) provides that quali- terization of taxable compensation after it
fied transportation fringes may be provid- has been paid to the employee. There are §1.132–0 Outline of regulations under
ed in the form of cash reimbursement. no particular professional skills required section 132.
The legislative history indicates that an to maintain these records. *****
employer providing cash reimbursement A less burdensome alternative for small
to the employer’s employees for qualified organizations would be to exempt those §1.132–5 Working condition fringes.
transportation fringes must establish a entities from the recordkeeping require-
bona fide reimbursement arrangement. ments under this rule. However, it would *****
As a condition to providing cash reim- be inconsistent with the statutory provi- (p) * * *
bursement for qualified transportation sions and legislative history to exempt (4) Dates of applicability.
fringes, this rule provides that employers those entities from the recordkeeping *****
must receive substantiation from employ- requirements imposed under this rule. §1.132–9 Qualified transportation
ees. The objective of this rule is to ensure This rule provides several options fringes.
that reimbursements are made for quali- which avoid more burdensome record-
fied transportation fringes. keeping requirements for small entities. (a) Table of contents.

2001–11 I.R.B. 797 March 12, 2001


(b) Questions and answers. suant to a compensation reduction agree- Q-1. What is a qualified transportation
Par. 3. Section 1.132–5 is amended by ment? fringe?
adding paragraph (p)(4) to read as fol- Q-12. What is a compensation reduction A-1. (a) The following benefits are
lows: election for purposes of section 132(f)? qualified transportation fringe benefits:
Q–13. Is there a limit to the amount of the (1) Transportation in a commuter high-
§1.132–5 Working condition fringes. compensation reduction? way vehicle.
***** Q–14. When must the employee have (2) Transit passes.
(p) * * * made a compensation reduction election (3) Qualified parking.
(4) Dates of applicability. This para- and under what circumstances may the (b) An employer may simultaneously
graph (p) applies to benefits provided amount be paid in cash to the employee? provide an employee with any one or
before January 1, 1993. For benefits pro- Q–15. May an employee whose qualified more of these three benefits.
vided after December 31, 1992, see transportation fringe costs are less than Q-2. What is transportation in a com-
§1.132–9. the employee’s compensation reduction muter highway vehicle?
***** carry over this excess amount to subse- A-2. Transportation in a commuter
Par. 4. Section 1.132–9 is added to read quent periods? highway vehicle is transportation provid-
as follows: ed by an employer to an employee in con-
(4) Expense reimbursements. nection with travel between the employ-
§1.132–9 Qualified transportation Q–16. How does section 132(f) apply to ee’s residence and place of employment.
fringes. expense reimbursements? A commuter highway vehicle is a high-
Q-17. May an employer provide nontax- way vehicle with a seating capacity of at
(a) Table of contents. This section con- least 6 adults (excluding the driver) and
able cash reimbursement under section
tains a list of the questions and answers in with respect to which at least 80 percent
132(f) for periods longer than one month?
§1.132–9. of the vehicle’s mileage for a year is rea-
Q-18. What are the substantiation
requirements if an employer distributes sonably expected to be—
(1) General rules.
transit passes? (a) For transporting employees in con-
Q-1. What is a qualified transportation Q-19. May an employer choose to impose nection with travel between their resi-
fringe? substantiation requirements in addition to dences and their place of employment;
Q-2. What is transportation in a com- those described in this regulation? and
muter highway vehicle? (b) On trips during which the number
Q-3. What are transit passes? (5) Special rules for parking and of employees transported for commuting
Q-4. What is qualified parking? vanpools. is at least one-half of the adult seating
Q-5. May qualified transportation fringes capacity of the vehicle (excluding the dri-
Q-20. How is the value of parking deter- ver).
be provided to individuals who are not
mined? Q-3. What are transit passes?
employees?
Q-21. How do the qualified transporta- A-3. A transit pass is any pass, token,
Q-6. Must a qualified transportation
tion fringe rules apply to van pools? farecard, voucher, or similar item (includ-
fringe benefit plan be in writing?
(6) Reporting and employment taxes. ing an item exchangeable for fare media)
(2) Dollar limitations. that entitles a person to transportation—
Q-22. What are the reporting and (a) On mass transit facilities (whether
Q-7. Is there a limit on the value of qual-
employment tax requirements for quali- or not publicly owned); or
ified transportation fringes that may be
fied transportation fringes? (b) Provided by any person in the busi-
excluded from an employee’s gross
ness of transporting persons for compen-
income? (7) Interaction with other fringe benefits. sation or hire in a highway vehicle with a
Q-8. What amount is includible in an
Q-23. How does section 132(f) interact seating capacity of at least 6 adults
employee’s wages for income and
with other fringe benefit rules? (excluding the driver).
employment tax purposes if the value of
Q-4. What is qualified parking?
the qualified transportation fringe exceeds
(8) Application to individuals who are not A-4. (a) Qualified parking is parking
the applicable statutory monthly limit?
employees. provided to an employee by an employ-
Q-9. Are excludable qualified transporta-
er—
tion fringes calculated on a monthly Q-24. May qualified transportation (1) On or near the employer’s business
basis? fringes be provided to individuals who are premises; or
Q-10. May an employee receive qualified partners, 2-percent shareholders of S-cor- (2) At a location from which the
transportation fringes from more than one porations, or independent contractors? employee commutes to work (including
employer?
(9) Effective date. commuting by carpool, commuter high-
(3) Compensation reduction. way vehicle, mass transit facilities, or
Q-25. What is the effective date of this transportation provided by any person in
Q-11. May qualified transportation section? the business of transporting persons for
fringes be provided to employees pur- (b) Questions and answers. compensation or hire).

March 12, 2001 798 2001–11 I.R.B.


(b) For purposes of section 132(f), month is excludable from the gross monthly limit by $20, $240 ($195 - $175, times 12
parking on or near the employer’s busi- income of an employee for transportation months) must be included in Employee E’s wages
for income and employment tax purposes for the
ness premises includes parking on or near in a commuter highway vehicle and tran- year with respect to the qualified parking.
a work location at which the employee sit passes provided by an employer. On Example 3. (i) For each month in a year in which
provides services for the employer. January 1, 2002, this amount is increased the statutory monthly qualified parking limit is $175,
However, qualified parking does not to $100 per month. Employer P provides qualified parking with a fair
include— (b) Parking. Up to $175 per month is market value of $220 per month to its employees,
but charges each employee $45 per month.
(1) The value of parking provided to an excludable from the gross income of an
(ii) In this Example 3, because the sum of the
employee that is excludable from gross employee for qualified parking. amount paid by an employee ($45) plus the amount
income under section 132(a)(3) (as a (c) Combination. An employer may excludable for qualified parking ($175) is not less
working condition fringe), or provide qualified parking benefits in addi- than the fair market value of the monthly benefit, no
(2) Reimbursement paid to an employ- tion to transportation in a commuter high- amount is includible in the employee’s wages for
ee for parking costs that is excludable way vehicle and transit passes. income and employment tax purposes with respect
to the qualified parking.
from gross income as an amount treated (d) Cost-of-living adjustments. The
Q-9. Are excludable qualified trans-
as paid under an accountable plan. See amounts in paragraphs (a) and (b) of this
portation fringes calculated on a monthly
§1.62–2. Q/A-7 are adjusted annually, beginning
basis?
(c) However, parking on or near prop- with 2000, to reflect cost-of-living. The
A-9. (a) In general. Yes. The value of
erty used by the employee for residential adjusted figures are announced by the
purposes is not qualified parking. transportation in a commuter highway
Service before the beginning of the year.
(d) Parking is provided by an employer vehicle, transit passes, and qualified park-
Q-8. What amount is includible in an
if— employee’s wages for income and ing is calculated on a monthly basis to
(1) The parking is on property that the employment tax purposes if the value of determine whether the value of the bene-
employer owns or leases; the qualified transportation fringe exceeds fit has exceeded the applicable statutory
(2) The employer pays for the parking; the applicable statutory monthly limit? monthly limit on qualified transportation
or A-8. (a) Generally, an employee must fringes. Except in the case of a transit
(3) The employer reimburses the include in gross income the amount by pass provided to an employee, the applic-
employee for parking expenses (see Q/A- which the fair market value of the benefit able statutory monthly limit applies to
16 of this section for rules relating to cash exceeds the sum of the amount, if any, qualified transportation fringes used by
reimbursements). paid by the employee and any amount the employee in a month. Monthly exclu-
Q-5. May qualified transportation excluded from gross income under section sion amounts are not combined to provide
fringes be provided to individuals who are 132(a)(5). Thus, assuming no other statu- a qualified transportation fringe for any
not employees? tory exclusion applies, if an employer pro- month exceeding the statutory limit. A
A-5. An employer may provide quali- vides an employee with a qualified trans- month is a calendar month or a substan-
fied transportation fringes only to individ- portation fringe that exceeds the tially equivalent period applied consis-
uals who are currently employees of the applicable statutory monthly limit and the tently.
employer at the time the qualified trans- employee does not make any payment, the (b) Transit passes. In the case of tran-
portation fringe is provided. The term value of the benefits provided in excess of sit passes provided to an employee, the
employee for purposes of qualified trans- the applicable statutory monthly limit is applicable statutory monthly limit applies
portation fringes is defined in included in the employee’s wages for to the transit passes provided by the
§1.132–1(b)(2)(i). This term includes income and employment tax purposes. employer to the employee in a month for
only common law employees and other See §1.61–21(b)(1). that month or for any previous month in
statutory employees, such as officers of (b) The following examples illustrate the calendar year. In addition, transit
corporations. See Q/A-24 of this section the principles of this Q/A-8: passes distributed in advance for more
for rules regarding partners, 2-percent Example 1. (i) For each month in a year in which than one month, but not for more than
shareholders, and independent contrac- the statutory monthly transit pass limit is $100 (i.e., twelve months, are qualified transporta-
a year after 2001), Employer M provides a transit tion fringes if the requirements in para-
tors. pass valued at $110 to Employee D, who does not
Q-6. Must a qualified transportation pay any amount to Employer M for the transit pass.
graph (c) of this Q/A-9 are met (relating
fringe benefit plan be in writing? (ii) In this Example 1, because the value of the to the income tax and employment tax
A-6. No. Section 132(f) does not monthly transit pass exceeds the statutory monthly treatment of advance transit passes). The
require that a qualified transportation limit by $10, $120 ($110 - $100, times 12 months) applicable statutory monthly limit under
must be included in D’s wages for income and section 132(f)(2) on the combined amount
fringe benefit plan be in writing. employment tax purposes for the year with respect to
Q-7. Is there a limit on the value of the transit passes.
of transportation in a commuter highway
qualified transportation fringes that may Example 2. (i) For each month in a year in which vehicle and transit passes may be calcu-
be excluded from an employee’s gross the statutory monthly qualified parking limit is $175, lated by taking into account the monthly
income? Employer M provides qualified parking valued at limits for all months for which the transit
$195 to Employee E, who does not pay any amount
A-7. (a) Transportation in a commuter passes are distributed. In the case of a
to M for the parking.
highway vehicle and transit passes. (ii) In this Example 2, because the fair market pass that is valid for more than one month,
Before January 1, 2002, up to $65 per value of the qualified parking exceeds the statutory such as an annual pass, the value of the

2001–11 I.R.B. 799 March 12, 2001


pass may be divided by the number of (ii) In this Example 1, because monthly exclusion in X’s wages for income and employment tax pur-
months for which it is valid for purposes amounts may not be combined to provide a benefit poses. The value of the transit passes provided to
in any month greater than the applicable statutory Employer F’s other employees is excludable from
of determining whether the value of the limit, the amount by which the amount reimbursed the employees’ wages for income and employment
pass exceeds the statutory monthly limit. for July exceeds the applicable statutory monthly tax purposes.
(c) Rule if employee’s employment ter- limit ($180 minus $175 equals $5) is includible in Example 6. (i) Each month during a year in
minates— (1) income tax treatment. The Employee E’s wages for income and employment which the statutory monthly transit pass limit is $65,
value of transit passes provided in tax purposes. Employer R distributes transit passes with a face
Example 2. (i) Employee F receives transit pass- amount of $70 to each of its employees. Transit
advance to an employee with respect to a
es from Employer G with a value of $195 in March passes with a face amount of $70 can be purchased
month in which the individual is not an of a year (for which the statutory monthly transit from the transit system by any individual for $65.
employee is included in the employee’s pass limit is $65) for January, February, and March (ii) In this Example 6, because the value of the
wages for income tax purposes. of that year. F was hired during January and has not transit passes distributed by Employer R does not
(2) Reporting and employment tax treat- received any transit passes from G. exceed the applicable statutory monthly limit ($65),
(ii) In this Example 2, the value of the transit no portion of the value of the transit passes is includ-
ment. Transit passes distributed in advance
passes (three months times $65 equals $195) is ed as wages for income and employment tax purpos-
to an employee are excludable from wages excludable from F’s wages for income and employ- es.
for employment tax purposes under sec- ment tax purposes. Q-10. May an employee receive quali-
tions 3121, 3306, and 3401 (FICA, FUTA, Example 3. (i) Employer S has a qualified trans-
fied transportation fringes from more than
and income tax withholding) if the employ- portation fringe benefit plan under which its employ-
ees receive transit passes near the beginning of each one employer?
er distributes transit passes to the employee A-10. (a) General rule. Yes. The statu-
calendar quarter for that calendar quarter. All
in advance for not more than three months employees of Employer S receive transit passes from tory monthly limits described in Q/A-7 of
and, at the time the transit passes are dis- Employer S with a value of $195 on March 31 for this section apply to benefits provided by
tributed, there is not an established date that the second calendar quarter covering the months
an employer to its employees. For this
the employee’s employment will terminate April, May, and June (of a year in which the statuto-
ry monthly transit pass limit is $65). purpose, all employees treated as
(for example, if the employee has given employed by a single employer under sec-
(ii) In this Example 3, because the value of the
notice of retirement) which will occur transit passes may be calculated by taking into tion 414(b), (c), (m), or (o) are treated as
before the beginning of the last month of account the monthly limits for all months for which employed by a single employer. See sec-
the period for which the transit passes are the transit passes are distributed, the value of the
tion 414(t) and §1.132–1(c). Thus, quali-
provided. If the employer distributes tran- transit passes (three months times $65 equals $195)
is excludable from the employees’ wages for income fied transportation fringes paid by entities
sit passes to an employee in advance for not
and employment tax purposes. under common control under section
more than three months and at the time the Example 4. (i) Same facts as in Example 3, 414(b), (c), (m), or (o) are combined for
transit passes are distributed there is an except that Employee T, an employee of Employer purposes of applying the applicable statu-
established date that the employee’s S, terminates employment with S on May 31. There
tory monthly limit. In addition, an indi-
employment will terminate, and the was not an established date of termination for
Employee T at the time the transit passes were dis- vidual who is treated as a leased employ-
employee’s employment does terminate
tributed. ee of the employer under section 414(n) is
before the beginning of the last month of (ii) In this Example 4, because at the time the treated as an employee of that employer
the period for which the transit passes are transit passes were distributed there was not an for purposes of section 132. See section
provided, the value of transit passes provid- established date of termination for Employee T, the
414(n)(3)(C).
ed for months beginning after the date of value of the transit passes provided for June ($65) is
excludable from T’s wages for employment tax pur- (b) Examples. The following examples
termination during which the employee is
poses. However, the value of the transit passes dis- illustrate the principles of this Q/A-10:
not employed by the employer is included tributed to Employee T for June ($65) is not exclud- Example 1. (i) During a year in which the statu-
in the employee’s wages for employment able from T’s wages for income tax purposes. tory monthly qualified parking limit is $175,
tax purposes. If transit passes are distrib- (iii) If Employee T’s May 31 termination date Employee E works for Employers M and N, who are
uted in advance for more than three months, was established at the time the transit passes were unrelated and not treated as a single employer under
the value of transit passes provided for the provided, the value of the transit passes provided for section 414(b), (c), (m), or (o). Each month, M and
June ($65) is included in T’s wages for both income N each provide qualified parking benefits to E with
months during which the employee is not a value of $100.
and employment tax purposes.
employed by the employer is includible in Example 5. (i) Employer F has a qualified trans- (ii) In this Example 1, because M and N are unre-
the employee’s wages for employment tax portation fringe benefit plan under which its employ- lated employers, and the value of the monthly park-
purposes regardless of whether at the time ees receive transit passes semi-annually in advance ing benefit provided by each is not more than the
the transit passes were distributed there was of the months for which the transit passes are pro- applicable statutory monthly limit, the parking ben-
vided. All employees of Employer F, including efits provided by each employer are excludable as
an established date of termination of the
Employee X, receive transit passes from F with a qualified transportation fringes assuming that the
employee’s employment. value of $390 on June 30 for the 6 months of July other requirements of this section are satisfied.
(d) Examples. The following examples through December (of a year in which the statutory Example 2. (i) Same facts as in Example 1,
illustrate the principles of this Q/A-9: monthly transit pass limit is $65). Employee X’s except that Employers M and N are treated as a sin-
Example 1. (i) Employee E incurs $150 for qual- employment terminates and his last day of work is gle employer under section 414(b).
ified parking used during the month of June of a year August 1. Employer F’s other employees remain (ii) In this Example 2, because M and N are treat-
in which the statutory monthly parking limit is $175, employed throughout the remainder of the year. ed as a single employer, the value of the monthly
for which E is reimbursed $150 by Employer R. (ii) In this Example 5, the value of the transit parking benefit provided by M and N must be com-
Employee E incurs $180 in expenses for qualified passes provided to Employee X for the months bined for purposes of determining whether the
parking used during the month of July of that year, September, October, November, and December ($65 applicable statutory monthly limit has been exceed-
for which E is reimbursed $180 by Employer R. times 4 months equals $260) of the year is included ed. Thus, the amount by which the value of the park-

March 12, 2001 800 2001–11 I.R.B.


ing benefit exceeds the monthly limit ($200 minus deemed to have been made if the employ- (2) In any other case, the date the
the monthly limit amount of $175 equals $25) for ee does not elect to receive cash compen- employee uses the qualified transportation
each month in the year is includible in E’s wages for
income and employment tax purposes.
sation in lieu of the qualified transporta- fringe.
Q-11. May qualified transportation tion fringe, provided that the employee (c) Revocability of elections. The
fringes be provided to employees pur- receives adequate notice that a compensa- employee may not revoke a compensation
suant to a compensation reduction agree- tion reduction will be made and is given reduction election after the employee is
ment? adequate opportunity to choose to receive able currently to receive the cash or other
A-11. Yes. An employer may offer the cash compensation instead of the qual- taxable amount at the employee’s discre-
employees a choice between cash com- ified transportation fringe. tion. In addition, the election may not be
pensation and any qualified transportation Q–13. Is there a limit to the amount of revoked after the beginning of the period
fringe. An employee who is offered this the compensation reduction? for which the qualified transportation
choice and who elects qualified trans- A–13. Yes. Each month, the amount of fringe will be provided.
portation fringes is not required to include the compensation reduction may not (d) Compensation reduction amounts
the cash compensation in income if— exceed the combined applicable statutory not refundable. Unless an election is
(a) The election is pursuant to an monthly limits for transportation in a revoked in a manner consistent with para-
arrangement described in Q/A-12 of this commuter highway vehicle, transit passes, graph (c) of this Q/A-14, an employee
section; and qualified parking. For example, for a may not subsequently receive the com-
(b) The amount of the reduction in cash year in which the statutory monthly limit pensation (in cash or any form other than
compensation does not exceed the limita- is $65 for transportation in a commuter by payment of a qualified transportation
tion in Q/A-13 of this section; highway vehicle and transit passes, and fringe under the employer’s plan). Thus,
(c) The arrangement satisfies the timing $175 for qualified parking, an employee an employer’s qualified transportation
and reimbursement rules in Q/A-14 and could elect to reduce compensation for fringe benefit plan may not provide that
16 of this section; and any month by no more than $240 ($65 an employee who ceases to participate in
(d) The related fringe benefit arrange- plus $175) with respect to qualified trans- the employer’s qualified transportation
ment otherwise satisfies the requirements portation fringes. If an employee were to fringe benefit plan (such as in the case of
set forth elsewhere in this section. elect to reduce compensation by $250 for termination of employment) is entitled to
Q-12. What is a compensation reduc- a month, the excess $10 ($250 minus receive a refund of the amount by which
tion election for purposes of section $240) would be includible in the employ- the employee’s compensation reductions
132(f)? ee’s wages for income and employment exceed the actual qualified transportation
A-12. (a) Election requirements gener- tax purposes. fringes provided to the employee by the
ally. A compensation reduction arrange- Q–14. When must the employee have employer.
ment is an arrangement under which the made a compensation reduction election (e) Examples. The following examples
employer provides the employee with the and under what circumstances may the illustrate the principles of this Q/A-14:
amount be paid in cash to the employee? Example 1. (i) Employer P maintains a qualified
right to elect whether the employee will transportation fringe benefit arrangement during a
receive either a fixed amount of cash A–14. (a) The compensation reduction
year in which the statutory monthly limit is $100 for
compensation at a specified future date or election must satisfy the requirements set transportation in a commuter highway vehicle and
a fixed amount of qualified transportation forth under paragraphs (b), (c), and (d) of transit passes (2002 or later) and $180 for qualified
fringes to be provided for a specified this Q/A-14. parking. Employees of P are paid cash compensa-
(b) Timing of election. The compensa- tion twice per month, with the payroll dates being
future period (such as qualified parking to
the first and the fifteenth day of the month. Under
be used during a future calendar month). tion reduction election must be made
P’s arrangement, an employee is permitted to elect at
The employee’s election must be in writ- before the employee is able currently to any time before the first day of a month to reduce his
ing or another form, such as electronic, receive the cash or other taxable amount at or her compensation payable during that month in an
that includes, in a permanent and verifi- the employee’s discretion. The determina- amount up to the applicable statutory monthly limit
tion of whether the employee is able cur- ($100 if the employee elects coverage for trans-
able form, the information required to be
portation in a commuter highway vehicle or a mass
in the election. The election must contain rently to receive the cash does not depend
transit pass, or $180 if the employee chooses quali-
the date of the election, the amount of the on whether it has been constructively fied parking) in return for the right to receive quali-
compensation to be reduced, and the peri- received for purposes of section 451. The fied transportation fringes up to the amount of the
od for which the benefit will be provided. election must specify that the period (such election. If such an election is made, P will provide
as a calendar month) for which the quali- a mass transit pass for that month with a value not
The election must relate to a fixed dollar
exceeding the compensation reduction amount elect-
amount or fixed percentage of compensa- fied transportation fringe will be provided
ed by the employee or will reimburse the cost of
tion reduction. An election to reduce must not begin before the election is made. other qualified transportation fringes used by the
compensation for a period by a set amount Thus, a compensation reduction election employee on or after the first day of that month up to
for such period may be automatically must relate to qualified transportation the compensation reduction amount elected by the
fringes to be provided after the election. employee. Any compensation reduction amount
renewed for subsequent periods.
elected by the employee for the month that is not
(b) Automatic election permitted. An For this purpose, the date a qualified trans-
used for qualified transportation fringes is not
employer may provide under its qualified portation fringe is provided is— refunded to the employee at any future date.
transportation fringe benefit plan that a (1) The date the employee receives a (ii) In this Example 1, the arrangement satisfies
compensation reduction election will be voucher or similar item; or the requirements of this Q/A-14 because the election

2001–11 I.R.B. 801 March 12, 2001


is made before the employee is able currently to of March. On April 5 of the year, Employer T reim- ment for transit passes made under a bona
receive the cash and the election specifies the future burses Employee R $185 for the parking expenses fide reimbursement arrangement, but, in
period for which the qualified transportation fringes incurred on February 28, and during March, of the
will be provided. The arrangement would also satis- year.
accordance with section 132(f)(3), only if
fy the requirements of this Q/A-14 and Q/A-13 of (ii) In this Example 3, no amount would be permitted under paragraph (b) of this
this section if employees are allowed to elect to includible in Employee R’s wages for income and Q/A-16. The reimbursement must be
reduce compensation up to $280 per month ($100 employment tax purposes because the compensation made under a bona fide reimbursement
plus $180). reduction related solely to parking on or near arrangement which meets the rules of
(iii) The arrangement would also satisfy the Employer R’s business premises used during a peri-
requirements of this Q/A-14 (and Q/A-13 of this sec- od not beginning before the date of the election and
paragraph (c) of this Q/A-16. A payment
tion) if employees are allowed to make an election at the amount reimbursed for parking used in any one made before the date an expense has been
any time before the first or the fifteenth day of the month does not exceed the statutory monthly limita- incurred or paid is not a reimbursement.
month to reduce their compensation payable on that tion. In addition, a bona fide reimbursement
payroll date by an amount not in excess of one-half Q–15. May an employee whose quali- arrangement does not include an arrange-
of the applicable statutory monthly limit (depending fied transportation fringe costs are less ment that is dependent solely upon an
on the type of qualified transportation fringe elected
by the employee) and P provides a mass transit pass than the employee’s compensation reduc- employee certifying in advance that the
on or after the applicable payroll date for the com- tion carry over this excess amount to sub- employee will incur expenses at some
pensation reduction amount elected by the employee sequent periods? future date.
for the payroll date or reimburses the cost of other A–15. (a) Yes. An employee may carry (b) Special rule for transit passes— (1)
qualified transportation fringes used by the employ- over unused compensation reduction In general. The term qualified trans-
ee on or after the payroll date up to the compensation
reduction amount elected by the employee for that amounts to subsequent periods under the portation fringe includes cash reimburse-
payroll date. plan of the employee’s employer. ment for transit passes made under a bona
Example 2. (i) Employee Q elects to reduce his (b) The following example illustrates fide reimbursement arrangement, but, in
compensation payable on March 1 of a year (for the principles of this Q/A-15: accordance with section 132(f)(3), only if
which the statutory monthly mass transit limit is Example. (i) By an election made before
$65) by $195 in exchange for a mass transit voucher
no voucher or similar item that may be
November 1 of a year for which the statutory month-
to be provided in March. The election is made on ly mass transit limit is $65, Employee E elects to
exchanged only for a transit pass is readi-
the preceding February 27. Employee Q was hired reduce compensation in the amount of $65 for the ly available for direct distribution by the
in January of the year. On March 10 of the year, the month of November. E incurs $50 in employee- employer to employees. If a voucher is
employer of Employee Q delivers to Employee Q a operated commuter highway vehicle expenses dur- readily available, the requirement that a
mass transit voucher worth $195 for the months of ing November for which E is reimbursed $50 by
January, February, and March.
voucher be distributed in-kind by the
Employer R, E’s employer. By an election made
(ii) In this Example 2, $65 is included in before December, E elects to reduce compensation
employer is satisfied if the voucher is dis-
Employee Q’s wages for income and employment by $65 for the month of December. E incurs $65 in tributed by the employer or by another
tax purposes because the compensation reduction employee-operated commuter highway vehicle person on behalf of the employer (for
election fails to satisfy the requirement in this Q/A- expenses during December for which E is reim- example, if a transit operator credits
14 and Q/A-12 of this section that the period for bursed $65 by R. Before the following January, E
which the qualified transportation fringe will be pro-
amounts to the employee’s fare card as a
elects to reduce compensation by $50 for the month
vided not begin before the election is made to the of January. E incurs $65 in employee-operated com-
result of payments made to the operator
extent the election relates to $65 worth of transit muter highway vehicle expenses during January for by the employer).
passes for January of the year. The $65 for February which E is reimbursed $65 by R because R allows E (2) Voucher or similar item. For pur-
is not taxable because the election was for a future to carry over to the next year the $15 amount by poses of the special rule in paragraph (b)
period that includes at least one day in February. which the compensation reductions for November
(iii) However, no amount would be included in
of this Q/A-16, a transit system voucher is
and December exceeded the employee-operated
Employee Q’s wages as a result of the election if commuter highway vehicle expenses incurred during
an instrument that may be purchased by
$195 worth of mass transit passes were instead pro- those months. employers from a voucher provider that is
vided to Q for the months of February, March, and (ii) In this Example, because Employee E is reim- accepted by one or more mass transit
April (because the compensation reduction would bursed in an amount not exceeding the applicable operators (e.g., train, subway, and bus) in
relate solely to fringes to be provided for a period statutory monthly limit, and the reimbursement does
not beginning before the date of the election and the
an area as fare media or in exchange for
not exceed the amount of employee-operated com-
amount provided does not exceed the aggregate limit muter highway vehicle expenses incurred during the
fare media. Thus, for example, a transit
for the period, i.e., the sum of $65 for each of month of January, the amount reimbursed ($65) is pass that may be purchased by employers
February, March, and April). See Q/A-9 of this sec- excludable from E’s wages for income and employ- directly from a voucher provider is a tran-
tion for rules governing transit passes distributed in ment tax purposes. sit system voucher.
advance for more than one month. Q–16. How does section 132(f) apply (3) Voucher provider. The term vouch-
Example 3. (i) Employee R elects to reduce his
compensation payable on March 1 of a year (for to expense reimbursements? er provider means any person in the trade
which the statutory monthly parking limit is $175) A-16. (a) In general. The term quali- or business of selling transit system
by $185 in exchange for reimbursement by fied transportation fringe includes cash vouchers to employers, or any transit sys-
Employer T of parking expenses incurred by reimbursement by an employer to an tem or transit operator that sells vouchers
Employee R for parking on or near Employer T’s employee for expenses incurred or paid to employers for the purpose of direct dis-
business premises during the period beginning after
the date of the election through March. The election by an employee for transportation in a tribution to employees. Thus, a transit
is made on the preceding February 27. Employee R commuter highway vehicle or qualified operator might or might not be a voucher
incurs $10 in parking expenses on February 28 of the parking. The term qualified transporta- provider. A voucher provider is not, for
year, and $175 in parking expenses during the month tion fringe also includes cash reimburse- example, a third-party employee benefits

March 12, 2001 802 2001–11 I.R.B.


administrator that administers a transit available are restrictions imposed by the the vouchers either as fare media or in exchange for
pass benefit program for an employer voucher provider other than fare media fare media. To cover its operating expenses, C impos-
es on each voucher a 50 cents charge, plus a reason-
using vouchers that the employer could charges that effectively prevent the able and customary $15 charge for delivery of each
obtain directly. employer from obtaining vouchers appro- order of vouchers. Employer M disburses vouchers
(4) Readily available. For purposes of priate for distribution to employees. purchased from C to its employees who use operators
this paragraph (b), a voucher or similar Examples of such restrictions include— that accept the vouchers and M reasonably expects
item is readily available for direct distrib- (i) Advance purchase requirements. that $55 is the average value of the voucher it will pur-
chase from C for the next calendar year.
ution by the employer to employees if and Advance purchase requirements cause (ii) In this Example, vouchers for X are readily
only if an employer can obtain it from a vouchers to not be readily available only available for direct distribution by the employer to
voucher provider that– if the voucher provider does not offer employees because the expected cost of the vouchers
(i) does not impose fare media charges vouchers at regular intervals or fails to disbursed to M’s employees for the next calendar
that cause vouchers to not be readily provide the voucher within a reasonable year is not more than 1 percent of the value of the
vouchers (50 cents divided by $55 equals 0.91 per-
available as described in paragraph (b)(5) period after receiving payment for the cent), the delivery charges are disregarded because
of this section; and voucher. For example, a requirement that they are reasonable and customary, and there are no
(ii) does not impose other restrictions vouchers may be purchased only once per other restrictions that cause the vouchers to not be
that cause vouchers to not be readily year may effectively prevent an employer readily available. Thus, any reimbursement of mass
available as described in paragraph (b)(6) from obtaining vouchers for distribution transportation costs in X would not be a qualified
transportation fringe.
of this section. to employees. An advance purchase
(c) Substantiation requirements.
(5) Fare media charges. For purposes requirement that vouchers be purchased
Employers that make cash reimbursements
of paragraph (b)(4) of this section, fare not more frequently than monthly does
must establish a bona fide reimbursement
media charges relate only to fees paid by not effectively prevent the employer from
the employer to voucher providers for obtaining vouchers for distribution to arrangement to establish that their employ-
vouchers. The determination of whether employees. ees have, in fact, incurred expenses for
obtaining a voucher would result in fare (ii) Purchase quantity requirements. transportation in a commuter highway
media charges that cause vouchers to not Purchase quantity requirements cause vehicle, transit passes, or qualified parking.
be readily available as described in this vouchers to not be readily available if the For purposes of section 132(f), whether
paragraph (b) is made with respect to each voucher provider does not offer vouchers cash reimbursements are made under a
transit system voucher. If more than one in quantities that are reasonably appropri- bona fide reimbursement arrangement may
transit system voucher is available for ate to the number of the employer’s vary depending on the facts and circum-
direct distribution to employees, the employees who use mass transportation stances, including the method or methods
employer must consider the fees imposed (for example, the voucher provider of payment utilized within the mass transit
for the lowest cost monthly voucher for requires a $1,000 minimum purchase and system. The employer must implement
purposes of determining whether the fees the employer seeks to purchase only $200 reasonable procedures to ensure that an
imposed by the voucher provider satisfy of vouchers). amount equal to the reimbursement was
this paragraph. However, if transit system (iii) Limitations on denominations of incurred for transportation in a commuter
vouchers for multiple transit systems are vouchers that are available. If the vouch- highway vehicle, transit passes, or quali-
required in an area to meet the transit er provider does not offer vouchers in fied parking. The expense must be sub-
needs of the individual employees in that denominations appropriate for distribu- stantiated within a reasonable period of
area, the employer has the option of aver- tion to the employer’s employees, vouch- time. An expense substantiated to the
aging the costs applied to each transit sys- ers are not readily available. For exam- payor within 180 days after it has been paid
tem voucher for purposes of determining ple, vouchers provided in $5 increments will be treated as having been substantiat-
whether the fare media charges for transit up to the monthly limit are appropriate for ed within a reasonable period of time. An
system vouchers satisfy this paragraph. distribution to employees, while vouchers employee certification at the time of reim-
Fare media charges are described in this available only in a denomination equal to bursement in either written or electronic
paragraph (b)(5), and therefore cause the monthly limit are not appropriate for form may be a reasonable reimbursement
vouchers to not be readily available, if and distribution to employees if the amount of procedure depending on the facts and cir-
only if the average annual fare media the benefit provided to the employer’s cumstances. Examples of reasonable reim-
charges that the employer reasonably employees each month is normally less bursement procedures are set forth in para-
expects to incur for transit system vouch- than the monthly limit. graph (d) of this Q/A-16.
ers purchased from the voucher provider (7) Example. The following example (d) Illustrations of reasonable reim-
(disregarding reasonable and customary illustrates the principles of this paragraph bursement procedures. The following are
delivery charges imposed by the voucher (b): examples of reasonable reimbursement
provider, e.g., not in excess of $15) are Example. (i) Company C in City X sells mass procedures for purposes of paragraph (c)
transit vouchers to employers in the metropolitan area of this Q/A-16. In each case, the reim-
more than 1 percent of the average annual
of X in various denominations appropriate for distrib- bursement is made at or within a reason-
value of the vouchers for a transit system. ution to employees. Employers can purchase vouch-
(6) Other restrictions. For purposes of ers monthly in reasonably appropriate quantities.
able period after the end of the events
paragraph (b)(4) of this section, restric- Several different bus, rail, van pool, and ferry opera- described in paragraphs (d)(1) through
tions that cause vouchers to not be readily tors service X, and a number of the operators accept (d)(3) of this section.

2001–11 I.R.B. 803 March 12, 2001


(1) An employee presents to the transit passes. Thus, an employer may transportation fringe exclusion for transit
employer a parking expense receipt for distribute a transit pass for each month passes is available for travel in van pools
parking on or near the employer’s busi- with a value not more than the statutory owned and operated either by public transit
ness premises, the employee certifies that monthly limit without requiring any certi- authorities or by any person in the business
the parking was used by the employee, fication from the employee regarding the of transporting persons for compensation
and the employer has no reason to doubt use of the transit pass. or hire. In accordance with paragraph (b)
the employee’s certification. Q-19. May an employer choose to of Q/A-3 of this section, the van must seat
(2) An employee either submits a used impose substantiation requirements in at least 6 adults (excluding the driver). See
time-sensitive transit pass (such as a addition to those described in this regula- Q/A-16(b) and (c) of this section for a spe-
monthly pass) to the employer and certi- tion? cial rule for cash reimbursement for transit
fies that he or she purchased it or presents A-19. Yes. passes and the substantiation requirements
an unused or used transit pass to the Q-20. How is the value of parking for cash reimbursement.
employer and certifies that he or she pur- determined? (e) Value of van pool transportation
chased it and the employee certifies that A-20. Section 1.61–21(b)(2) applies benefits. Section 1.61–21(b)(2) provides
he or she has not previously been reim- for purposes of determining the value of that the fair market value of a fringe ben-
bursed for the transit pass. In both cases, parking. efit is based on all the facts and circum-
the employer has no reason to doubt the Q-21. How do the qualified transporta- stances. Alternatively, transportation in
employee’s certification. tion fringe rules apply to van pools? an employer-provided commuter highway
(3) If a receipt is not provided in the A-21. (a) Van pools generally. vehicle may be valued under the automo-
ordinary course of business (e.g., if the Employer and employee-operated van bile lease valuation rule in §1.61–21(d),
employee uses metered parking or if used pools, as well as private or public transit- the vehicle cents-per-mile rule in
transit passes cannot be returned to the operated van pools, may qualify as quali- §1.61–21(e), or the commuting valuation
user), the employee certifies to the fied transportation fringes. The value of rule in §1.61–21(f). If one of these spe-
employer the type and the amount of van pool benefits which are qualified cial valuation rules is used, the employer
expenses incurred, and the employer has transportation fringes may be excluded up must use the same valuation rule to value
no reason to doubt the employee’s certifi- to the applicable statutory monthly limit the use of the commuter highway vehicle
cation. for transportation in a commuter highway by each employee who share the use. See
Q-17. May an employer provide non- vehicle and transit passes, less the value §1.61–21(c)(2)(i)(B).
taxable cash reimbursement under section of any transit passes provided by the (f) Qualified parking prime member. If
132(f) for periods longer than one month? employer for the month. an employee obtains a qualified parking
A-17. (a) General rule. Yes. Qualified (b) Employer-operated van pools. The space as a result of membership in a car or
transportation fringes include reimburse- value of van pool transportation provided van pool, the applicable statutory monthly
ment to employees for costs incurred for by or for an employer to its employees is limit for qualified parking applies to the
transportation in more than one month, excludable as a qualified transportation individual to whom the parking space is
provided the reimbursement for each fringe, provided the van qualifies as a com- assigned. This individual is the prime
month in the period is calculated separate- muter highway vehicle as defined in sec- member. In determining the tax conse-
ly and does not exceed the applicable tion 132(f)(5)(B) and Q/A-2 of this section. quences to the prime member, the statuto-
statutory monthly limit for any month in A van pool is operated by or for the ry monthly limit amounts of each car pool
the period. See Q/A-8 and 9 of this sec- employer if the employer purchases or member may not be combined. If the
tion if the limit for a month is exceeded. leases vans to enable employees to com- employer provides access to the space and
(b) Example. The following example mute together or the employer contracts the space is not assigned to a particular
illustrates the principles of this Q/A-17: with and pays a third party to provide the individual, then the employer must desig-
Example. (i) Employee R pays $100 per month vans and some or all of the costs of operat- nate one of its employees as the prime
for qualified parking used during the period from
ing the vans, including maintenance, liabil- member who will bear the tax conse-
April 1 through June 30 of a year in which the statu-
tory monthly qualified parking limit is $175. After ity insurance and other operating expenses. quences. The employer may not desig-
receiving adequate substantiation from Employee R, (c) Employee-operated van pools. nate more than one prime member for a
R’s employer reimburses R $300 in cash on June 30 Cash reimbursement by an employer to car or van pool during a month. The
of that year. employees for expenses incurred for employer of the prime member is respon-
(ii) In this Example, because the value of the
transportation in a van pool operated by sible for including the value of the quali-
reimbursed expenses for each month did not exceed
the applicable statutory monthly limit, the $300 employees independent of their employer fied parking in excess of the statutory
reimbursement is excludable from R’s wages for are excludable as qualified transportation monthly limit in the prime member’s
income and employment tax purposes as a qualified fringes, provided that the van qualifies as wages for income and employment tax
transportation fringe. a commuter highway vehicle as defined in purposes.
Q-18. What are the substantiation section 132(f)(5)(B) and Q/A-2 of this Q-22. What are the reporting and
requirements if an employer distributes section. See Q/A-16 of this section for the employment tax requirements for quali-
transit passes? rules governing cash reimbursements. fied transportation fringes?
A-18. There are no substantiation (d) Private or public transit-operated A-22. (a) Employment tax treatment
requirements if the employer distributes van pool transit passes. The qualified generally. Qualified transportation

March 12, 2001 804 2001–11 I.R.B.


fringes not exceeding the applicable statu- compensation reduction election), the month does not exceed the dollar amount
tory monthly limit described in Q/A-7 of value of the benefit may be excludable, specified in §1.132–6(d)(1). However, if
this section are not wages for purposes of either totally or partially, under fringe the value of a pass provided in a month
the Federal Insurance Contributions Act benefit rules other than the qualified exceeds the dollar amount specified in
(FICA), the Federal Unemployment Tax transportation fringe rules under section §1.132–6(d)(1), the full value of the ben-
Act (FUTA), and federal income tax with- 132(f). See §§1.132–6(d)(2)(i) (occasion- efit provided (not merely the amount in
holding. Any amount by which an al local transportation fare), excess of the dollar amount specified in
employee elects to reduce compensation 1.132–6(d)(2)(iii) (transportation provid- §1.132–6(d)(1)) is includible in gross
as provided in Q/A-11 of this section is ed under unusual circumstances), and income.
not subject to the FICA, the FUTA, and 1.61–21(k) (valuation of local transporta- (c) Parking. The working condition
federal income tax withholding. tion provided to qualified employees). fringe rules under section 132(d) do not
Qualified transportation fringes exceeding See also Q/A-4(b) of this section. apply to commuter parking. See
the applicable statutory monthly limit Q-24. May qualified transportation §1.132–5(a)(1). However, the de minimis
described in Q/A-7 of this section are fringes be provided to individuals who are fringe rules under section 132(e) are
wages for purposes of the FICA, the partners, 2-percent shareholders of S-cor- available for parking provided to individ-
FUTA, and federal income tax withhold- porations, or independent contractors? uals who are partners, 2-percent share-
ing and are reported on the employee’s A-24. (a) General rule. Section holders, or independent contractors that
Form W-2, Wage and Tax Statement. 132(f)(5)(E) states that self-employed qualifies under the de minimis rules. See
(b) Employment tax treatment of cash individuals who are employees within the §1.132–6(a) and (b).
reimbursement exceeding monthly limits. meaning of section 401(c)(1) are not (d) Example. The following example
Cash reimbursement to employees (for employees for purposes of section 132(f). illustrates the principles of this Q/A-24:
example, cash reimbursement for quali- Therefore, individuals who are partners, Example. (i) Individual G is a partner in partner-
ship P. Individual G commutes to and from G’s
fied parking) in excess of the applicable sole proprietors, or other independent
office every day and parks free of charge in P’s lot.
statutory monthly limit under section contractors are not employees for purpos- (ii) In this Example, the value of the parking is
132(f) is treated as paid for employment es of section 132(f). In addition, under not excluded under section 132(f), but may be
tax purposes when actually or construc- section 1372(a), 2-percent shareholders of excluded under section 132(e) if the parking is a de
tively paid. See §§31.3121(a)–2(a), S corporations are treated as partners for minimis fringe under §1.132–6.
31.3301–4, 31.3402(a)–1(b) of this chap- fringe benefit purposes. Thus, an individ- Q–25. What is the effective date of this
ter. Employers must report and deposit ual who is both a 2-percent shareholder of section?
the amounts withheld in addition to an S corporation and a common law A-25. (a) Except as provided in para-
reporting and depositing other employ- employee of that S corporation is not con- graph (b) of this Q/A-25, this section is
ment taxes. See Q/A-16 of this section for sidered an employee for purposes of sec- applicable for taxable years beginning
rules governing cash reimbursements. tion 132(f). However, while section after December 31, 2001.
(c) Noncash fringe benefits exceeding 132(f) does not apply to individuals who (b) The last sentence of paragraph
monthly limits. If the value of noncash are partners, 2-percent shareholders of S (b)(5) of Q/A-16 of this section (relating
qualified transportation fringes exceeds corporations, or independent contractors, to whether transit system vouchers for
the applicable statutory monthly limit, the other exclusions for working condition transit passes are readily available) is
employer may elect, for purposes of the and de minimis fringes may be available effective for taxable years beginning after
FICA, the FUTA, and federal income tax as described in paragraphs (b) and (c) of December 31, 2003.
withholding, to treat the noncash taxable this Q/A-24. See §§1.132–1(b)(2) and
PART 602 — OMB CONTROL
fringe benefits as paid on a pay period, 1.132–1(b)(4).
NUMBERS UNDER THE
quarterly, semi-annual, annual, or other (b) Transit passes. The working con-
PAPERWORK REDUCTION ACT
basis, provided that the benefits are treat- dition and de minimis fringe exclusions
ed as paid no less frequently than annual- under section 132(a)(3) and (4) are avail- Par. 5. The authority citation for part
ly. able for transit passes provided to individ- 602 continues to read as follows:
Q–23. How does section 132(f) inter- uals who are partners, 2-percent share- Authority: 26 U.S.C. 7805.
act with other fringe benefit rules? holders, and independent contractors. For Par. 6. In §602.101, paragraph (b) is
A-23. For purposes of section 132, the example, tokens or farecards provided by amended by adding an entry in numerical
terms working condition fringe and de a partnership to an individual who is a order to the table to read as follows:
minimis fringe do not include any quali- partner that enable the partner to commute
fied transportation fringe under section on a public transit system (not including §602.101 OMB Control numbers.
132(f). If, however, an employer provides privately-operated van pools) are exclud-
*****
local transportation other than transit able from the partner’s gross income if the
(b) * * *
passes (without any direct or indirect value of the tokens and farecards in any

2001–11 I.R.B. 805 March 12, 2001


CFR part or section where Current OMB
identified and described control no.
*****
1.132–9(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1676
*****

Robert E. Wenzel, DATES: Effective Date. These regula- Business Administration for comment on
Deputy Commissioner tions are effective as of January 11, 2001. the impact of the proposed regulations on
of Internal Revenue. Applicability Dates. These regulations small business.
apply to distributions or dispositions that
Approved December 29, 2000. occur on or after January 11, 2001. Drafting Information
Jonathan Talisman, FOR FURTHER INFORMATION CON- The principal author of these regula-
Acting Assistant Secretary TACT: Mark D. Harris, (202) 622-3860 tions is Mark Harris of the Office of
of the Treasury. (not a toll-free number). Associate Chief Counsel (International).
However, other personnel from the IRS
(Filed by the Office of the Federal Register on Janu- SUPPLEMENTARY INFORMATION: and Treasury Department participated in
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, 66 F.R. Background their development.
2241) * * * * *
On January 24, 2000, the IRS and
Adoption of Amendments to the
Treasury issued final regulations under
Regulations
Section 280G.—Golden section 367(b) of the Internal Revenue
Parachute Payments Code (Code). At the same time, the IRS Accordingly, 26 CFR parts 1 and 7 are
and Treasury also modified temporary amended as follows:
regulation §7.367(b)–12(a). The final
Federal short-term, mid-term, and long-term rates
regulations and modified temporary regu- PART 1—INCOME TAXES
are set forth for the month of March 2001. See Rev.
Rul. 2001–12, page 811. lation were effective as of February 23,
Paragraph 1. The authority citation for
2000.
part 1 is amended by adding an entry in
As modified, §7.367(b)–12(a) address-
numerical order to read in part as follows:
Section 367.— Foreign es distributions with respect to, or a dis-
Authority: 26 U.S.C. 7805 * * *
Corporations position of, stock that was subject to cer-
Section 1.367(b)–12 also issued under
tain provisions of the temporary section
26 U.S.C. 367(a) and (b). * * *
26 CFR 1.367(b)–12: Subsequent treatment of 367(b) regulations that were in effect
amounts attributed or included in income. Par. 2. Section 1.367(b)–0 is amended
before February 23, 2000. This document
by revising the introductory text and
finalizes the rule stated in §7.367(b)
T.D. 8937 –12(a) in order to insure its continued
adding entries for §1.367(b)–12 to read as
follows:
DEPARTMENT OF THE TREASURY application. See section 7805(e)(2) (stat-
Internal Revenue Service ing a “sunset rule” applicable to tempo- §1.367(b)–0 Table of contents.
rary regulations).
26 CFR Parts 1 and 7 This section lists the paragraphs con-
Special Analyses tained in §§1.367(b)–1 through
Stock Transfer Rules: Transition
1.367(b)–6 and 1.367(b)–12.
Rules It has been determined that this *****
Treasury decision is not a significant reg-
AGENCY: Internal Revenue Service ulatory action as defined in Executive §1.367(b)–12 Subsequent treatment of
(IRS), Treasury. Order 12866. Therefore, a regulatory amounts attributed or included in income.
assessment is not required. It also has
ACTION: Final regulations and removal (a) In general.
been determined that section 553(b) of the
of temporary regulations. (b) Applicable rules.
Administrative Procedure Act (5 U.S.C.
SUMMARY: This document contains chapter 5) does not apply to these regula- (c) Effective date.
final regulations addressing distributions tions, and because the notice of proposed Par. 3. Section 1.367(b)–12 is added to
with respect to, or a disposition of, certain rulemaking preceding the regulations was read as follows:
stock that was subject to prior temporary issued prior to March 29, 1996, the §1.367(b)–12 Subsequent treatment of
regulations under section 367(b). Section Regulatory Flexibility Act (5 U.S.C. amounts attributed or included in
367(b) addresses the application of non- chapter 6) does not apply. income.
recognition exchange provisions in Pursuant to section 7805(f) of the Code,
Subchapter C of the Internal Revenue the notice of proposed rulemaking preced- (a) In general. This section applies to
Code to transactions that involve one or ing these regulations was submitted to the distributions with respect to, or a disposi-
more foreign corporations. Chief Counsel for Advocacy of the Small tion of, stock—
March 12, 2001 806 2001–11 I.R.B.
(1) To which, in connection with an The adjusted applicable federal long-term rate is Section 985.—Functional
exchange occurring before February 23, set forth for the month of March 2001. See Rev. Rul.
2001–12, page 811. Currency
2000, an amount has been attributed pur-
suant to §7.367(b)–9 or 7.367(b)–10 of 26 CFR 1.985–8: Special rules applicable to the
this chapter (as in effect prior to February European Monetary Union (conversion to euro).
23, 2000, see 26 CFR part 1 revised as of Section 467.—Certain Payments
for the Use of Property or T.D. 8927
April 1, 1999); or
(2) In respect of which, before Services DEPARTMENT OF THE TREASURY
February 23, 2000, an amount has been The adjusted applicable federal short-term, mid- Internal Revenue Service
included in income or added to earnings term, and long-term rates are set forth for the month 26 CFR Part 1
and profits pursuant to §7.367(b)–7 or of March 2001. See Rev. Rul. 2001–12, page 811.
7.367(b)–10 of this chapter (as in effect Conversion to the Euro
prior to February 23, 2000, see 26 CFR
part 1 revised as of April 1, 1999). Section 468.—Special Rules for AGENCY: Internal Revenue Service
(b) Applicable rules. See §7.367(b) Mining and Solid Waste (IRS), Treasury.
–12(b) through (e) of this chapter (as in Reclamation and Closing Costs ACTION: Final regulations and removal
effect prior to January 11, 2001, see 26 of temporary regulations.
CFR part 1 revised as of April 1, 2000) for The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month SUMMARY: This document contains
purposes of applying paragraph (a) of this of March 2001. See Rev. Rul. 2001–12, page 811.
section. final Income Tax Regulations relating to
(c) Effective date. This section applies U.S. taxpayers operating, investing, or
to distributions or dispositions that occur otherwise conducting business in the cur-
Section 482.—Allocation of rencies of certain European countries that
on or after January 11, 2001.
Income and Deductions Among replace their national currencies with a
PART 7—TEMPORARY INCOME TAX Taxpayers single, multinational currency called the
REGULATIONS UNDER THE TAX euro. These regulations provide rules
Federal short-term, mid-term, and long-term
REFORM ACT OF 1976 rates are set forth for the month of March 2001. See relating to adjustments required for quali-
Rev. Rul. 2001–12, page 811. fied business units operating in such cur-
Par. 4. The authority citation for part 7
rencies and rules relating to the tax effect
is amended by removing the entry for
of holding such currencies, or financial
§7.367(b)–12 and continues to read in part
as follows:
Section 483.—Interest on instruments or contracts denominated in
Certain Deferred Payments such currencies.
Authority: 26 U.S.C. 7805 * * *
The adjusted applicable federal short-term, mid- DATES: Effective Date: These regulations
§7.367(b)–12 [Removed] term, and long-term rates are set forth for the month are effective January 11, 2001.
of March 2001. See Rev. Rul. 2001–12, page 811. Applicability Date: These regulations
Par. 5. Section 7.367(b)–12 is
removed. are applicable for tax years ending after
July 29, 1998.
Robert E. Wenzel, Section 642.—Special Rules for
FOR FURTHER INFORMATION CON-
Deputy Commissioner of Credits and Deductions
TACT: John W. Rogers III of the Office of
Internal Revenue.
Federal short-term, mid-term, and long-term Associate Chief Counsel (International),
rates are set forth for the month of March 2001. See (202) 622-3870, regarding the change in
Approved December 28, 2000.
Rev. Rul. 2001–12, page 811.
functional currency rules and Thomas
Jonathan Talisman, Preston of the Office of Assistant Chief
Acting Assistant Secretary Counsel (Financial Institutions and
of the Treasury. Section 807.—Rules for Certain Products), (202) 622-3930, regarding sec-
Reserves tion 1001 (not toll free calls).
(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of The adjusted applicable federal short-term, mid- SUPPLEMENTARY INFORMATION:
the Federal Register for January 11, 2001, 66 F.R. term, and long-term rates are set forth for the month
2256) of March 2001. See Rev. Rul. 2001–12, page 811. Background

On March 9, 1998, the IRS issued


Section 382.—Limitation on Section 846.—Discounted Announcement 98–18 (1998–1 C.B. 676)
Net Operating Loss Unpaid Losses Defined requesting comments relating to the tax
issues for U.S. taxpayers operating,
Carryforwards and Certain The adjusted applicable federal short-term, mid- investing, or otherwise conducting busi-
Built-In Losses Following term, and long-term rates are set forth for the month
ness in a currency that is converting to the
Ownership Change of March 2001. See Rev. Rul. 2001–12, page 811.
euro. Numerous comments were received.

2001–11 I.R.B. 807 March 12, 2001


After consideration of the comments, and cy as its functional currency. For exam- mended that the regulations provide rules
in order to provide immediate guidance, ple, a corporation may have a non-legacy that require calculation of section 987
the Treasury and the IRS published in the currency as its functional currency gain or loss during the period in which the
Federal Register temporary regulations because its economic environment reflect- taxpayer and its branch have different
(63 FR 40366) and a notice of proposed ed more significant activities denominat- functional currencies. The recommenda-
rulemaking by cross-reference to the tem- ed in such currency (e.g., the U.S. dollar tion is not adopted because section 987
porary regulations (63 F.R. 40383 [T.D. or the Swiss franc) relative to any single currency gain or loss should not arise
8776, 1998–2 C.B. 200]) on July 29, legacy currency. However, given the when a taxpayer and its branch use the
1998. No public hearing was held in con- aggregation of the individual legacy cur- same legacy currency as their functional
junction with the notice of proposed rule- rencies into the euro, the currency of the currencies even if each adopts the euro as
making because no taxpayers requested to corporation’s economic environment in its functional currency in different years.
speak at the hearing. which a significant part of its activities are Finally, the notice of proposed rule-
In the notice of proposed rulemaking, conducted is the euro. The commenter making requested comments regarding
the Treasury and The IRS requested com- suggested that, in such circumstances, the the treatment of section 988 transactions
ments with respect to certain additional corporation should be allowed to change that are held by euro functional currency
issues. Two comments were received in its functional currency to the euro auto- QBUs and that are denominated in a cur-
connection with the request for comments matically. rency that is replaced by the euro in the
and are discussed in greater detail below. In response to the comment, the regula- future. While no comments were
tion provides a new rule in which a QBU received, Treasury and the IRS believe
Explanation of Provisions and that rules relating to this issue should be
that uses a non-legacy currency as its
Discussion of Comments clarified. Accordingly, §1.985–8(d) pro-
functional currency may change its func-
The temporary regulations provide tional currency to the euro provided that vides that the principles of §1.985–8(c)(3)
rules relating to U.S. taxpayers operating, the euro is a currency of the economic apply in this context. Under this rule,
investing, or otherwise conducting busi- environment in which a significant part of legacy currency transactions generally
ness in the currencies of countries that the QBU’s activities are conducted, the continue to be treated as section 988
replace their national currencies (legacy QBU maintains its books and records in transactions and the principles of section
currencies) with a single, multinational the euro after conversion, and the QBU is 988 apply. Further, the principles provid-
currency called the euro. Thus, a legacy not required to use the dollar as its func- ed in §1.985–8(c)(3)(iii) and (iv) continue
currency would include former currencies tional currency. The change is deemed to to apply to currency and accounts payable
of the eleven countries that adopted the be made with the consent of the and receivable, respectively.
euro in 1999 as well as the currency of a Commissioner if the change is made with-
Special Analysis
country after it adopts the euro at some in the period set forth in §1.985–8(b)(2).
later date. The temporary regulations A QBU changing its functional currency It has been determined that this
generally provide guidance relating to the under this new rule is required to make Treasury decision is not a significant reg-
circumstances under which the euro con- the change in method of accounting ulatory action as defined in Executive
version creates a realization event with adjustments under §1.985–5. Treasury Order 12866. Therefore, a regulatory
respect to instruments and contracts and the IRS believe that the rules of assessment is not required. It has also
denominated in a legacy currency, and the §1.985–5 appropriately apply to this cir- been determined that section 553(b) of the
circumstances under which the euro con- cumstance because the change in func- Administrative Procedures Act (5 U.S.C.
version constitutes a change in functional tional currency is not an involuntary chapter 5) does not apply to these regula-
currency for a qualified business unit change of the same nature as a QBU tions, and because the final rule does not
(QBU or QBUs, as the case may be) whose functional currency is a legacy cur- impose a collection of information on
whose functional currency is a legacy cur- rency. small entities, the provisions of the
rency, and certain consequences thereof. The second comment suggested that the Regulatory Flexibility Act do not apply.
The temporary regulations published in temporary regulations do not provide Pursuant to section 7805(f) of the Internal
the Federal Register on July 29, 1998, clear guidance in the case where, prior to Revenue Code, these regulations were
are finalized substantially as proposed. conversion, the functional currency of a submitted to the Chief Counsel for
See the preamble to the temporary regula- taxpayer and one of its QBU branches is Advocacy of the Small Business
tions for an explanation of the provisions the same legacy currency, and either the Administration for comment on their
of those regulations. taxpayer or its QBU branch converts to impact on small business.
As noted above, two comments were the euro as its functional currency in a DRAFTING INFORMATION: The
received in connection with the publica- taxable year prior to the conversion of the principal authors of these final regulations
tion of the temporary regulations and the other. The comment noted that the tem- are John W. Rogers III of the Office of the
notice of proposed rulemaking. One com- porary regulations presume that the tax- Associate Chief Counsel (International)
ment addressed the effect of the euro con- payer and its branch have a different func- and Thomas Preston of the Office of
version to a corporation that has signifi- tional currency, but do not address Associate Chief Counsel (Financial
cant numbers of legacy currency instances where they have the same func- Institutions and Products). Other person-
transactions but has a non-legacy curren- tional currency. The comment recom- nel from the IRS and Treasury

March 12, 2001 808 2001–11 I.R.B.


Department also participated in their (A) That begins on or after the day that includes the following: “TAXPAYER
development. the euro is substituted for that legacy cur- CERTIFIES THAT A QBU OF THE
* * * * * rency (in accordance with the Treaty on TAXPAYER HAS CHANGED ITS
European Union); and FUNCTIONAL CURRENCY TO THE
Adoption of Amendments to the (B) In which the QBU begins to main- EURO PURSUANT TO TREAS. REG.
Regulations tain its books and records (as described in §1.985–8.” For purposes of this paragraph
Accordingly, 26 CFR part 1 is amended §1.989(a)–1(d)) in the euro. (b)(5), an affected taxpayer shall be in the
as follows: (ii) Notwithstanding paragraph (b)(2)(i) case where the QBU is: a QBU of an indi-
of this section, a QBU with a legacy cur- vidual U.S. resident (as a result of the
PART 1—INCOME TAXES rency as its functional currency is activities of such individual), the individ-
required to change its functional currency ual; a QBU branch of a U.S. corporation,
Paragraph 1. The authority citation for to the euro no later than the last taxable the corporation; a controlled foreign cor-
part 1 continues to read in part as follows: year beginning on or before the first day poration (as described in section 957)(or
Authority: 26 U.S.C. 7805 * * * such legacy currency is no longer valid QBU branch thereof), each United States
§1.985–1 [Amended] legal tender. shareholder (as described in section
(3) QBU with a non-legacy currency as 951(b)); a partnership, each partner sepa-
Par. 2. In §1.985–1, paragraph (c)(6), in its functional currency — (i) In general. rately; a noncontrolled section 902 corpo-
the last sentence, the reference A QBU with a non-legacy currency as its ration (as described in section
“§1.985–8T” is removed and “§1.985–8” functional currency may change its func- 904(d)(2)(E)) (or branch thereof), each
is added in its place. tional currency to the euro pursuant to this domestic shareholder as described in
§1.985–8 if– §1.902–1(a)(1); or a trust or estate, the
§1.985–4 [Amended] (A) Under the rules set forth in fiduciary of such trust or estate.
§1.985–1(c), the euro is the currency of (c) Adjustments required when a QBU
Par. 3. In §1.985–4, paragraph (a), in
the economic environment in which a sig- changes its functional currency from a
the last sentence, the reference
nificant part of the QBU’s activities are legacy currency to the euro pursuant to
“§1.985–8T” is removed and “§1.985–8”
conducted; paragraph (b)(2) of this section—(1) In
is added in its place.
(B) After conversion, the QBU main- general. A QBU that changes its function-
Par. 4. Section 1.985–8 is added to read
tains its books and records (as described al currency from a legacy currency to the
as follows:
in §1.989(a)–1(d)) in the euro; and euro pursuant to paragraph (b)(2) of this
§1.985–8 Special rules applicable to the (C) The QBU is not required to use the section must make the adjustments
European Monetary Union (conversion to dollar as its functional currency under described in paragraphs (c)(2) through (5)
euro). §1.985–1(b). of this section. Section 1.985–5 shall not
(ii) Time period for change. A QBU apply.
(a) Definitions—(1) Legacy currency. with a non-legacy currency as its func- (2) Determining the euro basis of prop-
A legacy currency is the former currency tional currency may change its functional erty and the euro amount of liabilities and
of a Member State of the European currency to the euro under this section other relevant items. The euro basis in
Community which is substituted for the only if it does so within the period set property and the euro amount of liabilities
euro in accordance with the Treaty estab- forth in paragraph (b)(2) of this section as and other relevant items shall equal the
lishing the European Community signed if the functional currency of the QBU was product of the legacy functional currency
February 7, 1992. The term legacy curren- a legacy currency. adjusted basis or amount of liabilities
cy shall also include the European (4) Consent of Commissioner. A change multiplied by the applicable conversion
Currency Unit. made pursuant to paragraph (b) of this rate.
(2) Conversion rate. The conversion section shall be deemed to be made with (3) Taking into account exchange gain
rate is the rate at which the euro is substi- the consent of the Commissioner for pur- or loss on legacy currency section 988
tuted for a legacy currency. poses of §1.985–4. A QBU changing its transactions—(i) In general. Except as
(b) Operative rules—(1) Initial adop- functional currency to the euro pursuant provided in paragraphs (c)(3)(iii) and
tion. A QBU (as defined in to paragraph (b)(2) of this section must (iv) of this section, a legacy currency
§1.989(a)–1(b)) whose first taxable year make adjustments as provided in para- denominated section 988 transaction
begins after the euro has been substituted graph (c) of this section. A QBU chang- (determined after applying section
for a legacy currency may not adopt a ing its functional currency to the euro pur- 988(d)) outstanding on the last day of the
legacy currency as its functional currency. suant to paragraph (b)(3) must make taxable year immediately prior to the
(2) QBU with a legacy currency as its adjustments as provided in §1.985–5. year of change shall continue to be treat-
functional currency—(i) Required (5) Statement to file upon change. With ed as a section 988 transaction after the
change. A QBU with a legacy currency as respect to a QBU that changes its func- change and the principles of section 988
its functional currency is required to tional currency to the euro under para- shall apply.
change its functional currency to the euro graph (b) of this section, an affected tax- (ii) Examples. The application of this
beginning the first day of the first taxable payer shall attach to its return for the paragraph (c)(3) may be illustrated by the
year– taxable year of change a statement that following examples:

2001–11 I.R.B. 809 March 12, 2001


Example 1. X, a calendar year QBU on the cash in 1998, X will realize exchange loss of  C 25.13 Branch changing from a legacy currency to
method of accounting, uses the deutschmark as its under §1.988–2(b)(3) as follows: [C  488.89 the euro in a taxable year during which
functional currency. X is not described in section (fl1100/2.25)- 
C 514.02 (DM1028.04/2) = -  C 25.13].
1281(b). On July 1, 1998, X converts 10,000
taxpayer’s functional currency is other
With respect to the one month of interest accrued in
deutschmarks (DM) into Dutch guilders(fl) at the spot 1999, X will realize no exchange gain or loss since the than the euro. If a branch changes its func-
rate of fl1 = DM1 and loans the 10,000 guilders to Y exchange rate when the interest accrued and the spot tional currency from a legacy currency to
(an unrelated party) for one year at a rate of 10% with rate on the payment date are the same. the euro for a taxable year during which the
principal and interest to be paid on June 30, 1999. On (iii) X will realize exchange loss of taxpayer’s functional currency is other than
January 1, 1999, X changes its functional currency to C 666.67 on repayment of the loan principal com-
the euro, the branch’s euro equity pool
the euro pursuant to this section. Assume that the puted in the same manner as in Example 1 [ C
euro/deutschmark conversion rate is set by the 5333.33 (fl12,000/2.25) -  C 6000 fl12,000/1)/2)]. shall equal the product of the legacy cur-
European Council at  C 1= DM2. Assume further that The losses with respect to accrued interest and prin- rency amount of the equity pool multiplied
the euro/guilder conversion rate is set at C 1 = fl2.25. cipal are characterized and sourced under the rules by the applicable conversion rate. No
Accordingly, under the terms of the note, on June 30, of section 988. adjustment to the basis pool is required.
1999, X will receive  C 4444.44 (fl10,000/2.25) of
(iii) Special rule for legacy nonfunc- (ii) Branch changing from a legacy cur-
principal and  C 444.44 (fl1,000/2.25) of interest.
Pursuant to this paragraph (c)(3), X will realize an tional currency. The QBU shall realize or rency to the euro in a taxable year during
exchange loss on the principal computed under the otherwise take into account for all purpos- which taxpayer’s functional currency is the
principles of §1.988–2(b)(5). For this purpose, the es of the Internal Revenue Code the euro. If a branch changes its functional cur-
exchange rate used under §1.988–2(b)(5)(i) shall be amount of any unrealized exchange gain
the guilder/euro conversion rate. The amount under
rency from a legacy currency to the euro
§1.988–2(b)(5)(ii) is determined by translating the
or loss attributable to nonfunctional cur- for a taxable year during which the taxpay-
fl10,000 at the guilder/deutschmark spot rate on July rency (as described in section 988(c)(1) er’s functional currency is the euro, the tax-
1, 1998, and translating that deutschmark amount into (C)(ii)) that is denominated in a legacy payer shall realize gain or loss attributable
euros at the deutschmark/euro conversion rate. Thus, currency as if the currency were disposed to the branch’s equity pool under the prin-
X will compute an exchange loss for 1999 of  C of on the last day of the taxable year
555.56 determined as follows: [  C 4444.44
ciples of section 987, computed as if the
(fl10,000/2.25) - 5000 C ((fl10,000/1)/2) = immediately prior to the year of change. branch terminated on the last day prior to
-555.56].
C Pursuant to this paragraph (c)(3), the char- The character and source of the gain or the year of change. Adjustments under this
acter and source of the loss are determined pursuant to loss are determined under section 988. paragraph (c)(4)(ii) shall be taken into
section 988 and regulations thereunder. Because X (iv) Legacy currency denominated account by the taxpayer ratably over four
uses the cash method of accounting for the interest on
accounts receivable and payable—(A) In taxable years beginning with the taxable
this debt instrument, X does not realize exchange gain
or loss on the receipt of that interest. general. A QBU may elect to realize or year of change.
Example 2. (i) X, a calendar year QBU on the otherwise take into account for all purpos- (5) Adjustments to a branch’s accounts
accrual method of accounting, uses the deutschmark es of the Internal Revenue Code the when a taxpayer changes to the euro—(i)
as its functional currency. On February 1, 1998, X amount of any unrealized exchange gain Taxpayer changing from a legacy curren-
converts 12,000 deutschmarks into Dutch guilders at
the spot rate of fl1 = DM1 and loans the 12,000
or loss attributable to a legacy currency cy to the euro in a taxable year during
guilders to Y (an unrelated party) for one year at a denominated item described in section which a branch’s functional currency is
rate of 10% with principal and interest to be paid on 988(c)(1)(B)(ii) as if the item were termi- other than the euro. If a taxpayer changes
January 31, 1999. In addition, assume the average nated on the last day of the taxable year its functional currency to the euro for a
rate (deutschmark/guilder) for the period from
ending prior to the year of change. taxable year during which the functional
February 1, 1998, through December 31, 1998 is
fl1.07 = DM1. Pursuant to §1.988–2(b)(2)(ii)(C), X (B) Time and manner of election. With currency of a branch of the taxpayer is
will accrue eleven months of interest on the note and respect to a QBU that makes an election other than the euro, the basis pool shall
recognize interest income of DM1028.04 described in paragraph (c)(3)(iv)(A) of equal the product of the legacy currency
(fl1100/1.07) in the 1998 taxable year. this section, an affected taxpayer (as amount of the basis pool multiplied by the
(ii) On January 1, 1999, the euro will replace the
deutschmark as the national currency of Germany
described in paragraph (b)(5) of this sec- applicable conversion rate. No adjustment
pursuant to the Treaty on European Union signed tion) shall attach a statement to its tax to the equity pool is required.
February 7, 1992. Assume that on January 1, 1999, return for the taxable year ending imme- (ii) Taxpayer changing from a legacy
X changes its functional currency to the euro pur- diately prior to the year of change which currency to the euro in a taxable year dur-
suant to this section. Assume that the includes the following: “TAXPAYER ing which a branch’s functional currency is
euro/deutschmark conversion rate is set by the
European Council at 1 C = DM2. Assume further
CERTIFIES THAT A QBU OF THE the euro. If a taxpayer changes its func-
that the euro/guilder conversion rate is set at 1 C = TAXPAYER HAS ELECTED TO REAL- tional currency from a legacy currency to
fl2.25. In 1999, X will accrue one month of interest IZE CURRENCY GAIN OR LOSS ON the euro for a taxable year during which the
equal to  C 44.44 (fl100/2.25). On January 31, 1999, LEGACY CURRENCY DENOMINAT- functional currency of a branch of the tax-
pursuant to the note, X will receive interest denomi-
ED ACCOUNTS RECEIVABLE AND payer is the euro, the taxpayer shall take
nated in euros of  C 533.33 (fl1200/2.25). Pursuant
to this paragraph (c)(3), X will realize an exchange PAYABLE UPON CHANGE OF FUNC- into account gain or loss as determined
loss in the 1999 taxable year with respect to accrued TIONAL CURRENCY TO THE EURO.” under paragraph (c)(4)(ii) of this section.
interest computed under the principles of A QBU making the election must do so (6) Additional adjustments that are nec-
§1.988–2(b)(3). For this purpose, the exchange rate for all legacy currency denominated items essary when a corporation changes its
used under §1.988–2(b)(3)(i) is the guilder/euro con-
version rate and the exchange rate used under
described in section 988(c)(1)(B)(ii). functional currency to the euro. The
§1.988–2(b)(3)(ii) is the deutschmark/euro conver- (4) Adjustments when a branch changes amount of a corporation’s euro currency
sion rate. Thus, with respect to the interest accrued its functional currency to the euro—(i) earnings and profits and the amount of its

March 12, 2001 810 2001–11 I.R.B.


euro paid-in capital shall equal the prod- the QBU shall take into account for all Jonathan Talisman,
uct of the legacy currency amounts of purposes of the Internal Revenue Code Acting Assistant Secretary
these items multiplied by the applicable the amount of any unrealized exchange of the Treasury.
conversion rate. The foreign income taxes gain or loss attributable to a legacy cur-
(Filed by the Office of the Federal Register on Janu-
and accumulated profits or deficits in rency denominated item described in sec-
ary 10, 2001, 8:45 a.m., and published in the issue of
accumulated profits of a foreign corpora- tion 988(c)(1)(B)(ii) as if the item were the Federal Register for January 11, 2001, 66 F.R.
tion that were maintained in foreign cur- terminated on the day prior to the day the 2215)
rency for purposes of section 902 and that euro is substituted for the Country X cur-
are attributable to taxable years of the for- rency.
eign corporation beginning before (e) Effective date. This section applies Section 1274.—Determination
January 1, 1987, also shall be translated to tax years ending after July 29, 1998. of Issue Price in the Case of
into the euro at the conversion rate. Certain Debt Instruments Issued
(d) Treatment of legacy currency sec- §1.985–8T [Removed]
for Property
tion 988 transactions with respect to a Par.5. Section 1.985–8T is removed.
QBU that has the euro as its functional Par.6. Section 1.1001–5 is added to (Also sections 42, 280G, 382, 412, 467, 468, 482,
currency—(1) In general. This read as follows: 483, 642, 807, 846, 1288, 7520, 7872.)
§1.985–8(d) applies to a QBU that has the
euro as its functional currency and that §1.1001–5 European Monetary Union Federal rates; adjusted federal rates;
holds a section 988 transaction denomi- (conversion to the euro). adjusted federal long-term rate; and
nated in, or determined by reference to, a the long-term exempt rate. For purposes
(a) Conversion of currencies. For pur-
currency that is substituted by the euro. of sections 382, 1274, 1288, and other
poses of §1.1001–1(a), the conversion to
For example, this paragraph (d) will apply sections of the Code, tables set forth the
the euro of legacy currencies (as defined
to a German QBU with the euro as its rates for March 2001.
in §1.985–8(a)(1)) is not the exchange of
functional currency if the QBU is holding property for other property differing
Country X currency or other section 988 Rev. Rul. 2001–12
materially in kind or extent.
transactions denominated in such curren- (b) Effect of currency conversion on This revenue ruling provides various
cy on the day in the year 2005 when the other rights and obligations. For purposes prescribed rates for federal income tax
euro is substituted for the Country X cur- of §1.1001–1(a), if, solely as the result of purposes for March 2001 (the current
rency. the conversion of legacy currencies to the month). Table 1 contains the short-term,
(2) Principles of paragraph (c)(3) of euro, rights or obligations denominated in mid-term, and long-term applicable fed-
this section shall apply. With respect to a a legacy currency become rights or oblig- eral rates (AFR) for the current month
QBU described in paragraph (d) of this ations denominated in the euro, that event for purposes of section 1274(d) of the
section, the principles of paragraph (c)(3) is not the exchange of property for other Internal Revenue Code. Table 2 con-
of this section shall apply. For example, if property differing materially in kind or tains the short-term, mid-term, and long-
a German QBU with the euro as its func- extent. Thus, for example, when a debt term adjusted applicable federal rates
tional currency is holding a Country X instrument that requires payments of (adjusted AFR) for the current month for
currency denominated debt instrument on amounts denominated in a legacy curren- purposes of section 1288(b). Table 3
the day in the year 2005 when the euro is cy becomes a debt instrument requiring sets forth the adjusted federal long-term
substituted for the Country X currency, payments of euros, that alteration is not a rate and the long-term tax-exempt rate
the instrument shall continue to be treated modification within the meaning of described in section 382(f). Table 4 con-
as a section 988 transaction pursuant to §1.1001–3(c). tains the appropriate percentages for
the principles of paragraph (c)(3)(i) of this (c) Effective date. This section applies determining the low-income housing
section. However, if such QBU holds to tax years ending after July 29, 1998. credit described in section 42(b)(2) for
Country X currency, the QBU shall take buildings placed in service during the
into account any unrealized exchange §1.1001–5T [Removed] current month. Finally, Table 5 contains
gain or loss pursuant to the principles of the federal rate for determining the pre-
Par. 7. Section 1.1001–5T is removed.
paragraph (c)(3)(iii) of this section as if sent value of an annuity, an interest for
the currency was disposed of on the day Robert E. Wenzel, life or for a term of years, or a remainder
prior to the day the euro is substituted for Deputy Commissioner or a reversionary interest for purposes of
the Country X currency. Similarly, if the of Internal Revenue. section 7520.
QBU makes an election under the princi-
ples of paragraph (c)(3)(iv) of this section, Approved December 12, 2000.

2001–11 I.R.B. 811 March 12, 2001


REV. RUL. 2001-12 TABLE 1
Applicable Federal Rates (AFR) for March 2001
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-Term
AFR 4.86% 4.80% 4.77% 4.75%
110% AFR 5.35% 5.28% 5.25% 5.22%
120% AFR 5.84% 5.76% 5.72% 5.69%
130% AFR 6.34% 6.24% 6.19% 6.16%
Mid-Term
AFR 5.07% 5.01% 4.98% 4.96%
110% AFR 5.59% 5.51% 5.47% 5.45%
120% AFR 6.10% 6.01% 5.97% 5.94%
130% AFR 6.62% 6.51% 6.46% 6.42%
150% AFR 7.66% 7.52% 7.45% 7.40%
175% AFR 8.96% 8.77% 8.68% 8.61%
Long-Term
AFR 5.58% 5.50% 5.46% 5.44%
110% AFR 6.14% 6.05% 6.00% 5.98%
120% AFR 6.71% 6.60% 6.55% 6.51%
130% AFR 7.28% 7.15% 7.09% 7.05%

REV. RUL. 2001-12 TABLE 2


Adjusted AFR for March 2001
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-term
adjusted AFR 3.44% 3.41% 3.40% 3.39%
Mid-term
adjusted AFR 3.98% 3.94% 3.92% 3.91%
Long-term
adjusted AFR 4.87% 4.81% 4.78% 4.76%

REV. RUL. 2001-12 TABLE 3


Rates Under Section 382 for March 2001
Adjusted federal long-term rate for the current month 4.87%

Long-term tax-exempt rate for ownership changes during


the current month (the highest of the adjusted federal long-term
rates for the current month and the prior two months.) 5.24%

REV. RUL. 2001-12 TABLE 4


Appropriate Percentages Under Section 42(b)(2) for March 2001

Appropriate percentage for the 70% present value low-income housing credit 8.24%
Appropriate percentage for the 30% present value low-income housing credit 3.53%

March 12, 2001 812 2001–11 I.R.B.


REV. RUL. 2001-12 TABLE 5
Rate Under Section 7520 for March 2001

Applicable federal rate for determining the present value of an annuity,


an interest for life or a term of years, or a remainder or reversionary interest 6.2%

Section 1288.—Treatment of FOR FURTHER INFORMATION CON- opinion of the United States Court of
Original Issue Discounts on Tax- TACT: Charles A. Hall, (202) 622-4940 Appeals for the Second Circuit in
Exempt Obligations (not a toll-free number). Weisbart v. United States Department of
Treasury and Internal Revenue Service,
The adjusted applicable federal short-term, mid- SUPPLEMENTARY INFORMATION:
222 F.3d 93 (2d Cir. 2000), rev’g 99–1
term, and long-term rates are set forth for the month
Background USTC (CCH) ¶ 50,549 (E.D.N.Y. 1999),
of March 2001. See Rev. Rul. 2001–12 page 811.
AOD-CC-2000–09 (Nov. 13, 2000).
This document contains amendments to The IRS and the Treasury Department
the Regulations on Procedure and have further determined that claims for
Section 7502.—Timely Mailing Administration (26 CFR part 301) under credit or refund made on late filed original
Treated as Timely Filing and section 7502 relating to timely mailing tax returns other than income tax returns
Paying treated as timely filing and paying. A should also be treated under section 7502
notice of proposed rulemaking as timely filed on the postmark date for
26 CFR 301.7502–1: Timely mailing of documents
and payments treated as timely filing and paying.
(REG–115433–98, 1999–1 C.B. 651) was purposes of section 6511(b)(2)(A). This
published in the Federal Register (64 would include returns such as Form 720,
T.D. 8932 F.R. 2606) on January 15, 1999. Quarterly Federal Excise Tax Return, and
Temporary regulations (T.D. 8807, Form 706, U.S. Estate Tax Return.
DEPARTMENT OF THE TREASURY 1999–1 C.B. 630) relating to electronic Moreover, the IRS and the Treasury
Internal Revenue Service postmarks for electronically filed income Department have determined that the late
26 CFR Part 301 tax returns were published in the Federal filed original tax return, as well as the
Register for the same day (64 F.R. 2568). claim for credit or refund, should also be
Timely Mailing Treated as No public hearing was requested or held. treated as filed on the postmark date.
Timely Filing/Electronic No comments were received from the These changes, which are reflected in
Postmark public in response to the notice of pro- §301.7502–1(f), will assist taxpayers in
posed rulemaking. The proposed regula- filing timely claims for credit or refund,
AGENCY: Internal Revenue Service tions under section 7502 are adopted as and will be applied retroactively to certain
(IRS), Treasury. revised by this Treasury decision and the previously disallowed claims for credit or
ACTION: Final regulations; and removal corresponding temporary regulations are refund.
of temporary regulations. removed. The revisions are discussed These changes are effective for any
below. claim for credit or refund on a late filed
SUMMARY: This document contains
tax return described in §301.7502–1(f)(1)
regulations relating to timely mailing Explanation of Revisions
except for those claims for credit or
treated as timely filing and paying under
In the notice of proposed rulemaking, refund which (without regard to para-
section 7502 of the Internal Revenue
the IRS and the Treasury Department graph (f) of this section) were barred by
Code. The regulations generally reflect
requested comments regarding whether the operation of section 6532(a) or any
changes to the law made since 1960. In
section 7502 should apply to claims for other law or rule of law (including res
addition, the regulations provide that the
credit or refund made on late filed original judicata) as of January 11, 2001. See
date of an electronic postmark will be the
income tax returns. No comments were §301.7502–1(g)(2), which provides the
filing date under certain circumstances.
received on this issue. However, the IRS effective date rules for §301.7502–1(f).
The regulations affect taxpayers who file
and the Treasury Department have deter- Consistent with the effective date rules
documents or make payments or deposits.
mined that, in certain situations, a claim for §301.7502–1(f), the IRS will attempt
DATES: Effective Date: These regulations for credit or refund made on a late filed to identify as many claims as possible that
are effective January 11, 2001. original income tax return should be treat- were filed on untimely original individual
Applicability Date: For dates of applic- ed under section 7502 as timely filed on income tax returns and that were previ-
ability, see §§301.7502–1(g) and the postmark date for purposes of section ously disallowed based on the
301.7502–2(e). 6511(b)(2)(A). This is consistent with the Government’s position in Weisbart. In

2001–11 I.R.B. 813 March 12, 2001


these cases, the IRS intends to issue a Act (5 U.S.C. chapter 6) does not apply. computing the penalties and additions to
refund, or credit the overpayment against Pursuant to section 7805(f) of the Internal tax imposed by section 6651. Except as
a liability as provided in section 6402, Revenue Code, the notice of proposed provided in section 7502(e) and
without the need for the taxpayer to con- rulemaking preceding these regulations §301.7502–2, relating to the timely mail-
tact the IRS. Such automatic reconsidera- was submitted to the Chief Counsel for ing of deposits, and paragraph (d) of this
tion of the claim will generally occur if Advocacy of the Small Business Admin- section, relating to electronically filed
the claim was filed on an individual istration for comment on its impact on documents, section 7502 is applicable
income tax return for 1995 or a subse- small business. only to those documents or payments as
quent calendar year. Claims filed on other defined in paragraph (b) of this section
types of original returns will not receive Drafting Information and only if the document or payment is
automatic reconsideration under this pro- The principal author of these regula- mailed in accordance with paragraph (c)
gram, e.g., individual returns for years tions is Charles A. Hall of the Office of of this section and is delivered in accor-
prior to 1995. Associate Chief Counsel, Procedure dance with paragraph (e) of this section.
Because the IRS will be undertaking and Administration (Administrative (b) Definitions—(1) Document defined.
the automatic reconsideration program Provisions and Judicial Practice (i) The term document, as used in this sec-
described above and intends to complete Division). However, other personnel tion, means any return, claim, statement,
the program by June 30, 2001, taxpayers from the IRS and Treasury Department or other document required to be filed
who have filed income tax refund claims participated in their development. within a prescribed period or on or before
for tax year 1995 and later years that qual- * * * * * a prescribed date under authority of any
ify under §301.7502–1(f) need not contact Adoption of Amendments to the provision of the internal revenue laws,
the IRS regarding their claims unless the Regulations except as provided in paragraph (b)(1)(ii),
two-year period for filing a refund suit Accordingly, 26 CFR part 301 is (iii), or (iv) of this section.
under section 6532(a) for their denied amended as follows: (ii) The term does not include returns,
claim will expire prior to June 30, 2001. PART 301—PROCEDURE AND claims, statements, or other documents
In such cases, taxpayers are advised to file that are required under any provision of
ADMINISTRATION
a request for reconsideration with the the internal revenue laws or the regula-
Paragraph 1. The authority citation for
appropriate IRS Service Center. Such a tions thereunder to be delivered by any
part 301 is amended by adding entries in
request should include a notation on the method other than mailing.
numerical order to read as follows:
top of the first page that it is a “Weisbart (iii) The term does not include any doc-
Authority: 26 U.S.C. 7805 * * *
Claim.” Such taxpayers are also advised ument filed in any court other than the Tax
Section 301.7502–1 also issued under
to file a refund suit to protect their legal Court, but the term does include any doc-
26 U.S.C. 7502.
rights with respect to the claim. The IRS ument filed with the Tax Court, including
Section 301.7502–2 also issued under
will respond to the requests for reconsid- a petition and a notice of appeal of a deci-
26 U.S.C. 7502. * * *
eration after the IRS has finished identify- sion of the Tax Court.
Par. 2. Section 301.7502–1 is revised
ing eligible claims under the automatic (iv) The term does not include any doc-
to read as follows:
reconsideration program and paying those ument that is mailed to an authorized
refunds. Taxpayers whose two-year peri- §301.7502–1 Timely mailing of financial institution under section 6302.
od for filing a refund suit under section documents and payments treated as However, see §301.7502–2 for special
6532(a) does not expire until after June timely filing and paying. rules relating to the timeliness of deposits
30, 2001, and who have not received a and documents required to be filed with
refund by that date, are advised to file a (a) General rule. Section 7502 pro- deposits.
request for reconsideration with the vides that, if the requirements of that sec- (2) Claims for refund. In the case of cer-
appropriate IRS Service Center at that tion are met, a document or payment is tain taxes, a return may constitute a claim
time. deemed to be filed or paid on the date of for credit or refund. In such a case, section
the postmark stamped on the envelope or 7502 is applicable to the claim for credit or
Special Analyses other appropriate wrapper (envelope) in refund if the conditions of such section are
which the document or payment was met, irrespective of whether the claim is
It has been determined that this mailed. Thus, if the envelope that con- also a return. For rules regarding claims
Treasury decision is not a significant reg- tains the document or payment has a time- for refund on late filed tax returns, see
ulatory action as defined in Executive ly postmark, the document or payment is paragraph (f) of this section.
Order 12866. Therefore, a regulatory considered timely filed or paid even if it is (3) Payment defined. (i) The term pay-
assessment is not required. It also has received after the last date, or the last day ment, as used in this section, means any
been determined that section 553(b) of the of the period, prescribed for filing the payment required to be made within a pre-
Administrative Procedure Act (5 U.S.C. document or making the payment. scribed period or on or before a prescribed
chapter 5) does not apply to these regula- Section 7502 does not apply in determin- date under the authority of any provision
tions, and because these regulations do ing whether a failure to file a return or pay of the internal revenue laws, except as
not impose a collection of information on a tax has continued for an additional provided in paragraph (b)(3)(ii), (iii), (iv),
small entities, the Regulatory Flexibility month or fraction thereof for purposes of or (v) of this section.

March 12, 2001 814 2001–11 I.R.B.


(ii) The term does not include any pay- envelope, properly addressed to the Service, but it is received after the time
ment that is required under any provision agency, officer, or office with which the when a document or payment postmarked
of the internal revenue laws or the regula- document is required to be filed or to and mailed at that time would ordinarily
tions thereunder to be delivered by any which the payment is required to be made. be received, the sender may be required to
method other than mailing. See, for (ii) Timely deposited in U.S. mail. The prove that it was timely mailed.
example, section 6302(h) and the regula- document or payment must be deposited (B) Postmark made by other than U.S.
tions thereunder regarding electronic within the prescribed time in the mail in Postal Service—(1) In general. If the
funds transfer. the United States with sufficient postage postmark on the envelope is made other
(iii) The term does not include any pay- prepaid. For this purpose, a document or than by the U.S. Postal Service—
ment, whether it is made in the form of payment is deposited in the mail in the (i) The postmark so made must bear a
currency or other medium of payment, United States when it is deposited with legible date on or before the last date, or
unless it is actually received and account- the domestic mail service of the U.S. the last day of the period, prescribed for
ed for. For example, if a check is used as Postal Service. The domestic mail service filing the document or making the pay-
the form of payment, this section does not of the U.S. Postal Service, as defined by ment; and
apply unless the check is honored upon the Domestic Mail Manual as incorporat- (ii) The document or payment must be
presentation. ed by reference in the postal regulations, received by the agency, officer, or office
(iv) The term does not include any pay- includes mail transmitted within, among, with which it is required to be filed not
ment to any court other than the Tax and between the United States of later than the time when a document or
Court. America, its territories and possessions, payment contained in an envelope that is
(v) The term does not include any and Army post offices (APO), fleet post properly addressed, mailed, and sent by
deposit that is required to be made with an offices (FPO), and the United Nations, the same class of mail would ordinarily be
authorized financial institution under sec- NY. (See Domestic Mail Manual, section received if it were postmarked at the same
tion 6302. However, see §301.7502–2 for G011.2.1, as incorporated by reference in point of origin by the U.S. Postal Service
rules relating to the timeliness of deposits. 39 CFR 111.1.) Section 7502 does not on the last date, or the last day of the peri-
(4) Last date or last day prescribed. As apply to any document or payment that is od, prescribed for filing the document or
used in this section, the term the last date, deposited with the mail service of any making the payment.
or the last day of the period, prescribed other country. (2) Document or payment received late.
for filing the document or making the pay- (iii) Postmark—(A) U.S. Postal If a document or payment described in
ment includes any extension of time Service postmark. If the postmark on the paragraph (c)(1)(iii)(B)(1) is received
granted for that action. When the last envelope is made by the U.S. Postal after the time when a document or pay-
date, or the last day of the period, pre- Service, the postmark must bear a date on ment so mailed and so postmarked by the
scribed for filing the document or making or before the last date, or the last day of U.S. Postal Service would ordinarily be
the payment falls on a Saturday, Sunday the period, prescribed for filing the docu- received, the document or payment is
or legal holiday, section 7503 applies. ment or making the payment. If the post- treated as having been received at the time
Therefore, in applying the rules of this mark does not bear a date on or before the when a document or payment so mailed
paragraph (b)(4), the next succeeding day last date, or the last day of the period, pre- and so postmarked would ordinarily be
that is not a Saturday, Sunday, or legal scribed for filing the document or making received if the person who is required to
holiday is treated as the last date, or the the payment, the document or payment is file the document or make the payment
last day of the period, prescribed for filing considered not to be timely filed or paid, establishes—
the document or making the payment. regardless of when the document or pay- (i) That it was actually deposited in the
Also, when the last date, or the last day of ment is deposited in the mail. U.S. mail before the last collection of mail
the period, prescribed for filing the docu- Accordingly, the sender who relies upon from the place of deposit that was post-
ment or making the payment falls within a the applicability of section 7502 assumes marked (except for the metered mail) by
period disregarded under section 7508 or the risk that the postmark will bear a date the U.S. Postal Service on or before the
section 7508A, the next succeeding day on or before the last date, or the last day last date, or the last day of the period, pre-
after the expiration of the section 7508 of the period, prescribed for filing the scribed for filing the document or making
period or section 7508A period that is not document or making the payment. See, the payment;
a Saturday, Sunday, or legal holiday is however, paragraph (c)(2) of this section (ii) That the delay in receiving the doc-
treated as the last date, or the last day of with respect to the use of registered mail ument or payment was due to a delay in
the period, prescribed for filing the docu- or certified mail to avoid this risk. If the the transmission of the U.S. mail; and
ment or making the payment. postmark on the envelope is made by the (iii) The cause of the delay.
(c) Mailing requirements—(1) In gen- U.S. Postal Service but is not legible, the (3) U.S. and non-U.S. postmarks. If the
eral. Section 7502 does not apply unless person who is required to file the docu- envelope has a postmark made by the U.S.
the document or payment is mailed in ment or make the payment has the burden Postal Service in addition to a postmark
accordance with the following require- of proving the date that the postmark was not so made, the postmark that was not
ments: made. Furthermore, if the envelope that made by the U.S. Postal Service is disre-
(i) Envelope and address. The docu- contains a document or payment has a garded, and whether the envelope was
ment or payment must be contained in an timely postmark made by the U.S. Postal mailed in accordance with this paragraph

2001–11 I.R.B. 815 March 12, 2001


(c)(1)(iii)(B) will be determined solely by postmark means a record of the date and 6511(b)(2)(A), if his claim is not filed within three
applying the rule of paragraph time (in a particular time zone) that an years after April 15, 1999, the date on which he is
deemed under section 6513 to have paid his 1998
(c)(1)(iii)(A) of this section. authorized electronic return transmitter tax, he is not entitled to any refund. Thus, because
(2) Registered or certified mail. If the receives the transmission of a taxpayer’s A’s claim for refund is postmarked and mailed in
document or payment is sent by U.S. reg- electronically filed document on its host accordance with the requirements of this section and
istered mail, the date of registration of the system. However, if the taxpayer and the is delivered after the last day of the period specified
document or payment is treated as the electronic return transmitter are located in in section 6511(b)(2)(A), section 7502 is applicable
and the claim is deemed to have been filed on April
postmark date. If the document or pay- different time zones, it is the taxpayer’s 15, 2002.
ment is sent by U.S. certified mail and the time zone that controls the timeliness of (f) Claim for credit or refund on late
sender’s receipt is postmarked by the the electronically filed document. filed tax return—(1) In general.
postal employee to whom the document (e) Delivery—(1) Except as provided in Generally, an original income tax return
or payment is presented, the date of the section 7502(f) and paragraph (d) of this may constitute a claim for credit or refund
U.S. postmark on the receipt is treated as section, section 7502 is not applicable of income tax. See §301.6402–3(a)(5).
the postmark date of the document or pay- unless the document or payment is deliv- Other original tax returns can also be con-
ment. Accordingly, the risk that the docu- ered by U.S. mail to the agency, officer, or sidered claims for credit or refund if the
ment or payment will not be postmarked office with which the document is liability disclosed on the return is less
on the day that it is deposited in the mail required to be filed or to which payment is than the amount of tax that has been paid.
may be eliminated by the use of registered required to be made. However, in the case If section 7502 would not apply to a
or certified mail. of a document (but not a payment) sent by return (but for the operation of paragraph
(d) Electronically filed documents—(1) registered or certified mail, proof that the (f)(2) of this section) that is also consid-
In general. A document filed electroni- document was properly registered or that ered a claim for credit or refund because
cally with an electronic return transmitter a postmarked certified mail sender’s the envelope that contains the return does
(as defined in paragraph (d)(3)(i) of this receipt was properly issued and that the not have a postmark dated on or before
section and authorized pursuant to para- envelope was properly addressed to the the due date of the return, section 7502
graph (d)(2) of this section) in the manner agency, officer, or office constitutes prima will apply separately to the claim for cred-
and time prescribed by the Commissioner facie evidence that the document was it or refund if—
is deemed to be filed on the date of the delivered to the agency, officer, or office. (i) The date of the postmark on the
electronic postmark (as defined in para- (2) Section 7502 is applicable to the envelope is within the period that is three
graph (d)(3)(ii) of this section) given by determination of whether a claim for cred- years (plus the period of any extension of
the authorized electronic return transmit- it or refund is timely filed for purposes of time to file) from the day the tax is paid or
ter. Thus, if the electronic postmark is section 6511(a), assuming all the require- considered paid (see section 6513), and
timely, the document is considered filed ments of section 7502 are satisfied. the claim for credit or refund is delivered
timely although it is received by the Section 7502 is also applicable when a after this three-year period; and
agency, officer, or office after the last claim for credit or refund is delivered (ii) The conditions of section 7502 are
date, or the last day of the period, pre- after the last day of the period specified in otherwise met.
scribed for filing such document. section 6511(b)(2)(A) or in any other cor- (2) Filing date of late filed return. If
(2) Authorized electronic return trans- responding provision of law relating to the conditions of paragraph (f)(1) of this
mitters. The Commissioner may enter into the limit on the amount of credit or refund section are met, the late filed return will
an agreement with an electronic return that is allowable. be deemed filed on the postmark date.
transmitter or prescribe in forms, instruc- (3) Example. The rules of paragraph (3) Example. The rules of this para-
tions, or other appropriate guidance the (e)(2) of this section are illustrated by the graph (f) are illustrated by the following
procedures under which the electronic following example: example:
return transmitter is authorized to provide Example. (i) Taxpayer A, an individual, mailed Example. (i) Taxpayer A, an individual, mailed
taxpayers with an electronic postmark to his 1998 Form 1040, “U.S. Individual Income Tax his 2001 Form 1040, “U.S. Individual Income Tax
Return,” on May 10, 1999, but no tax was paid at Return,” on April 15, 2005, claiming a refund of
acknowledge the date and time that the
that time because the tax liability disclosed by the amounts paid through withholding during 2001. The
electronic return transmitter received the return had been completely satisfied by the income date of the postmark on the envelope containing the
electronically filed document. tax that had been withheld on A’s wages. On April return and claim for refund is April 15, 2005. The
(3) Definitions—(i) Electronic return 15, 2002, A mails in accordance with the require- return and claim for refund are received by the
transmitter. For purposes of this para- ments of this section, a Form 1040X, “U.S. Internal Revenue Service (IRS) on April 18, 2005.
Amended Individual Income Tax Return,” claiming Amounts withheld in 2001 exceeded A’s tax liability
graph (d), the term electronic return
a refund of a portion of the tax that had been paid for 2001 and are treated as paid on April 15, 2002,
transmitter has the same meaning as con- through withholding during 1998. The date of the pursuant to section 6513.
tained in section 3.01(4) of Rev. Proc. postmark on the envelope containing the claim for (ii) Even though the date of the postmark on the
2000–31 (2000–31 I.R.B. 146 (July 31, refund is April 15, 2002. The claim is received by envelope is after the due date of the return, the claim
2000))(see §601.601(d)(2) of this chapter) the Internal Revenue Service (IRS) on April 18, for refund and the late filed return are treated as filed
or in procedures prescribed by the 2002. on the postmark date for purposes of this paragraph
(ii) Under section 6511(a), A’s claim for refund is (f). Accordingly, the return will be treated as filed on
Commissioner. timely if filed within three years from May 10, 1999, April 15, 2005. In addition, the claim for refund will
(ii) Electronic postmark. For purposes the date on which A’s 1998 return was filed. be treated as timely filed on April 15, 2005. Further,
of this paragraph (d), the term electronic However, as a result of the limitations of section the entire amount of the refund attributable to with-

March 12, 2001 816 2001–11 I.R.B.


holding is allowable as a refund under section for making the deposit, the deposit will payment, except that the date of registra-
6511(b)(2)(A). not be considered timely received unless tion or the date of the postmark on the
(g) Effective date—(1) In general. it is actually received on or before the date sender’s receipt is considered the date of
Except as provided in paragraphs (g)(2) prescribed for making the deposit. mailing of such deposit.
and (3) of this section, the rules of this Section 7502(e) only applies to a deposit (d) Delivery. Section 7502(e) does not
section apply to any payment or document mailed to the financial institution autho- apply unless a deposit is actually delivered
mailed and delivered in accordance with rized to receive that deposit. Thus, sec- by U.S. mail to the authorized financial insti-
the requirements of this section in an tion 7502(e) does not apply to any remit- tution with which the deposit is required to
envelope bearing a postmark dated after tance mailed to an internal revenue be made and is accepted by that financial
January 11, 2001. service center. institution. For rules relating to the accep-
(2) Claim for credit or refund on late (2) Deposits of $20,000 or more. tance of deposits by authorized financial
filed tax return. Paragraph (f) of this sec- Paragraph (a)(1) of this section does not institutions see 31 CFR 203.18. The fact that
tion applies to any claim for credit or apply with respect to any deposit of a deposit is sent by U.S. registered or U.S.
refund on a late filed tax return described $20,000 or more by any person required certified mail does not constitute prima facie
in paragraph (f)(1) of this section except to deposit any tax more than once a evidence that the deposit was delivered to the
for those claims for credit or refund which month. Any such deposit must be made financial institution authorized to receive the
(without regard to paragraph (f) of this by the due date for such deposit, regard- deposit. Section 7502(e) does not apply
section) were barred by the operation of less of the method of delivery. unless the deposit is delivered after the date
section 6532(a) or any other law or rule of (b) Deposit defined. The term deposit, prescribed for making the deposit.
law (including res judicata) as of January as used in this section, means any deposit (e) Effective date. This section applies
11, 2001. of tax required to be made on or before a to all deposits required to be made after
(3) Electronically filed documents. prescribed date at an authorized financial January 11, 2001.
This section applies to any electronically institution pursuant to regulations pre-
filed return, claim, statement, or other scribed under section 6302. Robert E. Wenzel,
document transmitted to an electronic (c) Mailing requirements—(1) In gen- Deputy Commissioner
return transmitter that is authorized to eral. Section 7502(e) does not apply of Internal Revenue.
provide an electronic postmark pursuant unless the deposit is mailed in accordance
to paragraph (d)(2) of this section after Approved December 21, 2000.
with the requirements of paragraph (c)(2)
January 11, 2001. of this section. Jonathan Talisman,
§301.7502–1T [Removed] (2) Requirements. The date of mailing Acting Assistant Secretary
must fall on or before the second day pre- of the Treasury.
Par. 3. Section 301.7502–1T is ceding the prescribed date for making a
removed. (Filed by the Office of the Federal Register on Janu-
deposit (including any extension of time
ary 10, 2001, 8:45 a.m., and published in the issue of
Par. 4. Section 301.7502–2 is added to granted for making the deposit). For the Federal Register for January 11, 2001, 66 F.R.
read as follows: example, if a deposit is due on or before 2257)
January 15, the date of mailing must fall
§301.7502–2 Timely mailing of deposits.
on or before January 13. The deposit
(a) General rule—(1) Two day rule. must be contained in an envelope or other Section 7520.—Valuation Tables
Section 7502(e) provides that, if the appropriate wrapper approved for use in
requirements of that section are met, a the mails by the U.S. Postal Service, prop- The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
deposit is deemed to be received on the erly addressed to the financial institution of March 2001. See Rev. Rul. 2001–12 page 811.
date the deposit was mailed even though it authorized to receive the deposit. The
is received after the date prescribed for deposit must be deposited with sufficient
making the deposit. The requirements of postage prepaid in the mail in the United
Section 7872.—Treatment of
the section are met if the person required States within the meaning of §301.7502–1
on or before the second day preceding the
Loans with Below-Market
to make the deposit establishes that the
date of mailing was on or before the sec- prescribed date for making a deposit. Interest Rates
ond day preceding the date prescribed for (3) Registered and certified mail. The The adjusted applicable federal short-term, mid-
making the deposit. If the date of mailing provisions of §301.7502–1(c)(2) apply to term, and long-term rates are set forth for the month
was not established to be on or before the a deposit sent by U.S. registered mail or of March 2001. See Rev. Rul. 2001–12 page 811.
second day preceding the date prescribed U.S. certified mail as if the deposit were a

2001–11 I.R.B. 817 March 12, 2001


Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest Rate interest rates used to calculate current lia- The average yield on the 30-year
Update bility for the purpose of the full funding Treasury Constant Maturities for January
limitation of § 412(c)(7) of the Internal 2001 is 5.54 percent.
Notice 2001-20 Revenue Code as amended by the The following rates were determined
Omnibus Budget Reconciliation Act of for the plan years beginning in the month
Notice 88-73 provides guidelines for 1987 and as further amended by the shown below.
determining the weighted average interest Uruguay Round Agreements Act, Pub. L.
rate and the resulting permissible range of 103-465 (GATT).
90% to 105% 90% to 110%
Weighted Permissible Permissible
Month Year Average Range Range
February 2001 5.89 5.30 to 6.19 5.30 to 6.48

Drafting Information and other issuers of tax-exempt private The proper population figures for cal-
activity bonds under § 141, of the proper culating the Credit Ceiling and the
The principal author of this notice is population figures to be used for calculating Volume Cap for the 2001 calendar year
Todd Newman of the Employee Plans, the 2001 calendar year population-based are the resident population of the 50
Tax Exempt and Government Entities component of the state housing credit ceil- states, the District of Columbia, and
Division. For further information regard- ing (Credit Ceiling) under § 42(h)(3)(C)(ii) Puerto Rico, released by the Bureau of the
ing this notice, please call Mr. Newman at and the 2001 calendar year volume cap Census on December 28, 2000, in Press
(202) 283-9702 (not a toll-free number). (Volume Cap) under § 146. Release CB00-CN.65. The proper popu-
The population figures both for the lation figures for calculating the Credit
population-based component of the Credit Ceiling and the Volume Cap for the 2001
Low-Income Housing Tax Ceiling and for the Volume Cap are deter- calendar year for the insular areas
Credit—2001 Calendar Year mined by reference to § 146(j). That sec- (American Samoa, Guam, Northern
Resident Population Estimates tion provides generally that determina- Mariana Islands, and U.S. Virgin Islands)
tions of population for any calendar year are the estimates of the resident popula-
Notice 2001-21
are made on the basis of the most recent tion for July 1, 1999, released by the
This notice informs (1) state and local census estimate of the resident population Bureau of the Census on December 29,
housing credit agencies that allocate low- of a state (or issuing authority) released 1999, in Press Release CB99-254. For
income housing tax credits under § 42 of by the Bureau of the Census before the convenience, the CB00-CN.65 and CB99-
the Internal Revenue Code and (2) states beginning of such calendar year. 254 figures are reprinted below.

Resident Population Figures


Alabama 4,447,100
Alaska 626,932
American Samoa 63,781
Arizona 5,130,632
Arkansas 2,673,400
California 33,871,648
Colorado 4,301,261
Connecticut 3,405,565
Delaware 783,600
D.C. 572,059
Florida 15,982,378
Georgia 8,186,453
Guam 151,968
Hawaii 1,211,537

March 12, 2001 818 2001–11 I.R.B.


Resident Population Figures—cont.

Idaho 1,293,953
Illinois 12,419,293
Indiana 6,080,485
Iowa 2,926,324
Kansas 2,688,418
Kentucky 4,041,769
Louisiana 4,468,976
Maine 1,274,923
Maryland 5,296,486
Massachusetts 6,349,097
Michigan 9,938,444
Minnesota 4,919,479
Mississippi 2,844,658
Missouri 5,595,211
Montana 902,195
Nebraska 1,711,263
Nevada 1,998,257
New Hampshire 1,235,786
New Jersey 8,414,350
New Mexico 1,819,046
New York 18,976,457
North Carolina 8,049,313
North Dakota 642,200
Northern Mariana Islands 69,216
Ohio 11,353,140
Oklahoma 3,450,654
Oregon 3,421,399
Pennsylvania 12,281,054
Puerto Rico 3,808,610
Rhode Island 1,048,319
South Carolina 4,012,012
South Dakota 754,844
Tennessee 5,689,283
Texas 20,851,820
U.S. Virgin Islands 119,615
Utah 2,233,169
Vermont 608,827
Virginia 7,078,515
Washington 5,894,121
West Virginia 1,808,344
Wisconsin 5,363,675
Wyoming 493,782

The principal authors of this notice are and Special Industries) and Timothy L. Entities). For further information regard-
Christopher J. Wilson of the Office of Jones of the Office of Associate Chief ing this notice contact Mr. Wilson at (202)
Associate Chief Counsel (Passthroughs Counsel (Tax Exempt and Government 622-3040 (not a toll-free call).

2001–11 I.R.B. 819 March 12, 2001


Part IV. Items of General Interest
Notice of Proposed Rulemaking selecting the “Tax Regs” option on the IRS Estimates of capital or start-up costs and
and Notice of Public Hearing Home Page, or by submitting comments costs of operation, maintenance, and
directly to the IRS Internet site at: purchase of services to provide informa-
Source of Income From Certain http://www.irs.ustreas.gov/tax_regs/regslist. tion.
Space and Ocean Activities; html. The public hearing will be held in the The collection of information require-
Also, Source of auditorium, seventh floor, Internal Revenue ments are in proposed §1.863–8(g) and in
Communications Income Building, 1111 Constitution Avenue, NW., §1.863–9(g). This information is required
Washington, DC. by the IRS to monitor compliance with
REG–106030–98 the federal tax rules for determining the
FOR FURTHER INFORMATION CON-
source of income from space or ocean
AGENCY: Internal Revenue Service TACT: Concerning the regulations, Anne
activities, or from transmission of com-
(IRS), Treasury. Shelburne, (202) 874-1490; concerning
munications. The likely respondents are
submissions and the hearing, and/or to be
ACTION: Notice of proposed rulemak- taxpayers who conduct space or ocean
placed on the building access list to attend
ing and notice of public hearing. activities, or who derive communications
the hearing, La Nita Van Dyke, (202) 622-
income. Responses to this collection of
SUMMARY: This document contains 7180 (not toll-free numbers).
information are required to properly
proposed regulations under section 863(d) SUPPLEMENTARY INFORMATION: determine the source of a taxpayer’s
governing the source of income from cer- income from such transactions.
tain space and ocean activities. It also Paperwork Reduction Act Books or records relating to a collec-
contains proposed regulations under sec- tion of information must be retained as
The collection of information contained
tions 863(a), (d), and (e) governing the long as their contents may become mater-
in this notice of proposed rulemaking has
source of income from certain communi- ial in the administration of any internal
been submitted to the Office of
cations activity. This document also con- revenue law. Generally, tax returns and
Management and Budget (OMB) for
tains proposed regulations under sections tax return information are confidential, as
review in accordance with the Paperwork
863(a) and (b), amending the regulations required by 26 U.S.C. 6103.
Reduction Act of 1995 (44 U.S.C. 3507(d)).
in §1.863–3 to conform those regulations
Comments on the collection of infor- Estimated total annual reporting/record-
with these proposed regulations. This keeping burden: 1,200 hours. The esti-
mation should be sent to the Office of
document affects persons who conduct Management and Budget, Attn: Desk mated annual burden per respondent
activities in space, or on or under water Officer for the Department of Treasury, varies from 3 hours to 7 hours, depending
not within the jurisdiction of a foreign Office of Information and Regulatory on individual circumstances, with an esti-
country, possession of the United States, Affairs, Washington, DC 20503, with mated average of 5 hours.
or the United States (collectively, in inter- copies to the Internal Revenue Service, Estimated number of respondents: 250
national water). This document also Attn: IRS Reports Clearance Officer,
affects persons who derive income from Estimated annual frequency of responses:
W:CAR:MP:FP:S:O, Washington, DC
transmission of communications. In addi- One time per year.
20224. Comments on the collection of
tion, this document provides notice of a An agency may not conduct or sponsor,
information should be received by April
public hearing on these proposed regula- and a person is not required to respond to,
17, 2001. Comments are specifically
tions. a collection of information unless the col-
requested concerning:
lection of information displays a valid
DATES: Comments and outlines of oral Whether the proposed collection of infor- control number assigned by the Office of
comments to be presented at the public mation is necessary for the proper perfor- Management and Budget.
hearing scheduled for March 28, 2001, at mance of the functions of the IRS, includ-
10 a.m. must be received by March 7, ing whether the information will have Background
2001. practical utility;
This document contains proposed regu-
The accuracy of the estimated burden lations relating to the Income Tax
ADDRESSES: Send submissions to:
associated with the proposed collection of Regulations (CFR part 1) under sections
CC:M&SP:RU (Reg–106030–98), room
information (see below); 863(a), (b), (d), and (e) of the Internal
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC How the quality, utility, and clarity of the Revenue Code (Code). Congress enacted
20044. Submissions may be hand delivered information to be collected may be section 863(d) and section 863(e) as part
Monday through Friday between the hours enhanced; of the Tax Reform Act of 1986 (Public
of 8 a.m. and 5 p.m. to: CC:M&SP:RU How the burden of complying with the Law 99–514, 100 Stat. 2085) (the 1986
(REG–106030–98), Courier’s Desk, proposed collection of information may Act). Section 863(d) governs the source
Internal Revenue Service, 1111 Constitu- be minimized, including through the of income derived from certain space and
tion Avenue NW., Washington, DC. application of automated collection tech- ocean activities. Section 863(e) governs
Alternatively, taxpayers may submit com- niques or other forms of information tech- the source of income derived from inter-
ments electronically via the Internet by nology; and national communications activity.

March 12, 2001 820 2001–11 I.R.B.


Explanation of Provisions derived from space or ocean activity by a certain cases. Therefore, the proposed
U.S. person will be U.S. source income, regulations provide that if the foreign per-
These proposed regulations provide and if derived by a foreign person, foreign son can allocate gross space or ocean
two sets of rules, one in §1.863–8 for source income. Proposed regulations income between income from sources
determining the source of income from §1.863–8(b)(1) provides that a U.S. per- within the United States, space, or inter-
space and ocean activities, the other in son’s space or ocean income is U.S. national water, and outside the United
§1.863–9 for determining the source of source. Proposed regulations §1.863–8 States and space and international water,
income from communications activity. (b)(1) also states the general rule that to the satisfaction of the Commissioner,
Section 1.863–9 provides rules for both income derived by a foreign person from based on the facts and circumstances,
international communications income a space or ocean activity is foreign source which may include functions performed,
(ICI) and other communications income. income. However, the proposed regula- resources employed, risks assumed, or
The IRS and Treasury believe it is appro- tions contain several exceptions to that other contributions to value, income from
priate to provide source rules for both ICI general rule. outside the United States and space and
and other communications income in a Proposed regulations §1.863–8(b)(2) international water will be treated as for-
single regulation. provides that if a foreign corporation is 50 eign source income. When a foreign per-
The IRS and Treasury are fully aware percent or more owned by vote or value son is entitled to the benefits of a tax
of the rapid technological evolution in the (directly, indirectly, or constructively) by treaty with the United States, such person
space and communications industries U.S. persons and is not a controlled for- may elect to be taxed under the rules of
since Congress enacted sections 863(d) eign corporation within the meaning of that treaty, so that, for example, the
and (e) in 1986, and have attempted to section 957 (CFC), all income derived by United States would tax only income
take into account these changes as well as the corporation from space or ocean activ- attributable to a permanent establishment
changes in the space and communications ity is U.S. source income. This rule of that foreign person, regardless of the
industries and business practices and busi- amount of income considered effectively
reflects IRS and Treasury’s concern that
ness models. The IRS and Treasury rec- connected with a U.S. trade or business.
U.S. persons may use a foreign corpora-
ognize that these regulations address
tion (for example, by incorporating a
important issues for many different indus- b. Source Rules for Sales of Certain
50/50 joint venture with a foreign person,
tries and have worked closely with the Property
thereby avoiding CFC status) to obtain
industries in drafting these rules. The IRS
results that are inconsistent with the pur- Taxpayers must apply the rules of sec-
and Treasury are interested in receiving
poses of this section. The IRS and tion 863(d) and these proposed regula-
comments from these industries on how to
Treasury believe Congress granted tions to determine the source of income
accommodate issues arising from the use
Treasury broad regulatory authority in from sales of property purchased or pro-
of new technologies, consistent with the
section 863(d) to prevent taxpayers from duced by the taxpayer, either when pro-
language and purpose of the statutory pro-
circumventing the purposes of this sec- duction occurs in whole or in part in space
visions.
tion. or in international water, or when the sale
A. Space and Ocean Activity Under Proposed regulations §1.863–8(b)(3) occurs in space or in international water.
Section 863(d) provides that if a foreign person is The rules of sections 861, 862, 863(a) and
engaged in a U.S. trade or business, the (b), and 865, and the regulations thereun-
1. Scope of §1.863–8 of the proposed foreign person’s income derived from a der apply only to the extent provided in
regulations space or ocean activity is presumed to be proposed regulations §1.863–8(b)(4).
U.S. source income. The rule reflects IRS Proposed regulations §1.863–8(b)(4)(i)
Section 1.863–8 of the proposed regu-
and Treasury’s concern that a foreign per- provides that income derived from the
lations provides rules for sourcing income
son could engage in significant economic sale of purchased property in space or
derived from space and ocean activity,
notwithstanding other sections. Proposed activities in the United States and avoid international water is sourced under para-
regulations §1.863–8(a) provides that a U.S. taxation of space or ocean income graph (b)(1), (2), or (3) of this section.
taxpayer derives income from a space or derived from such activities. For exam- Proposed regulations §1.863–8(d)(2)(iii)
ocean activity only if the taxpayer con- ple, a foreign satellite company estab- provides that a sale occurs in space or
ducts such activity directly. This is con- lished in a no-tax jurisdiction could international water if either property is
sistent with the approach that IRS and engage in substantial activity in the located in space or international water at
Treasury adopted in the §1.863–3 regula- United States through launch facilities, the time the rights, title, and interests pass
tions sourcing income from inventory yet pay no U.S. or foreign tax on income to the purchaser, or the property sold is for
sales. arising from leasing the satellites it use in space or international water. This
launches. The IRS and Treasury believe rule for determining if a sale takes place
2. Source of gross income from space or Congress intended that a foreign person in space or in international water modifies
ocean activity engaged in substantial U.S. business in for space and ocean activity the rule in
the United States be subject to U.S. tax on §1.861–7(c) for otherwise determining
a. General related space or ocean activity. where a sale takes place. The IRS and
Section 863(d)(1) states that, except as The IRS and Treasury recognize that Treasury believe this rule for determining
provided in regulations, any income the presumption may be over-inclusive in the place of sale in the case of space or

2001–11 I.R.B. 821 March 12, 2001


ocean activity is consistent with the leg- activities occurring in space or in interna- 863(d)(1), proposed regulations §1.863–8
islative history of section 863(d), indicat- tional water, and production activities (b)(6) provides that income from commu-
ing Congress intended that space and occurring outside space and international nications activity that is also a space or
ocean activity be broadly defined. See water. Gross income must be allocated to ocean activity is sourced under proposed
S. Rept. No. 313, 99th Cong., 2d Sess. 357 the satisfaction of the Commissioner, regulations §1.863–9(b).
(1986) (Senate Report). It is also consis- based on all relevant facts and circum-
tent with the language of the Senate stances, which may include functions per- 3. Taxable income
Report stating that the committee did not formed, resources employed, risks
When a taxpayer allocates gross
intend to override the title passage rule for assumed, and any other contributions to
income under paragraph (b)(3) (allocation
sales of property on the high seas. the value of the property. The source of
for certain foreign persons), paragraph
Consistent with this language, proposed gross income attributable to production
(b)(4)(ii)(C) (allocation between produc-
regulations §1.863–8(d)(1)(ii) excludes activities in space or in international water
tion occurring in space or international
from the definition of ocean activity the is sourced under paragraphs (b)(1), (2), or
water and production occurring outside),
sale of inventory on international water, (3). The source of gross income attribut-
or paragraph (b)(5) (allocation between
and the source of income from such sales able to production activities outside space
services occurring in space or internation-
continues to be determined under and international water is determined
al water and those occurring outside) of
§1.861–7(c). under §1.863–3(c)(1).
this section, the taxpayer must allocate or
Proposed regulations §1.863–8(b)
c. Special Rule for Determining the apportion expenses, losses, and other
(4)(ii) provides rules for income derived
Source of Income from Services deductions under §§1.861–8 through
from the sale of property produced by the
1.861–14T of the regulations to the class
taxpayer. To determine the source of
Proposed regulations §1.863–8(b)(5) of gross income, which must include the
income derived from the sale of property
provides that income derived from the total income so allocated in each case. A
produced by the taxpayer, proposed regu-
performance of services in space or in taxpayer must then apply the rules of
lations §1.863–8(b)(4)(ii)(A) provides
international water is sourced under para- §§1.861–8 through 1.861–14T to properly
that the taxpayer must divide gross
graph (b)(1), (2), or (3). Proposed regula- allocate or apportion amounts of expens-
income from such sale equally between
tions §1.863–8(d)(2)(ii)(A) provides that es, losses, and other deductions allocated
production activity and sales activity.
a performance of a service is a space or or apportioned to such class of gross
Thus, one-half of the taxpayer’s gross
ocean activity when a part of the service, income between gross income from
income is attributed to production activity,
even if de minimis, is performed in space sources within the United States and with-
and the other one-half of such gross
or in international water. The IRS and out the United States.
income is attributed to sales activity.
Treasury believe that Congress intended a When a taxpayer must allocate gross
Proposed regulations §1.863–8(b)(4)
broad range of activities be treated as income to the satisfaction of the
(ii)(A) provides that income attributable
space or ocean activities. Commissioner based on the facts and cir-
to sales activity is sourced applying the
The IRS and Treasury recognize that this cumstances, IRS and Treasury believe that
rules applicable to the sale of purchased
rule may be over-inclusive in certain cases. such allocations would be based generally
property. If the taxpayer sells such prop-
Therefore, proposed regulations §1.863–8 on section 482 principles. However, IRS
erty in space or international water, the
(b)(5) provides that the taxpayer can allo- and Treasury solicit comments on this
source of income attributable to sales
cate gross income derived from the perfor- approach, including specific comments
activity is determined under paragraph
mance of the service between activities that and examples on alternative methods that
(b)(1), (2), or (3). If the taxpayer sells
occur in space or international water and could be used to make these allocations.
such property outside space and outside
activities that occur outside space and inter-
international water, the source of income 4. Definition of space and ocean activity
national water, to the satisfaction of the
attributable to sales activity is determined
Commissioner, based on facts and circum-
under §1.863–3(c)(2). Proposed regula- a. General Rules
stances, which may include functions per-
tions §1.863–8(b)(4)(ii)(B) provides that
formed, resources employed, risks
income attributable to production activity, Section 863(d)(2) provides that space or
assumed, or other contributions to value.
when production occurs only in space or ocean activity means any activity conduct-
Gross income allocated to activities occur-
in international water, is sourced under ed in space, and any activity conducted in
ring outside space and international water
paragraphs (b)(1), (2), or (3). When pro- or under water not within the jurisdiction
will be sourced under sections 861, 862,
duction occurs only outside space and of the United States or a foreign country.
863, and 865 of the Code.
international water, income attributable to Proposed regulations §1.863–8(d)(1)(i)
production activity is sourced under d. Special Rule for Determining the defines space as any area not within the
§1.863–3(c)(1). When production activi- Source of Communications Income jurisdiction (as recognized by the United
ty occurs both in space or in international States) of a foreign country, possession of
water and outside space and international A communications activity, as defined the United States, or the United States, and
water, proposed regulations §1.863–8(b) in proposed regulations §1.863–9(d), also not in international water.
(4)(ii)(C) splits the income attributed to can be a space or ocean activity. Pursuant Proposed regulations §1.863–8(d)(1)(i)
production activity between production to the authority granted in section provides that space activity is any activity

March 12, 2001 822 2001–11 I.R.B.


conducted in space, with certain excep- jurisdiction of the United States, U.S. space or ocean activity does not include
tions. Space activity includes perfor- possessions, or any foreign country (as any activity giving rise to international
mance and provision of services in space, defined in section 638). communications income as defined in
leasing of equipment or other property, Based on legislative history, the IRS proposed regulations §1.863–9(d)(3)(ii).
including spacecraft (e.g., satellites) or and Treasury believe space and ocean ac- These exceptions are consistent with sec-
transponders, located in space, licensing tivity should be broadly defined based on tion 863(d)(2)(B) of the Code.
of technology or other intangibles for use legislative history. The legislative history
in space, and the production, processing, clearly indicates that Congress intended b. Special Rules in Determining Space
or creation of property in space. Space to characterize certain land based activity or Ocean Activity
activity includes the sale of property in as space or ocean activity. See Senate
Proposed regulations §1.863–8(d)
space. Space activity also includes under- Report at 357. Consistent with that deter-
(2)(ii)(A) provides that services are per-
writing income from the insurance of mination, the proposed regulations pro-
formed in space or in international water
risks on activities that produce income vide that when activities occur both in
if functions are performed, resources
derived from space activity. The inclu- space or in international water and out-
employed, risks assumed, or other contri-
sion of such underwriting income is con- side space and international water, and
butions to the value of the transaction
sistent with language in the Senate constitute parts of a single transaction de-
occur in space or international water,
Report. See Senate Report at 357. scribed in §1.863–8(d)(1), the transaction
whether such contributions are per-
Proposed regulations §1.863–8(d)(1) will be characterized as space or ocean
formed by personnel, or equipment, or
(ii) provides that ocean activity is any ac- activity. Thus, for example, income from
otherwise. The IRS and Treasury believe
tivity conducted in international water, the lease of equipment located in space
that all contributions to a transaction’s
with certain exceptions. Ocean activity will be sourced in its entirety under sec-
value, whether contributed by personnel,
includes performance and provision of tion 863(d), even though certain functions
equipment, or otherwise, should be con-
services in international water, leasing of associated with the transaction may be
sidered in determining whether services
equipment or other property located in in- performed outside space and international
are performed in space or international
ternational water, licensing of technology water. The rules of this section for defin-
water.
or other intangibles for use in interna- ing space or ocean activity by combining
Proposed regulations §1.863–8(d)
tional water, and the production, process- activities occurring both in space or in in-
(2)(ii)(A) provides that the performance
ing, or creation of property in interna- ternational water and outside space and
of a service is treated as a space or ocean
tional water. Ocean activity includes the international water simply reflect existing
activity if a part of the service is per-
sale of property in international water, principles for characterizing a transac-
formed in space or international water.
and the sale of inventory under interna- tion, and are fully consistent with rules
The IRS and Treasury recognize that this
tional water, but does not include the sell- for characterizing income for purposes of
rule may be over-inclusive in certain
ing of inventory if the sale takes place on other source rules. Taxpayers enjoy flexi-
cases. Therefore, proposed regulations
international water. Thus, if property sold bility in structuring their transactions that
§1.863–8(d)(2)(ii)(B) provides that the
on international water is inventory prop- will be characterized under existing prin-
performance of a service will not be a
erty, income attributable to sales activity ciples. To ensure the statutory purpose is
space or ocean activity if the only activi-
is sourced under §1.861–7(c). not circumvented, the Commissioner may
ty of the taxpayer in space or in interna-
Ocean activity also includes underwrit- treat parts of a transaction as separate
tional water is to facilitate the taxpayer’s
ing income from the insurance of risks on transactions, or combine separate transac-
own communications, as part of provi-
activities that produce income derived tions as a single transaction.
sion or delivery of a service by the tax-
from ocean activity. The inclusion of Certain activities occurring in space or
payer, and that service would not other-
such underwriting income is consistent international water are not considered ei-
wise be in whole or in part a space or
with language in the Senate Report. See ther space or ocean activity. Proposed
ocean activity. Several examples in the
Senate Report at 357. regulations §1.863–8(d)(3)(i) provides
regulations illustrate this facilitation
Ocean activity also includes any activ- that space or ocean activity does not in-
exception. The IRS and Treasury recog-
ity performed in Antarctica. Ocean activ- clude any activity giving rise to trans-
nize that taxpayers may use communica-
ity further includes the leasing of a vessel portation income as defined in section
tions services in conducting a business,
if such vessel does not transport cargo or 863(c). Proposed regulations §1.863–8
and the fact that such communications
persons for hire between ports-of-call. (d)(3)(ii) provides that space or ocean ac-
may be routed through space or interna-
Thus, for example, income earned by a tivity also does not include any activity
tional water instead of by way of land
lessor of a vessel that is to engage only in with respect to mines, oil and gas wells,
should not produce differences in the
research activities in international water or other natural deposits to the extent the
source of the taxpayer’s income derived
is ocean income. Ocean activity also in- mines or wells are located within the ju-
from such service.
cludes the leasing of drilling rigs, extrac- risdiction (as recognized by the United
tion of minerals, and performance and States) of any country, including the 5. Treatment of partnerships
provision of services related thereto, to United States and its possessions (as de-
the extent the mines, oil and gas wells, or fined in section 638). Proposed regula- Proposed regulations §1.863–8(e) pro-
other natural deposits are not within the tions §1.863–8(d)(3)(iii) provides that vides that for U.S. partnerships, section

2001–11 I.R.B. 823 March 12, 2001


863(d) and the regulations thereunder will 2. Source of gross income derived from a foreign person has an office or fixed
be applied at the partnership level. The communications activity place of business in the United States.
IRS and Treasury believe this rule is con- This rule does not apply if the foreign per-
sistent with section 7701(a)(30)(B), a. International Communications Income son is engaged in a U.S. trade or business.
which defines a U.S. person as a domestic Section 863(e)(1)(A) states that any in- Proposed regulations §1.863–9(b)
partnership. For foreign partnerships, ternational communications income of a (2)(ii)(D) provides that if a foreign person
section 863(d) and the regulations there- U.S. person will be sourced 50 percent to is engaged in a U.S. trade or business, the
under will be applied at the partner level. the United States and 50 percent to for- foreign person’s international communi-
The proposed regulations provide a differ- eign sources. Proposed regulations cations income is presumed to be U.S.
ent rule for foreign partnerships because §1.863–9(b)(2)(i) provides that interna- source income. The rule reflects IRS and
IRS and Treasury are concerned that U.S. tional communications income of a U.S. Treasury’s concern that a foreign person
persons may use a foreign partnership to person will be sourced 50 percent to the could avoid a U.S. fixed place of business
circumvent the purposes of this section. United States and 50 percent to foreign under section 863(e)(1)(B)(ii), yet engage
For example, two U.S. persons by the sources. in significant communications activity in
simple expediency of forming a foreign Section 863(e)(1)(B)(i) provides that the United States. The IRS and Treasury
partnership can change significantly the any international communications income believe Congress intended that a foreign
U.S. tax consequences under section of a foreign person will be foreign source person engaged in substantial U.S. busi-
863(d). income except as provided in regulations ness in the United States be subject to
or in section 863(e)(1)(B)(ii). Proposed U.S. tax on that communications activity.
6. Reporting and documentation The IRS and Treasury recognize that
requirements regulations §1.863–9(b)(2)(ii)(A) states
the general rule that international commu- this rule may be over-inclusive in certain
When a taxpayer allocates gross nications income of a foreign person is cases. Therefore, the proposed regula-
income to the satisfaction of the foreign source income. However, the pro- tions provide that if the foreign person
Commissioner under §1.863–8(b)(3) posed regulations contain several excep- can allocate income to international
(income of certain foreign persons), tions to the general rule. communications activity outside the
§1.863–8(b)(4)(ii)(C) (certain production Proposed regulations §1.863–9(b)(2) United States and space and internation-
activity), or under §1.863–8(b)(5) (ser- (ii)(B) states that if a foreign corporation al water, to the satisfaction of the
vices) of the proposed regulations, the is 50 percent or more owned by vote or Commissioner, based on the facts and
taxpayer must do so by making the allo- value (directly, indirectly, or construc- circumstances, which may include func-
cation on a timely filed original return tively) by U.S. persons, or is a controlled tions performed, resources employed,
(including extensions). An amended foreign corporation within the meaning risks assumed, or other contributions to
return does not qualify, and section 9100 of section 957, all international commu- value, then the income allocated to such
relief will not be available. In all cases, a nications income is U.S. source income. communications activity outside the
taxpayer must maintain contemporaneous This rule reflects IRS and Treasury’s con- United States and space and internation-
documentation regarding the allocation of cern that U.S. persons may use a foreign al water will be foreign source income.
gross income, and allocation of expenses, corporation to obtain benefits that are When a foreign person is entitled to the
losses, and other deductions, the method- inconsistent with the purposes of this sec- benefits of a tax treaty with the United
ology used, and the circumstances justify- tion. States, such person may elect to be taxed
ing use of that methodology. The taxpay- Section 863(e)(1)(B)(ii) provides that if under the rules of that treaty, so that, for
er must produce such documentation a foreign person has a U.S. fixed place of example, the United States would tax
within 30 days upon request. business, international communications only income attributable to a permanent
income attributable to the fixed place of establishment of that foreign person,
B. Communications Activity Under business is U.S. source income. regardless of the amount of income con-
Sections 863(a), (d), and (e) Consistent with section 863(e)(1)(B)(ii), sidered effectively connected with a
proposed regulations §1.863–9(b)(2) U.S. trade or business.
1. Scope
(ii)(C) states that if a foreign person, other b. Other Communications Income
Section 1.863–9 of the proposed regu- than a foreign person described in para-
lations provides rules for sourcing income graph (b)(2)(ii)(A), maintains an office or The proposed regulations also provide
derived from communications activity, other fixed place of business in the United rules, for both U.S. and foreign persons,
notwithstanding any other section. States, any international communications for determining the source of income
Pursuant to proposed regulations §1.863 income attributable to the office or other from communications activity that does
–8, these source rules apply to communi- fixed place of business is U.S. source not qualify as international communica-
cations activity that is also space or ocean income. The principles of section tions activity. The IRS and Treasury
activity. 864(c)(5) will apply to determine whether believe rules that address income from

March 12, 2001 824 2001–11 I.R.B.


other communications activities are nec- ments on this approach, including specif- believe the exclusion of content and other
essary based on the legislative history. ic comments and examples on alternative services is consistent with the legislative
See Senate Report at 357. methods that could be used to make these history of section 863(e). No evidence
Proposed regulations §1.863–9(b)(3) allocations. exists in the Congressional testimony or
states that the source of income derived in the legislative history that content pro-
by either a U.S. or foreign person from 4. Definition of communications activity vided by transmission was to be consid-
U.S. communications activity is U.S. and income derived from ered a communications activity.
source income. Proposed regulations communications activity Proposed regulations §1.863–9(d)(1)
§1.863–9(b)(4) states that the source of (ii) requires that a transaction encompass-
income derived by either a U.S. or foreign a. Communications Activity
ing non-de minimis communications ac-
person from foreign communications ac- Proposed regulations §1.863–9(d)(1) tivities and non-de minimis non-commu-
tivity is foreign source income. Proposed defines a communications activity as an nications activities must be broken into
regulations §1.863–9(b)(5) states that the activity consisting solely in the delivery parts and each part treated as a separate
source of income derived from by transmission of communications or transaction. Proposed regulations
space/ocean communications activity is data (communications). The definition of §1.863–9(d)(1)(ii) states that gross income
determined under section 863(d) and the a communications activity is limited to derived from the activities must be allo-
regulations thereunder. the function of transmitting a particular cated to each separate transaction, to the
communication from point A to point B. satisfaction of the Commissioner, based
3. Taxable income on all relevant facts and circumstances,
The delivery of communications by
When a taxpayer allocates gross in- means other than transmission, for exam- which may include functions performed,
come under paragraph (b)(2)(ii)(D) (cer- ple, delivery of a letter is not a communi- resources employed, risks assumed, and
tain foreign persons), or (d)(1)(ii) (deter- cations activity. The IRS and Treasury any other contributions to the value of the
mining a communications activity), the believe that this narrow definition of com- respective transactions. For example, a
taxpayer must allocate or apportion ex- munications activity is consistent with the payment by an advertiser to a TV broad-
penses, losses, and other deductions as legislative history of section 863(e). See cast station may be in part a payment for
prescribed in §§1.861–8 through Senate Report at 357. transmission of the advertisement, but
1.861–14T of the regulations to the class The provision of capacity to transmit could also be a payment for other property
of gross income, which must include the communications or data is considered to be a or services, for example the transmitter’s
total income so allocated in each case. A communications activity. For example, the ability to reach a particular market or audi-
taxpayer must then apply the rules of provision of satellite transponder capacity ence. Such activities, if not de minimis,
§§1.861–8 through 1.861–14T of the reg- can qualify as a communications activity. must be treated as non-communications
ulations to properly allocate or apportion The provision of content or any other activities under §1.863–9(d)(1)(ii) of the
amounts of expenses, losses, and other additional service will not be treated as a proposed regulations.
deductions allocated or apportioned to communications activity unless de min- To ensure the statutory purposes are not
such gross income between gross income imis. For example, changes in the form of circumvented, the Commissioner may
from sources within the United States and a voice communication when switching treat parts of a transaction as separate
without the United States. For amounts from analog technology to digital data for transactions, or construe separate transac-
of expenses, losses, and other deductions Internet telephony would be disregarded tions as a single transaction.
allocated or apportioned to gross income in determining whether there has been a b. Income Derived from
derived from international communica- transmission of communications within Communications Activity
tions activity, when the source of income the meaning of proposed regulations
is determined under the 50/50 method of §1.863–9(d). However, payment for Income derived from communications
paragraph (b)(2)(i), taxpayers must ap- information from a data base sent elec- activity is defined in proposed regulations
portion expenses and other deductions be- tronically, or for income attributable to an §1.863–9(d)(2) as income derived from
tween U.S. and foreign sources pro rata entertainment event transmitted electroni- the transmission of communications,
based on the relative amounts of U.S. and cally, would not be income derived from a including income derived from the provi-
foreign source gross income. Research communications activity. sion of capacity to transmit communica-
and experimental expenditures qualifying When the provision of content or any tions. There is no requirement that the
under §1.861–17 are allocated under that other services is de minimis, such content income recipient perform the transmission
section. or services are ignored, and the transac- function. This rule reflects IRS and
When a taxpayer must allocate gross tion will be treated solely as the transmis- Treasury’s understanding that those pro-
income to the satisfaction of the sion of communications within the mean- viding communications services often use
Commissioner based on the facts and cir- ing of proposed regulations §1.863–9 capacity owned or operated by others.
cumstances, IRS and Treasury believe (d)(1). The determination of whether the However, income is derived from com-
that such allocations would be based gen- provision of content or other services is de munications activity only if the taxpayer
erally on section 482 principles. minimis should be based on all the facts is paid to transmit, and bears the risk of
However, IRS and Treasury solicit com- and circumstances. The IRS and Treasury transmitting, the communications.

2001–11 I.R.B. 825 March 12, 2001


c. Character of Communications Activity rived from such activity, for either a U.S. temporaneous documentation regarding
or foreign person, is U.S. source income. the allocation of gross income, and allo-
Proposed regulations §1.863–9(d)(3) Thus, for example, when a provider of cation of expenses, losses and other de-
provides rules for characterizing income communications services provides both ductions, the methodology used, and the
derived from a communications activity local and international long distance circumstances justifying use of that
for purposes of sourcing the income along with cable services in one-price methodology. The taxpayer must produce
derived from such activity. The character bundles for a set amount each month, such documentation within 30 days upon
of income derived from communications tracing each transmission may not be pos- request.
activity is determined by establishing the sible or practical. In such cases, the
two points between which the taxpayer is source of income derived from communi- C. Amendment to the §1.863–3
paid to transmit, and bears the risk of cations activity is U.S. source income. Regulations
transmitting, the communication. Under The IRS and Treasury understand that
the paid-to-do rule, the path the communi- These proposed regulations amend the
many in the communications industry regulations under §1.863–3 for determin-
cation takes between the two points is not may not consider it practical or possible
relevant in determining the character of ing the source of income in certain inven-
to prove the end points of the communica- tory sales.
the transmission. If a taxpayer is paid to tions the taxpayer transmits. The IRS
take a communication from one point to The regulations provide that in deter-
and Treasury solicit comments as to pro- mining the source of income from sales of
another point, income derived from the posals for those situations when taxpayers
transmission is characterized based on the property when the property is either (i)
cannot establish the points between which produced in whole or in part in space or in
transmission between those two points, the taxpayer is paid to transmit the com-
even though the taxpayer contracts out international water, or (ii) sold in space or
munications.
part of the transmission to another. This in international water, the rules of
rule reflects IRS and Treasury’s recogni- 5. Treatment of partnerships §1.863–8 of the proposed regulations
tion that those providing communications apply. The rules of sections 863(a) and
often use the network owned or operated Proposed regulations §1.863–9(e) pro- (b), and the regulations under those sec-
by others. Several examples in the pro- vides, in general, that for U.S. partner- tions, do not apply to determine the
posed regulations illustrate the paid-to-do ships, section 863(e) and the regulations source of income in such cases, except to
rule. thereunder will be applied at the partner- the extent provided in §1.863–8 of the
Proposed regulations §1.863–9(d)(3) ship level. The IRS and Treasury believe proposed regulations. The proposed regu-
(ii) defines income derived from interna- this rule is consistent with section lations in §1.863–8(b)(4)(ii)(A) provide,
tional communications activity as the 7701(a)(30)(B), which defines a U.S. per- however, that the source of income from
transmission from a point in the United son as a domestic partnership. For foreign sales of inventory on international water
States and a point in a foreign country (or partnerships, and in the case of a U.S. continues to be sourced under §1.863–
a possession of the United States). partnership in which 50 percent or more 3(c)(2). The regulations in §1.863–
Proposed regulations §1.863–9(d)(3)(iii) of the partnership interests are owned by 3(a)(1) and –3(c)(1)(i)(A) are amended to
defines income derived from U.S. com- foreign persons, section 863(e) and the reflect these provisions.
munications activity as the transmission regulations thereunder will be applied at The proposed regulations also amend
between two points in the United States or the partner level. The proposed regula- §1.863–3(c)(2) to provide that the place
a point in the United States and a point in tions provide a different rule for foreign of sale will be presumed to be the United
space or international water. partnerships and for U.S. partnerships States, for purposes of that section,
Proposed regulations §1.863–9(d)(3) with substantial foreign ownership when property is produced in the United
(iv) defines income derived from foreign because the IRS and Treasury are con- States and the property is sold to a U.S.
communications activity as the transmis- cerned that U.S. persons may use such resident for use, consumption, or dispo-
sion between two points either in a for- partnerships to circumvent the purposes sition in space. See §1.864–6(b)(3) for
eign country or in foreign countries or a of this section. determining whether property is used in
point in a foreign country and a point in 6. Reporting rules and documentation space and whether the sale is to a U.S.
space or international water. Proposed requirements resident.
regulations §1.863–9(d)(3)(v) defines These rules reflect the views of Treasury
income derived from space/ocean com- When a taxpayer allocates gross in- and the IRS that sales of satellites or
munications activity as the transmission come to the satisfaction of the Commis- transponders by a U.S. resident in space
between a point in space or international sioner under proposed regulations should produce U.S. source income. These
water and another point in space or inter- §1.863–9(b)(2)(ii)(D) (certain foreign rules also reflect the view that sales of such
national water. The IRS and Treasury persons) or –(d)(1)(ii) (determining a property by a U.S. resident to a U.S. pur-
believe these rules are consistent with the communications activity), it does so by chaser should produce U.S. source income.
legislative history. See Senate Report at making the allocation on a timely filed Treasury and the IRS believe that these
357. original return (including extensions). An provisions are consistent with Congress’
When the taxpayer cannot establish the amended return does not qualify, and sec- intent in enacting section 863(d) to tax U.S.
two points between which the taxpayer is tion 9100 relief will not be available. In persons on a residency basis on income
paid to transmit, the source of income de- all cases, a taxpayer must maintain con- that is not likely to be subject to foreign tax

March 12, 2001 826 2001–11 I.R.B.


by a foreign country. It is also consistent auditorium, seventh floor, Internal 1. Adding a sentence after the first sen-
with the tax policy of the foreign tax cred- Revenue Building, 1111 Constitution tence in paragraph (a)(1).
it that income not likely to be subject to Avenue, NW., Washington, DC. Due to 2. Adding a sentence at the end of para-
foreign tax should not be treated as foreign building security procedures, visitors graph (c)(1)(i)(A).
source income, which would inappropri- must enter at the 10th Street entrance, 3. Adding three sentences, one after the
ately allow taxpayers with excess foreign located between Constitution and current first sentence of paragraph (c)(2),
tax credits to shelter this income from U.S. Pennsylvania Avenues, NW. In addition, and the other two sentences after the cur-
tax. all visitors must present photo identifica- rent second sentence of paragraph (c)(2).
tion to enter the building. Because of The additions read as follows:
Proposed Effective Dates access restrictions, visitors will not be
admitted beyond the immediate entrance §1.863–3 Allocation and apportionment
These regulations are proposed to apply
area more than 15 minutes before the of income from certain sales of inventory.
for taxable years beginning on or after the
date that is 30 days after the date of pub- hearing starts. For information about hav-
(a) * * * (1) * * *To determine the
lication of final regulations in the Federal ing your name placed on the building
source of income from sales of property
Register. access list to attend the hearing, see the
produced by the taxpayer, when the prop-
“FOR FURTHER INFORMATION
erty is either produced in whole or in part
Special Analyses CONTACT” section of this preamble.
in space or on or under water not within
The rules of 26 CFR 601.601(a)(3)
It has been determined that this notice the jurisdiction (as recognized by the
apply to the hearing. Persons who wish to
of proposed rulemaking is not a signifi- United States) of a foreign country, pos-
present oral comments at the hearing must
cant regulatory action as defined in session of the United States, or the United
submit comments and an outline of topics
Executive Order 12866. Therefore, a reg- States (in international water), or is sold in
to be discussed and the time to be devoted
ulatory assessment is not required. It is space or in international water, the rules
to each topic (in the manner described
hereby certified that these regulations will of §1.863–8 apply, and the rules of this
under the ADDRESSES caption of this
not have a significant economic impact on section do not apply, except to the extent
preamble) by March 7, 2001.
a substantial number of small entities. provided in §1.863–8. * * *
A period of 10 minutes will be allotted
This certification is based on the fact that *****
to each person for making comments.
the rules of this section principally impact (c) * * * (1) * * *(i) * * *(A) * * * For
An agenda showing the scheduling of
large multinationals who pay foreign rules regarding the source of income
the speakers will be prepared after the
taxes on substantial foreign operations when production takes place, in whole or
deadline for receiving outlines has passed.
and therefore the rules will impact very in part, in space or in international water,
Copies of the agenda will be available
few small entities. Moreover, in those the rules of §1.863–8 apply, and the rules
free of charge at the hearing.
few instances where the rules of this sec- of this section do not apply except to the
tion impact small entities, the economic Drafting Information extent provided in §1.863–8.
impact on such entities is not likely to be *****
significant. Accordingly, a regulatory The principal author of these regula- (c)(2) * * * Notwithstanding any other
flexibility analysis is not required. tions is Anne Shelburne, Office of provision, for rules regarding the source
Pursuant to section 7805(f) of the Internal Associate Chief Counsel (International). of income when a sale takes place in
Revenue Code, this notice of proposed However, other personnel from the IRS space or in international water, the rules
rulemaking will be submitted to the Chief and Treasury Department participated in of §1.863–8 apply, and the rules of this
Counsel for Advocacy of the Small their development. section do not apply except to the extent
Business Administration for comment on * * * * * provided in §1.863–8. * * * The place of
its impact on small business. sale will be presumed to be the United
Proposed Amendments to the
States under this rule when property is
Comments and Public Hearing Regulations
produced in the United States and the
Accordingly, 26 CFR part 1 is proposed property is sold to a U.S. resident, who
Before these proposed regulations are
to be amended as follows: uses the property in space or in interna-
adopted as final regulations, consideration
tional water. In such cases, the property
will be given to any comments that are PART 1—INCOME TAXES will be treated as sold for use, consump-
submitted timely (in the manner described
tion, or disposition in the United States.
under the ADDRESSES caption) to the Paragraph 1. The authority citation for
*****
IRS. The IRS and Treasury specifically part 1 is amended by adding entries in
Par. 3 Section 1.863–8 and 1.863–9 are
request comments on the clarity of the numerical order to read as follows:
added to read as follows:
proposed regulations and how they may Authority: 26 U.S.C. 7805 * * *
be made easier to understand. All com- Section 1.863–8 also issued under 26 §1.863–8 Source of income from space
ments will be available for public inspec- U.S.C. 863(a), (b) and (d). and ocean activity under section 863(d).
tion and copying. Section 1.863–9 also issued under 26
A public hearing has been scheduled U.S.C. 863(a), (d) and (e). * * * (a) In general. Income of a U.S. or a
for March 28, 2001, at 10 a.m., in the Par. 2 Section 1.863–3 is amended by: foreign person derived from space or

2001–11 I.R.B. 827 March 12, 2001


ocean activity (space or ocean income) is chased property. When a taxpayer sells source of gross income allocated to space
sourced under the rules of this section, property in space or in international water, or international water is determined under
notwithstanding any other provision, the source of gross income shall be deter- paragraph (b)(1), (2), or (3) of this sec-
including sections 861, 862, 863, and 865. mined under paragraph (b)(1), (2), or (3) tion. The source of gross income allocat-
A taxpayer will not be considered to of this section as applicable. However, if ed outside space and international water is
derive income from space or ocean activ- inventory, within the meaning of section determined under §1.863–3(c)(1).
ity, as defined in paragraph (d) of this sec- 1221(1), is sold on international water, the (5) Special rule for determining the
tion, if such activity is performed by source of income shall be determined source of gross income from services. If a
another person, subject to the rules for the under §1.863–3(c)(2). transaction characterized as the per-
treatment of consolidated groups in sec- (ii) Sales of property produced by the formance of services constitutes a space
tion §1.1502–13. taxpayer—(A) General. If the taxpayer or ocean activity by reason of the perfor-
(b) Source of gross income from space both produces property and also sells such mance of part of the service in space or in
or ocean activity—(1) In general. Income property, the taxpayer must divide gross international water, as determined under
derived by a U.S. person from space or income from such sales between produc- paragraph (d)(2)(ii)(A) of this section, the
ocean activity is income from sources tion activity and sales activity under the source of all gross income derived from
within the United States, except as other- 50/50 method as described in this para- such transaction of which such per-
wise provided in this paragraph (b). graph (b)(4)(ii)(A). Under the 50/50 formance is a part is determined under
Income derived by a person other than a method, one-half of the taxpayer’s gross paragraph (b)(1), (2), or (3) of this sec-
United States person from space or ocean income will be considered income attrib- tion. However, if the taxpayer can allo-
activity is income from sources without utable to production activity, and the cate gross income between performance
the United States, except as otherwise source of that income will be determined occurring outside space and international
provided in this paragraph (b). under paragraphs (b)(4)(ii)(B) or (C) of water, and performance occurring in
(2) Income derived by certain foreign this section. The remaining one-half of space or international water, to the satis-
corporations. If a U.S. person or U.S. such gross income will be considered faction of the Commissioner, based on the
persons own 50 percent or more of the income attributable to sales activity and facts and circumstances, including func-
vote or value of the stock of a foreign cor- the source of that income will be deter- tions performed, resources employed,
poration (directly, indirectly or construc- mined under paragraph (b)(4)(i) of this risks assumed, or other contributions to
tively) that is not a controlled foreign cor- section. However, if the taxpayer sells value, then the source of income allocated
poration within the meaning of section such property outside space and outside to performance occurring outside space
957, all income derived by that foreign international water, the source of gross and international water shall be deter-
corporation from space or ocean activity income attributable to sales activity will mined under sections 861, 862, 863, and
is U.S. source income. be determined under §1.863–3(c)(2). 865.
(3) Income derived by foreign persons (B) Production only in space or in (6) Special rule for determining source
engaged in a U.S. trade or business. If a international water, or only outside space of income from communications activity
foreign person, other than a controlled and international water. When produc- (other than income from international
foreign corporation within the meaning of tion occurs only in space or in interna- communications activity). Space and
section 957 or a foreign person described tional water, income attributable to pro- ocean activity, as defined in paragraphs
in paragraph (b)(2) of this section, is duction activity is sourced under (d)(1) and (2) of this section, includes
engaged in a U.S. trade or business, all paragraph (b)(1), (2), or (3) of this section activity occurring in space or in interna-
income derived by that person from space as space or ocean income. When produc- tional water that is characterized as a
or ocean activity is presumed to be U.S. tion occurs only outside space and inter- communications activity as defined in
source income. However, if the foreign national water, income attributable to pro- §1.863–9(d). The source of gross income
person can allocate income between duction activity is sourced under from space or ocean activity that is also a
sources within the United States, or space, §1.863–3(c)(1). communications activity as defined in
or international water, and sources outside (C) Production both in space or in §1.863–9(d) is determined under the rules
the United States and space and interna- international water and outside space and of §1.863–9(b), rather than under para-
tional water, to the satisfaction of the international water. When property is graph (b) of this section.
Commissioner, based on the facts and cir- produced in space or in international (c) Taxable income. When a taxpayer
cumstances, which may include functions water and outside space and international allocates gross income under paragraph
performed, resources employed, risks water, gross income must be allocated to (b)(3), (b)(4)(ii)(C), or(b)(5) of this sec-
assumed, or other contributions to value, production occurring in space or in inter- tion, to the satisfaction of the Commis-
then space or ocean income allocated to national water and production occurring sioner, based on all the facts and circum-
sources outside the United States and outside space and international water, to stances, the taxpayer must allocate or
space and international water shall be the satisfaction of the Commissioner, apportion expenses, losses, and other de-
treated as from sources outside the United based on all the facts and circumstances, ductions as prescribed in §§1.861–8
States. which may include functions performed, through 1.861–14T to the class of gross
(4) Source rules for income from cer- resources employed, risks assumed, and income, which must include the total in-
tain sales of property—(i) Sales of pur- any other contributions to value. The come so allocated in each case. A tax-

March 12, 2001 828 2001–11 I.R.B.


payer must then apply the rules of production, processing, or creation of (B) Exception to the general
§§1.861–8 through 1.861–14T to properly property in international water, as defined rule–facilitating the taxpayer’s own com-
allocate or apportion amounts of ex- in paragraph (d)(2)(i) of this section. munications. If a taxpayer’s only activity
penses, losses, and other deductions allo- Ocean activity includes sales of property in space or in international water is to
cated or apportioned to such gross income in international water, as defined in para- facilitate the taxpayer’s own communica-
between gross income from sources graph (d)(2)(iii) of this section, but ocean tions as part of the provision or delivery
within the United States and without the activity does not include the selling of in- of a service provided by the taxpayer, and
United States. ventory as defined in section 1221(1) on that service would not otherwise be in
(d) Space and Ocean activity—(1) De- international water. Ocean activity in- whole or in part a space or ocean activity,
finition—(i) Space activity. In general, cludes activity occurring in international such service will not be treated as either
space activity is any activity conducted in water that is characterized as communica- space or ocean activity because of such
space. Space activity includes perfor- tions activity (other than international facilitation.
mance and provision of services in space, communications activity) under (iii) Sale in space or in international
as defined in paragraph (d)(2)(ii)(A) of §1.863–9(d). Ocean activity also includes water. In applying §1.861-7(c) to deter-
this section, leasing of equipment located underwriting income from the insurance mine where a sale takes place, property
in space, including spacecraft (e.g., satel- of risks on activities that produce ocean will be sold in space or in international
lites) or transponders located in space, li- income. Ocean activity also includes any water if the property is located in space or
censing of technology or other intangi- activity performed in Antarctica. Ocean in international water when rights, title
bles for use in space, and the production, activity further includes the leasing of a and interest pass to the buyer (or when
processing, or creation of property in vessel if such vessel does not transport bare legal title is retained, at the time and
space, as defined in paragraph (d)(2)(i) of cargo or persons for hire between ports- place of passage of beneficial ownership
this section. Space activity includes ac- of-call. Thus, for example, the leasing of and risk of loss), or if property is sold for
tivity occurring in space that is character- a vessel that is to engage only in research use in space or in international water.
ized as communications activity (other activities in international water is an (3) Exceptions to space or ocean activ-
than international communications activ- ocean activity. Except as provided in ity. Space or ocean activity does not in-
ity) under §1.863–9(d). Space activity paragraph (d)(3)(ii) of this section, ocean clude the following types of activities—
also includes underwriting income from activity also includes the leasing of (i) Any activity giving rise to trans-
the insurance of risks on activities that drilling rigs, extraction of minerals, and portation income as defined in section
produce space income. Space activity in- performance and provision of services re- 863(c); or
cludes the sale in space of property, as lated thereto. For purposes of determin- (ii) Any activity with respect to mines,
defined in paragraph (d)(2)(iii) of this ing ocean activity, the Commissioner may oil and gas wells, or other natural deposits
section. For purposes of this section, separate parts of a single transaction into to the extent the mines or wells are locat-
space means any area not within the ju- separate transactions or combine separate ed within the jurisdiction (as recognized
risdiction (as recognized by the United transactions as parts of a single transac- by the United States) of any country,
States) of a foreign country, possession of tion. Paragraph (d)(3) of this section lists including the United States and its posses-
the United States, or the United States, exceptions to the general rule. sions; or
and not in international water. For pur- (2) Determining a space or ocean (iii) Any activity giving rise to interna-
poses of determining space activity, the activity—(i) Production of property in tional communications income as defined
Commissioner may separate parts of a space or in international water. For pur- in §1.863–9(d)(3)(ii).
single transaction into separate transac- poses of this section, production activity (e) Treatment of partnerships. In the
tions or combine separate transactions as means an activity that creates, fabricates, case of a U.S. partnership, this section
parts of a single transaction. Paragraph manufactures, extracts, processes, cures, will be applied at the partnership level. In
(d)(3) of this section lists exceptions to or ages property within the meaning of the case of a foreign partnership, this sec-
the general rule. sections 864(a) and §1.864–1. tion will be applied at the partner level.
(ii) Ocean activity. In general, ocean (ii) Special rule for performance of (f) Examples. The following examples
activity is any activity conducted on or services—(A) General. If a transaction is illustrate the rules of this section:
under water not within the jurisdiction (as characterized as the performance of a ser- Example 1. Space activity-activity occurring on
recognized by the United States) of a for- vice, then such service will be treated as a land and in space. (i) Facts. S owns satellites, and
eign country, possession of the United space or ocean activity when a part of the leases one of its satellites to A. S, as lessor, will not
States, or the United States (collectively, service, even if de minimis, is performed operate the satellite. Part of S’s performance as
lessor in this transaction occurs on land.
in international water). Ocean activity in- in space or in international water. (ii) Analysis. The combination of S’s activities
cludes performance and provision of ser- Services are performed in space or in is characterized as the lease of equipment. Since the
vices in international water, as defined in international water if functions are per- equipment is located in space, the transaction is
paragraph (d)(2)(ii)(A) of this section, formed, resources employed, risks defined as space activity under paragraph (d)(1)(i) of
leasing of equipment located in interna- assumed, or other contributions to value this section. Income derived from the lease will be
sourced in its entirety under paragraph (b) of this
tional water, including underwater cables, occur in space or in international water, section.
licensing of technology or other intangi- regardless of whether performed by per- Example 2. Space activity. (i) Facts. X is an
bles for use in international water, and the sonnel, or equipment, or otherwise. Internet service provider, offering a service to per-

2001–11 I.R.B. 829 March 12, 2001


sonal computer users accessing the Internet. This case is not considered de minimis. L also acquires and (C) of this section. The source of S’s income
service permits a customer, C, to make a call, initiat- programming from H, and L pays H a royalty for use attributable to sales activity is determined under
ed by a modem, routed to a control center, for con- of copyrighted material in the United States and in paragraph (b)(4)(ii)(A) of this section and
nection to the World Wide Web. X transmits the foreign countries. Customer, C, pays L for delivery §1.863–3(c)(2) as U.S. source income.
requested information over its satellite capacity of the service to C’s residence in the United States. Example 6. Use of intangible property in space.
leased from S to C’s personal computer. X charges Assume S’s provision of capacity in this case was (i) Facts. X acquires a license to use a particular
its customers a flat monthly fee. Assume neither X viewed as the provision of a service, and also that S satellite slot or orbit, which X sublicenses to C. C
nor S derive international communications income does not derive international communications pays X a royalty.
within the meaning of §1.863–9(d)(3)(ii). income within the meaning of §1.863–9(d)(3)(ii). (ii) Analysis. Since the royalty is paid for the
(ii) Analysis. In this case, X performs a service, (ii) Analysis. On these facts, S’s activity in space right to use intangible property in space, the source
and X’s activity in space is not simply facilitation is not just the facilitation of its own communications of X’s royalty is determined under paragraph (b) of
within the meaning of paragraph (d)(2)(ii)(B) of this within the meaning of paragraph (d)(2)(ii)(B) of this this section.
section, because X’s activity is not simply the facili- section, because S is facilitating the communications Example 7. Performance of services. (i) Facts.
tation of X’s own communications and because X’s of others. To the extent S derives income from a E, a U.S. company, operates satellites with sensing
activity is not just part of another service provided space activity that is also a communications activity equipment that can determine how much heat and
by X. Thus, X’s activity constitutes space activity in under §1.863–9(d), the source of S’s income is deter- light particular plants emit and reflect. Based on the
its entirety under paragraph (d)(2)(ii)(A) of this sec- mined under §1.863–9(b), as provided in paragraph data, E will provide F, a U.S. farmer, a report ana-
tion, and the source of X’s income is determined (b)(6) of this section. On these facts, L is treated as lyzing the data, which F will use in growing crops.
under paragraph (b) of this section. To the extent X providing a service and is paid to deliver that service E analyzes the data from U.S. offices.
derives income from communications activity, with- to its customers, and each transaction, i.e., the provi- (ii) Analysis. Assume E’s combined activities are
in the meaning of §1.863–9(d), the source of X’s sion of the service and the delivery of the service, characterized as the performance of services.
income is determined under §1.863–9(b), as provid- constitutes a separate transaction. L’s income Because part of the service is performed in space, all
ed in paragraph (b)(6) of this section. S derives derived from provision of the service is not income income E derives from the transaction will be treat-
communications income within the meaning of derived from space activity. L’s income derived ed as derived from space activity under paragraph
§1.863–9(d), and therefore the source of S’s income from delivery of the service is space activity. L’s (d)(2)(ii)(A) of this section. The source of such
is determined under §1.863–9(b), as provided in delivery of the service is not just the facilitation of income will be determined under paragraph (b)(5) of
paragraph (b)(6) of this section. L’s own communications within the meaning of this section. If, however, E can allocate gross
Example 3. Services as space activity-facilitation paragraph (d)(2)(ii)(B) of this section, because it is income, to the satisfaction of the Commissioner, as
of communications. (i) Facts. R owns a retail outlet not just a part of the provision of a service, but prescribed in paragraph (b)(5) of this section, then
in the United States. R employs S to provide a secu- instead the entire service. Since L derives commu- the source of gross income attributable to services
rity system for R’s premises. S operates its security nications income within the meaning of performed outside space may be determined as pro-
system by transmitting images from R’s premises to §1.863–9(d), the source of L’s income is determined vided in paragraph (b)(5) of this section.
a satellite, and from there to a group of S employees under §1.863–9(b), as provided in paragraph (b)(6) Example 8. Separate transactions. (i) Facts.
located in Country B, who then monitor the premis- of this section. If on other facts, L provides a service The same facts as Example 7, except that E provides
es by viewing the transmitted images. O provides S and delivers that service, and L treats the provision the raw data to F in a transaction characterized as a
with transponder capacity on O’s satellite, which S of the service and the delivery of the service as one sale of a copyrighted article, and in addition also
uses to transmit those images. separate transaction, then L performs services in provides an analysis in the form of a report to F, a
(ii) Analysis. S derives income for providing space under paragraph (d)(2)(ii)(A) of this section, U.S. farmer who uses the information in growing
monitoring services. Because, in this case, S uses because the delivery of the service occurs in space. crops. The price F pays E for the raw data is sepa-
O’s satellite transponder to transmit images to facil- However, L’s activity in space would be limited to rately stated.
itate S’s own communications in space as part of its facilitating its own communications within the (ii) Analysis. To the extent the provision of raw
provision of a security service, S’s activity in space meaning of paragraph (d)(2)(ii)(B) of this section, data and the analysis of the data are each treated as
is limited to facilitating communications as because it is part of another service that would not separate transactions, the source of income from the
described in paragraph (d)(2)(ii)(B) of this section. otherwise be a space activity. As a result, L’s provi- production and sale of data is determined under
Thus, S is not engaged in a space activity, and none sion of the service would not be a space activity paragraph (b)(4) of this section. The provision of
of S’s income is space income. Assuming O’s pro- under paragraph (d)(2)(ii)(A) of this section. services would be analyzed in the same manner as in
vision of capacity is viewed as the provision of a ser- Example 5. Space activity—treatment of land Example 7.
vice, O’s activity in space is not simply the facilita- activity. (i) Facts. S, a U.S. person, offers remote Example 9. Sale of property under international
tion of communications as provided in paragraph imaging products and services to its customers. In water. (i) Facts. T owns transatlantic cable lying
(d)(2)(ii)(B) of this section, because O is not just year 1, S uses its satellite’s remote sensors to gather under the ocean, which it purchased. T sells the
facilitating its own communications. Thus, O’s data on certain geographical terrain. In year 3, C, a cable to B.
activity is characterized as space activity in its construction development company, contracts with S (ii) Analysis. Because the property is sold under
entirety under paragraph (d)(2)(ii)(A) of this section to obtain a satellite image of an area for site devel- international water as provided in paragraph
(unless O’s activity in space qualifies as internation- opment work. S pulls data from its archives and (d)(2)(iii) of this section, the transaction is ocean
al communications activity). To the extent O derives transfers to C the images gathered in year 1, in a activity under paragraph (d)(1)(ii) of this section,
income from communications activity, within the transaction that is characterized as a sale of the data. and the source of income is determined under para-
meaning of §1.863–9(d), the source of O’s income is Title to the data passes to C in the United States. graph (b)(4)(i) of this section, by reference to para-
determined under §1.863–9(b), as provided in para- Before transferring the images to C, S uses comput- graph (b)(1), (2), or (3) of this section.
graph (b)(6) of this section. On these facts, R does er software to enhance the images so that the images Example 10. Sales of property in space. (i)
not derive any income from space activity. can be used. Facts. S manufactures a satellite in the United States
Example 4. Space activity. (i) Facts. L, a U.S. (ii) Analysis. The collection of data and creation and sells it to a U.S. customer, with the rights, title,
company, offers programming and also certain ser- of images in space is characterized as the creation of and interest passing to the customer when the satel-
vices to customers located both in the United States property in space. S’s income is derived from pro- lite is located in space.
and in foreign countries. Assume L’s provision of duction of property in part in space, and is, therefore, (ii) Analysis. The source of income derived from
programming and services in this case was viewed derived in part from space activity. The source of the sale of the satellite in space is determined under
as the provision of a service, with no part of that ser- S’s income from production and sale of property is, paragraph (b)(4) of this section, with the source of
vice occurring in space. L uses satellite capacity therefore, determined under paragraph (b)(4) of this income attributable to production activity deter-
acquired from S to deliver the service directly to cus- section. Since production activity occurs both in mined under paragraphs (b)(4)(ii)(A) and (B) of this
tomers’ television sets, so that the delivery of the ser- space and on land, the source of S’s production section, and the source of income attributable to
vice occurs in space. Assume the delivery in this income is determined under paragraphs (b)(4)(ii)(A) sales activity determined under paragraphs

March 12, 2001 830 2001–11 I.R.B.


(b)(4)(ii)(A) and (b)(4)(i) of this section, by refer- garding the allocation of gross income cluding a controlled foreign corporation
ence to paragraph (b)(1), (2), or (3) of this section. and allocation or apportionment of ex- within the meaning of section 957, is 50
Example 11. Sale of property located in space.
(i) Facts. S has a right to operate from a particular
penses, losses and other deductions, the percent or more owned by vote or value
position in space. S sells the right to operate from methodology used, and the circumstances (directly, indirectly, or constructively) by
that satellite slot or orbit to P. justifying use of that methodology. The U.S. persons, all income derived by that
(ii) Analysis. Because the sale takes place in taxpayer must produce such documenta- corporation from international communi-
space, as provided in paragraph (d)(2)(iii) of this tion within 30 days upon request. cations activity is from sources within the
section, gain on the sale of the satellite slot or orbit
is income derived from space activity under para-
(h) Effective date. This section applies United States.
graph (d)(1)(i) of this section, and income from the to taxable years beginning on or after the (C) Income derived by foreign persons
sale is sourced under paragraph (b)(4)(i) of this sec- date that is 30 days after the date of pub- with a U.S. fixed place of business. If a
tion, by reference to paragraph (b)(1), (2), or (3) of lication of final regulations in the Federal foreign person (other than a foreign per-
this section. Register. son described in paragraph (b)(2)(ii)(B) of
Example 12. Source of income of a foreign per-
son. (i) Facts. FP, a foreign company, not a con-
this section) maintains an office or other
§1.863–9 Source of income derived from fixed place of business in the United
trolled foreign corporation within the meaning of
section 957, derives income from the operation of communications activity under sections States, the foreign person’s international
satellites. FP operates a ground station in the United 863(a), (d), and (e). communications income, as determined to
States and in foreign country, FC. the satisfaction of the Commissioner,
(ii) Analysis. In this case, FP is engaged in a U.S. (a) In general. Income of a U.S. or for-
trade or business of operating the ground station.
attributable to the office or other fixed
eign person derived from communications
Thus, under paragraph (b)(3) of this section, all FP’s place of business is from sources within
activity is sourced under the rules of this
income derived from space activity is presumed to the United States. The principles of sec-
be U.S. source income. However, if FP can allocate
section, notwithstanding any other provi-
tion 864(c)(5) apply in determining
space income to contributions occurring outside the sion including sections 861, 862, 863, and
whether a foreign person has an office or
United States, space, and international water, as pro- 865.
vided in paragraph (b)(3) of this section, for exam-
fixed place of business in the United
(b) Source of gross income derived
ple, to the ground station located in FC, then such States. See §1.864–6 and –7. This para-
from communications activity—(1) In
space income so allocated will be from sources out- graph does not apply if the foreign person
side the United States. general. The source of gross income de-
is engaged in a U.S. trade or business.
Example 13. Source of income of a foreign per- rived from each type of communications
(D) Income derived by foreign persons
son. (i) Facts. FP, a foreign company, not a con- activity, as defined in paragraph (d)(3) of
trolled foreign corporation within the meaning of
engaged in a U.S. trade or business. If a
this section, is determined under this
Section 957, operates remote sensing satellites, col- foreign person (other than a foreign per-
paragraph (b). If a communications activ- son described in paragraph (b)(2)(ii)(B) of
lecting data and images in space for its customers.
FP uses an independent agent, A, in the United ity would qualify as space or ocean activ- this section) is engaged in a U.S. trade or
States who provides marketing, order taking, and ity under section 863(d) and the regula- business, all of the foreign person’s inter-
other customer service functions. tions thereunder, the source of income national communications income is pre-
(ii) Analysis. In this case, FP is engaged in a U.S. derived from such communications activ-
trade or business on the basis of A’s activities on its sumed to be from sources within the
ity is determined under this section, and United States. However, if the foreign
behalf in the United States. Therefore, under para-
graph (b)(3) of this section, all of FP’s income not under section 863(d) and the regula- person can allocate income between
derived from space activity is presumed to be space tions thereunder. See §1.863–8(b)(6). sources within the United States, or space,
income. However, if FP can allocate income to con- (2) Source of international communi- or international water and sources outside
tributions occurring outside the United States, space, cations income—(i) Income derived by a
and international water, as provided in paragraph the United States and space and interna-
(b)(3) of this section, then such income so allocated
U.S. person. Under the 50/50 method of tional water, to the satisfaction of the
will be from sources outside the United States. this paragraph (b)(2)(i), income derived Commissioner, based on the facts and cir-
(g) Reporting and documentation re- by a U.S. person from international com- cumstances, which may include functions
quirements. When a taxpayer allocates munications activity is one-half from performed, resources employed, risks
gross income, to the satisfaction of the sources within the United States and one- assumed, or other contributions to value,
Commissioner, under paragraph (b)(3), half from sources without the United then the income allocated to sources out-
(b)(4)(ii)(C) , or (b)(5) of this section, it States. side the United States and space and inter-
does so by making the allocation on a (ii) Income derived by foreign national water shall be treated as from
timely filed original return (including ex- persons–(A) General rule. Income de- sources without the United States.
tensions). An amended return does not rived by a person other than a U.S. person (3) Source of U.S. communications
qualify for this purpose, nor shall the pro- from international communications activ- income. The source of income derived by
visions of §301.9100–1 of this chapter ity is, except as otherwise provided in this a U.S. or a foreign person from U.S. com-
and any guidance promulgated thereunder paragraph (b), wholly from sources with- munications activity is from sources with-
apply. In all cases, a taxpayer must main- out the United States. in the United States.
tain contemporaneous documentation in (B) Income derived by certain foreign (4) Source of foreign communications
existence when such return is filed re- corporations. If a foreign corporation, in- income. The source of income derived by

2001–11 I.R.B. 831 March 12, 2001


a U.S. or a foreign person from foreign (d) Communications activity and and bears the risk of transmitting, the
communications activity is from sources income derived from communications communications.
without the United States. activity–(1) Communications activity— (3) Determining the type of communi-
(5) Source of space/ocean communica- (i) General rule. For purposes of this cations activity—(i) In general. Whether
tions income. The source of income de- part, communications activity consists income is derived from international com-
rived by a U.S. or a foreign person from solely of the delivery by transmission of munications activity, U.S. communica-
space/ocean communications activity is communications or data (communica- tions activity, foreign communications
determined under section 863(d) and the tions). Delivery of communications other activity, or space/ocean communications
regulations thereunder, without regard to than by transmission, for example, by activity is determined by identifying the
§1.863–8(b)(6). delivery of physical packages and letters, two points between which the taxpayer is
(6) Source of communications income is not communications activity within the paid to transmit the communication. The
when taxpayer cannot establish the two meaning of this section. Communications taxpayer must establish to the satisfaction
points between which the taxpayer is paid activity also includes the provision of of the Commissioner the two points
to transmit the communication. The capacity to transmit communications. between which the taxpayer is paid to
income derived by a U.S. person or for- Provision of content or any other addi- transmit, and bears the risk of transmit-
eign person from communications activi- tional service provided along with, or in ting, the communication. Whether the
ty, when the taxpayer cannot establish the connection with, a non-de minimis com- taxpayer contracts out part or all of the
two points between which the taxpayer is munications activity must be treated as a transmission function is not relevant.
paid to transmit the communication as separate non-communications activity (ii) Income derived from international
required in paragraph (d)(3)(i) of this sec- unless de minimis. communications activity. Income derived
tion, is from sources within the United (ii) Separate transaction. To the extent by a taxpayer from international commu-
States. a taxpayer’s transaction consists in part of nications activity (international communi-
(c) Taxable income. When a taxpayer non-de minimis communications activity cations income) is income derived from
allocates gross income under paragraph and in part of non-de minimis non-com- communications activity, as defined in
(b)(2)(ii)(D) or (d)(1)(ii) of this section, to munications activity, such parts of the paragraph (d)(1) of this section, when the
the satisfaction of the Commissioner, transaction must be treated as separate taxpayer is paid to transmit between a
based on all the facts and circumstances, transactions. Gross income must be allo- point in the United States and a point in a
the taxpayer must allocate or apportion cated to each such transaction involving foreign country (or a possession of the
expenses, losses, and other deductions as the communications activity and the non- United States).
prescribed in §§1.861–8 through communications activity to the satisfac- (iii) Income derived from U.S. commu-
1.861–14T to the class of gross income, tion of the Commissioner, based on all nications activity. Income derived by a
which must include the total income so relevant facts and circumstances, which taxpayer from U.S. communications
allocated in each case. A taxpayer must may include functions performed, activity (U.S. communications income) is
then apply the rules of §§1.861–8 through resources employed, risks assumed, and income derived from communications
1.861–14T to properly allocate or appor- any other contributions to the value of the activity, as defined in paragraph (d)(1) of
tion amounts of expenses, losses, and respective transactions. For purposes of this section, when the taxpayer is paid to
other deductions allocated or apportioned determining whether income is derived transmit—
to such gross income between gross from communications activity, the (A) Between two points in the United
income from sources within the United Commissioner may treat communications States; or
States and without the United States. For activity and non-communications activity, (B) Between the United States and a
amounts of expenses, losses, and other treated as a single transaction, as separate point in space or in international water.
deductions allocated or apportioned to transactions, or combine separate commu- (iv) Income derived from foreign com-
gross income derived from international nications activity and non-communica- munications activity. Income derived by a
communications activity, when the source tions activity transactions into a single taxpayer from foreign communications
of income is determined under the 50/50 transaction. activity (foreign communications income)
method of paragraph (b)(2)(i) of this sec- (2) Income derived from communica- is income derived from communications
tion, taxpayers must apportion expenses, tions activity. Income derived from com- activity, as defined in paragraph (d)(1) of
losses, and other deductions between munications activity (communications this section, when the taxpayer is paid to
sources within and sources without pro income) is income derived from the deliv- transmit—
rata based on the relative amounts of ery by transmission of communications, (A) Between two points in a foreign
gross income from sources within the including income derived from the provi- country or countries (or possession or
United States and without the United sion of capacity to transmit communica- possessions of the United States); or
States. Research and experimental expen- tions. Income may be considered derived (B) Between a foreign country (or a
ditures qualifying under §1.861–17 are from a communications activity even if possession of the United States) and a
allocated under that section, and are not the taxpayer itself does not perform the point in space or in international water.
allocated and apportioned pro rata under transmission function, but in all cases, the (v) Income derived from space/ocean
the method of paragraph (b)(2)(i) of this taxpayer derives communications income communications activity. Income derived
section. only if the taxpayer is paid to transmit, by a taxpayer from space/ocean commu-

March 12, 2001 832 2001–11 I.R.B.


nications activity (space/ocean communi- States and a foreign country, and vice versa. Since (d)(1) of this section, the source of income is deter-
cations income) is income derived from a TC is a U.S. person, TC’s international communica- mined under paragraph (b)(6) of this section as
tions income is sourced under paragraph (b)(2)(i) of income from sources within the United States,
communications activity, as defined in this section as one-half from sources within the because A cannot establish the two points between
paragraph (d)(1) of this section, when the United States and one-half from sources without the which it is paid to transmit the communications.
taxpayer is paid to transmit between a United States. Example 8. Income derived from communica-
point in space or in international water Example 4. Character of communications activ- tions and non-communications activity. (i) Facts.
and another point in space or in interna- ity: the paid-to-do rule. (i) Facts. TC is paid to A, a U.S. company, offers customers local and long
transmit communications from Toronto, Canada, to distance phone service, video, and Internet services.
tional water. Paris, France. TC transmits the communication to Customers pay one monthly fee, and in addition 10
(e) Treatment of partnerships—(1) New York. TC pays another communications com- cents a minute for all long-distance calls, including
General. In the case of a U.S. partner- pany, IC, to transmit the communications from New international calls.
ship, this section will be applied at the York to Paris. (ii) Analysis. To the extent A derives income
partnership level. In the case of a foreign (ii) Analysis. Under the paid-to-do rule of para- from communications activity, A must allocate
graph (d)(3)(i) of this section, TC derives income income to its communications activity as provided in
partnership, this section will be applied at from foreign communications activity under para- paragraph (d)(1)(ii) of this section. To the extent A
the partner level. graph (d)(3)(iv) of this section, since it is paid to can establish that it derives international communi-
(2) Exception. In the case of a U.S. transmit communications between two foreign cations income as defined in paragraph (d)(3)(ii) of
partnership in which 50 percent or more points, Toronto and Paris. Under paragraph (d)(3)(i) this section, A would determine the source of such
of the partnership interests are owned by of this section, the character of TC’s activity is deter- income under paragraph (b)(2)(i) of this section. If
mined without regard to the fact that TC pays IC to A cannot establish the points between which it is
foreign persons, this section will be transmit the communication for some portion of the paid to transmit communications, as required in
applied at the partner level. delivery path. IC has international communications paragraph (d)(3)(i) of this section, the source of A’s
(f) Examples. The following examples income under paragraph (d)(3)(ii) of this section, income must be determined under paragraph (b)(6)
illustrate the rules of this section: because it is paid to transmit the communication of this section as from within the United States.
Example 1. Income derived from communica- between a point in the United States and a point in a Example 9. Income derived from communica-
tions activity. (i) Facts. D provides its customers in foreign country. tions activity. (i) Facts. T purchases capacity from
various foreign countries with access to its data base. Example 5. Income derived from international TC to transmit telephone calls. T sells prepaid tele-
A customer, C, places a toll call to D’s telephone communications activity. (i) Facts. S, a U.S. satel- phone calling cards, giving customers access to TC’s
number, and can then access D’s data base to obtain lite operator, owns satellites and the uplink facilities lines, for a certain number of minutes.
certain information, such as C’s customers’ health in Country X, a foreign country. B, a resident of (ii) Analysis. T derives income from communi-
care coverage. Country X, pays S to deliver its programming from cations activity, under paragraph (d)(2) of this sec-
(ii) Analysis. D is not paid to transmit communi- Country X to its downlink facility in the United tion, because T makes capacity to transmit available
cations and does not derive income solely from States, owned by C, a customer of B. to its customers. In this case, T cannot establish the
transmission of communications within the meaning (ii) Analysis. S derives communications income points between which communications are transmit-
of paragraph (d) of this section. D instead derives under paragraph (d) of this section. S’s income is ted. Therefore, the source of its income must be
income from provision of content or provision of characterized as international communications determined under paragraph (b)(6) of this section as
services to its customers. income under paragraph (d)(3)(ii) of this section, U.S. source income.
Example 2. Income derived from U.S. communi- because S is paid to transmit the communication Example 10. Income derived from communica-
cations activity. (i) Facts. Local telephone compa- between the beginning point in a foreign country to tions and non-communications activity. (i) Facts.
ny (TC) receives access fees from an international an end point in the United States. The source of S’s B, a U.S. company, transmits television programs
carrier for picking up calls from a local telephone international communications income is determined using its satellite transponder, from the United States
customer and delivering the call to a U.S. point of under paragraph (b)(2)(i) of this section as one-half to downlink facilities in foreign country Y, owned by
presence (POP) of the international carrier. The from sources within the United States and one-half D, a cable system operator in Country Y. D receives
international carrier picks up the call from its U.S. from sources without the United States. the transmission, unscrambles the signals, and dis-
POP and delivers the call to a foreign country. Example 6. Character of income derived from tributes the broadcast to customers in Country Y.
(ii) Analysis. TC is not paid to carry the trans- communications activity: the paid-to-do rule. (i) (ii) Analysis. B derives income both from com-
mission between the United States and a foreign Facts. TC is paid to take a call from North Carolina munications activity as defined under paragraph
country. It is paid to transmit communications to Iowa, two points in the United States, but routes (d)(1)(i) of this section, and from non-communica-
between two points in the United States. TC derives the call through Canada. tions activity. Gross income must be allocated to the
income from U.S. communications activity as (ii) Analysis. Under paragraph (d)(3)(i) of this communications activity as required in paragraph
defined in paragraph (d)(3)(iii) of this section, which section, the character of the income derived from (d)(1)(ii) of this section. Income derived by B for
is sourced under paragraph (b)(3) of this section as communications activity is determined by the two transmission to D is international communications
U.S. source income. points between which the taxpayer is paid to trans- income within paragraph (d)(3)(ii) of this section,
Example 3. Income derived from international mit, and bears the risk of transmitting, the communi- because B is paid to transmit communications from
communications activity. (i) Facts. TC, a U.S. com- cations, without regard to the path of the transmis- the United States to a foreign country.
pany, owns an underwater fiber optic cable. sion between those two points. Thus, under Example 11. Income derived from communica-
Pursuant to three year contracts, TC makes capacity paragraph (d)(3)(iii) of this section, TC derives tions activity. (i) Facts. TC is paid for Internet
to transmit communications via the cable available income from U.S. communications activity because access. TC replicates frequently requested sites on
to its customers. Such customers then solicit tele- it is paid to transmit between two U.S. points. its servers, solely to speed up response time.
phone customers and arrange for transmitting their Example 7. Source of income derived from com- (ii) Analysis. On these facts, the replication ser-
calls. The cable runs in part through U.S. waters, munications activity. (i) Facts. A, a U.S. company, vice would be treated as de minimis under paragraph
through international waters, and in part through for- is an Internet access provider. A charges C a lump (d)(1)(i) of this section, so that TC derives income
eign country waters. sum, paid monthly, for Internet access. A transmits from communications activity. The type and source
(ii) Analysis. TC derives income from communi- a call made by C in France to a recipient in England, of TC’s communications income depends on demon-
cations activity under paragraph (d)(2) of this sec- over the public Internet. A does not maintain records strating the points between which TC is paid by its
tion. The income is derived from international com- as to the beginning and end points of the transmis- customer to transmit the communications, under
munications activity as provided in paragraph sion. paragraph (d)(3)(i) of this section.
(d)(3)(ii) of this section, since TC is paid to make (ii) Analysis. Although A derives income from Example 12. Income derived from foreign com-
available capacity to transmit between the United communications activity as defined in paragraph munications activity. (i) Facts. S leases capacity to

2001–11 I.R.B. 833 March 12, 2001


B, a broadcaster located in Australia. B beams pro- AGENCY: Office of the Secretary, lection of information should be sent to the
gramming to the satellite, and S’s satellite picks the Treasury. Office of Management and Budget, Attn:
communications up in space, and beams the pro-
gramming over Southeast Asia.
Desk Officer for the Department of the
ACTION: Notice of proposed rulemak-
(ii) Analysis. S derives income from communi- Treasury, Office of Information and Regu-
ing and notice of public hearing.
cations activity under paragraph (d)(2) of this sec- latory Affairs, Washington, DC 20503, with
tion. S’s income is characterized as income derived SUMMARY: This notice proposes modi- copies to the Internal Revenue Service,
from foreign communications activity under para- fications of the regulations governing Attn: IRS Reports Clearance Officer,
graph (d)(3)(iv) of this section, because S picks up
the communication in space, and beams it to a foot-
practice before the Internal Revenue W:CAR:MP:FP:S:O, Washington, DC
print entirely covering a foreign area. The source of Service (Circular 230). These regulations 20224. Comments on the collection of in-
S’s income is determined under paragraph (b)(4) of would affect individuals who are eligible formation should be received by March 13,
this section as from sources without the United to practice before the Internal Revenue 2001. Comments are specifically requested
States. If S were beaming the programming over a Service. The proposed modifications concerning:
satellite footprint that covered area both in the
United States and outside the United States, S would
would clarify the general standards of Whether the proposed collection of
be required to allocate the income derived from the practice before the Internal Revenue information is necessary for the proper
different types of communications activity. Service and would modify the standards performance of the Office of the Director
(g) Reporting rules and disclosure on for providing advice regarding tax shel- of Practice, including whether the infor-
tax return. When a taxpayer allocates gross ters. This document also provides notice mation will have practical utility;
income to the satisfaction of the Commis- of a public hearing on the proposed regu- The accuracy of the estimated burden
sioner under paragraph (b)(2) (ii)(D), or lations. associated with the proper collection of
(d)(1)(ii) of this section, it does so by mak- information (see below);
DATES: Comments and requests to speak
ing the allocation on a timely filed original How the quality, utility, and clarity of
and outlines of topics to be discussed
return (including extensions). An amended the information to be collected may be
from persons wishing to speak at the pub-
return does not qualify for this purpose, nor enhanced;
lic hearing scheduled for May 2, 2001, in
shall the provisions of §301.9100–1 of this How the burden of complying with the
the auditorium of the Internal Revenue
chapter and any guidance promulgated proposed collection of information may
Building at 1111 Constitution Avenue,
thereunder apply. In all cases, a taxpayer be minimized, including through the
NW., Washington, DC 20224, must be
must maintain contemporaneous documen- application of automated collection tech-
received by April 12, 2001.
tation in existence when such return is filed niques or other forms of information tech-
regarding the allocation of gross income, ADDRESSES: Send submissions to: nology; and
and allocation and apportionment of ex- CC:M&SP:RU (REG–111835–99), room Estimates of capital or start-up costs
penses, losses, and other deductions, the 5226, Internal Revenue Service, P.O. Box and costs of operation, maintenance, and
methodology used, and the circumstances 7604, Ben Franklin Station, Washington, purchase of services to provide informa-
justifying use of that methodology. The DC 20044. Submissions may be hand tion.
taxpayer must produce such documentation delivered Monday through Friday be- The collection of information in these
within 30 days of a request. tween the hours of 8 am. and 5 pm. to: proposed regulations is in §§10.6, 10.29,
(h) Effective date. This section applies CC:M&SP:RU (REG–111835–99), and 10.30. Section 10.6 requires an en-
to taxable years beginning on or after the Courier’s Desk, Internal Revenue Ser- rolled agent to maintain records and edu-
date that is 30 days after the date of pub- vice, 1111 Constitution Avenue NW., cational materials regarding his or her sat-
lication of final regulations in the Federal Washington, DC. Submit comments and isfaction of the qualifying continuing
Register. data via electronic mail (email) to professional education credit. Section
http://www.irs.gov/tax_regs/regslist.html. 10.6 also requires sponsors of qualifying
Robert E. Wenzel, continuing professional education pro-
Deputy Commissioner FOR FURTHER INFORMATION CON-
grams to maintain records and educa-
of Internal Revenue. TACT: Concerning issues for comment,
tional material concerning these programs
Richard Goldstein at (202) 622-7820 or
(Filed by the Office of the Federal Register on Janu-
and those who attended them. The collec-
Brinton Warren at (202) 622-4940; con-
ary 16, 2001, 8:45 a.m., and published in the issue of tion of this material helps to ensure that
cerning submissions of comments and
the Federal Register for January 17, 2001, 66 F.R. individuals enrolled to practice before the
3903)
delivering comments, Guy Traynor at
Internal Revenue Service are informed of
(202) 622-7180; (not toll-free numbers).
the newest developments in Federal tax
SUPPLEMENTARY INFORMATION: practice.
Notice of Proposed Rulemaking Section 10.29 requires a practitioner to
Paperwork Reduction Act
and Notice of Public Hearing obtain and retain for a reasonable period
The collection of information contained written consents to representation when-
Regulations Governing Practice in this notice of proposed rulemaking has ever such representation directly conflicts
Before the Internal Revenue been submitted to the Office of Manage- with the interests of the practitioner or the
Service ment and Budget for review in accordance interests of another client of the practi-
with the Paperwork Reduction Act of 1995 tioner. The consents are to be obtained
REG–111835–99 (44 U.S.C. 3507). Comments on the col- after full disclosure of the conflict is pro-

March 12, 2001 834 2001–11 I.R.B.


vided to each party. Section 10.30 re- other duties as are necessary to carry out the regulations be clarified to provide that
quires a practitioner to retain for a reason- these functions. there is no violation of the regulations if
able period any communication and the The regulations have been amended the information or documents are not in
list of persons to whom that communica- from time to time to address various spe- the possession or control of the practi-
tion was provided with respect to public cific issues in need of resolution. For tioner or the practitioner’s client.
dissemination of fee information. The example, on February 23, 1984, the reg- Some commentators expressed con-
collection of consents to representation ulations were amended to provide stan- cern about a practitioner’s obligation
and communications concerning practi- dards for providing opinions used in tax when notifying a client of any noncom-
tioner fees protects the practitioner shelter offerings (49 FR 6719). On Oc- pliance with the revenue laws. The com-
against claims of impropriety and ensures tober 17, 1985, the regulations were mentators recommended that a practi-
the integrity of the tax administration sys- amended to conform to legislative tioner be required to advise the client of
tem. changes requiring the disqualification of the action necessary to correct the error
Estimated total annual recordkeeping an appraiser who is assessed a penalty or omission and the consequences of not
burden is 50,000 hours. under section 6701 of the Internal Rev- taking such action when notifying a
Estimated annual burden per record- enue Code for aiding and abetting the client of any noncompliance with the
keeper varies from 30 minutes to 1 hour, understatement of a tax liability (50 FR revenue laws. Some commentators ex-
depending on individual circumstances, 42014). The regulations were most re- pressed concern about the current prac-
with an estimated average of 54 minutes. cently amended on June 20, 1994 (59 FR tice used by some practitioners to obtain
Estimated number of recordkeepers is 31523), to provide standards for tax re- oral consents to represent parties where
56,000. turn preparation, to limit the use of con- there is a direct conflict of interest. They
An agency may not conduct or sponsor, tingent fees in tax return or refund claim recommended that a practitioner be re-
and a person is not required to respond to preparation, to provide expedited rules quired to obtain written consents to rep-
a collection of information unless it dis- for suspension, and to clarify or amend resent parties where there is a direct con-
plays a valid control number assigned by certain other items. flict of interest.
the Office of Management and Budget. On June 15, 1999, an advance notice Some commentators suggested that
Books or records relating to a collec- of proposed rulemaking was published §10.22 be amended specifically to permit
tion of information must be retained as (64 FR 31994) requesting comments on a practitioner to demonstrate due dili-
long as their contents may become mater- amendments to the regulations that gence for purposes of these regulations
ial in the administration of any internal would take into account legal develop- based on the practitioner’s reliance on the
revenue law. Generally, tax returns and ments, professional integrity and fairness work product of an associate or partner. It
tax return information are confidential, as to practitioners, taxpayer service, and also was suggested that §10.24 be
required by section 6103 of the Internal sound tax administration. On May 5, amended to permit a practitioner to share
Revenue Code. 2000, an advance notice of proposed fees with a suspended or disbarred person
rulemaking was published (65 FR 30375) during the period of suspension or disbar-
Background requesting comments on amendments to ment, respectively.
Section 330 of title 31 of the United the regulations relating to standards of Several commentators noted that the
States Code authorizes the Secretary of practice governing tax shelters and other regulations regarding solicitation are not
the Treasury to regulate the practice of general matters. consistent with recent court decisions
representatives before the Treasury De- concerning in-person contacts of potential
Summary of Comments clients by certified public accountants.
partment. The Secretary of the Treasury
is authorized, after notice and an oppor- Twenty-seven written comments have They suggested that the restrictions on in-
tunity for a proceeding, to suspend or been submitted concerning the revision of person contacts be liberalized for all prac-
disbar from practice before the Depart- Circular 230. All comments received have titioners. It also was suggested that the
ment those representatives who are in- been considered and are available for pub- prohibition of deceptive public solicita-
competent, disreputable, or who violate lic inspection upon request. The follow- tions be extended to deceptive private so-
regulations prescribed under section 330 ing paragraphs provide a summary of sig- licitations and that practitioners be pro-
of title 31. Pursuant to section 330 of nificant comments. hibited from associating with an
title 31, the Secretary has published the A few commentators expressed con- individual who uses deceptive solicitation
regulations in Circular 230 (31 CFR part cern that, under the current regulations, a practices, regardless of whether the de-
10). These regulations authorize the Di- practitioner may be in violation of the ceptive practices related to business con-
rector of Practice to act upon applica- regulations if the practitioner fails to fur- nected with the practitioner.
tions for enrollment to practice before nish information or documents subject to One commentator suggested that the
the Internal Revenue Service, to make a lawful request for documents made by regulations be modified to require the Di-
inquiries with respect to matters under an officer or employee of the Internal rector of Practice to notify a practitioner
the Director’s jurisdiction, to institute Revenue Service where neither the practi- whenever a complaint has been filed
proceedings for suspension or disbar- tioner nor the practitioner’s client pos- against the practitioner, whether or not
ment from practice before the Internal sesses or controls the documents. These any action is taken against the practitioner
Revenue Service, and to perform such commentators suggested that §10.20 of as a result of the complaint.

2001–11 I.R.B. 835 March 12, 2001


Several comments were received rec- penalties. One commentator suggested Enrollment
ommending changes to the regulation of that the opinion standards provide that
opinion writing by practitioners. Com- satisfaction of the standards would meet a Section 10.6 of the regulations sets
mentators recommended that new opinion practitioner’s obligations under Circular forth the conditions for renewal of enroll-
standards be promulgated with respect to 230, but would not determine the persua- ment to practice before the Internal
tax shelter opinions that are rendered for siveness of, and the taxpayer’s good faith Revenue Service. One condition for
the purpose of establishing a reasonable reliance on, the opinion. Two commenta- renewal of enrollment is that the enrolled
cause and good faith defense to the accu- tors also suggested that standards be pro- agent complete a minimum number of
racy-related penalties under section 6662 mulgated for written advice used for mar- hours of continuing professional educa-
of the Internal Revenue Code (“reason- keting purposes. tion. Paragraph (f) of §10.6 of the regula-
able cause opinions”). These commenta- Commentators generally did not oppose tions requires that there be a written out-
tors suggested that standards for such the expansion of sanctions to encompass line and/or textbook for each course.
opinions impose factual due diligence re- lesser sanctions such as censure. Com- Under the proposed regulations, a contin-
quirements that, in particular, restrict the mentators did not support attribution of uing education program may qualify for
reliance on hypothetical facts or factual practitioner misconduct to other members purposes of this part if the course requires
assumptions as the basis for such opin- of the practitioner’s firm. Several com- suitable electronic educational materials,
ions. Some commentators suggested that mentators, however, stated that in in- a written outline, or a textbook.
reliance on factual assumptions regarding stances where there has been a knowing The regulations permit any individual
the business purpose or noneconomic participation or acquiescence in such mis- who is enrolled as an actuary by the Joint
consequences of a transaction be treated conduct by other members of a firm or a Board for the Enrollment of Actuaries to
as inherently unreasonable. Comments pattern of abuse by members of a firm, enroll and qualify to practice before the
also were received on whether and to sanctions extending beyond the individual Internal Revenue Service by filing with
what extent reliance in an opinion on tax- practitioner may be appropriate. the Service a written declaration that such
payer representations or certifications The majority of commentators sup- individual is currently qualified as an
should be permitted and the conditions ported a contingent fee limitation with re- enrolled actuary. New paragraph 10.6(o)
under which a practitioner may rely on spect to original tax returns if the fee would be added to clarify that the renew-
the opinions of other practitioners. arrangement was contingent on the return al of enrollment of actuaries also is gov-
Several commentators recommended position being sustained. Such fee erned by the regulations concerning the
that the new standards impose require- arrangements may indicate an inappropri- Joint Board for the Enrollment of
ments with respect to the legal analysis ate reliance on the “audit lottery.” The Actuaries at 20 C.F.R. 901.1 et seq.
contained in reasonable cause opinions, commentators believed that the same con- Information to be Furnished
particularly that such opinions contain no siderations were not as persuasive with
unreasonable legal assumptions, address respect to amended tax returns. Section 10.20 of the regulations
all material tax issues, evaluate relevant Commentators generally did not favor requires a practitioner to submit docu-
legal authorities and consider applicable the imposition of restrictions in Circular ments or information whenever a lawful
judicial doctrines and statutory and regu- 230 on confidentiality imposed on practi- request for such documents or informa-
latory anti-abuse rules. One commenta- tioners by clients or on clients by practi- tion is made by a duly authorized officer
tor, however, thought it was unnecessary tioners. or employee of the Internal Revenue
to impose an explicit requirement in Service. The provision does not provide
Circular 230 that reasonable cause opin- Explanation of Provisions an exception if the practitioner or the
ions address the applicability of relevant Who May Practice practitioner’s client does not possess or
judicial doctrines. Another commentator control the requested documents or infor-
considered it sufficient for Circular 230 Paragraph (d)(2) of §10.3 of the regula- mation. Under the proposed regulations,
merely to require that reasonable cause tions provides a list of issues with respect paragraph (a) of §10.20 would be modi-
opinions consider the substance and pur- to which an enrolled actuary is authorized fied to clarify that a practitioner is
pose of the transaction under scrutiny. to represent a taxpayer in limited practice required to promptly respond to a lawful
Comments also were received as to before the Internal Revenue Service. This and proper request for documents by
whether a reasonable cause opinion list of issues would be expanded under the either submitting the requested informa-
should unambiguously opine on a comfort proposed regulations to include issues tion or advising the requesting officer or
level of “more likely than not” or higher, involving 26 U.S.C. 419 (treatment of employee why the information cannot be
should state that it is issued to establish funded welfare benefits), 419A (qualified provided (e.g., the documents requested
reasonable cause, and other matters. A asset accounts), 420 (transfers of excess are privileged, or the documents are not
few commentators expressed concern that pension assets to retiree health accounts), controlled by either the practitioner or the
the definition of a tax shelter utilized in 4972 (tax on nondeductible contributions practitioner’s client). If the documents
any opinion standards not be overly broad to qualified employer plans), 4976 (taxes are not controlled by either the practition-
and that opinion standards under Circular with respect to funded welfare benefit er or the practitioner’s client, the provi-
230 be coordinated with opinion-related plans), and 4980 (tax on reversion of qual- sion would require the practitioner, to the
requirements under the accuracy-related ified plan assets to employer). extent possible, to identify any persons

March 12, 2001 836 2001–11 I.R.B.


who may have the requested documents in tions, however, would not require practi- charging a contingent fee not only for
their control. tioners to disassociate themselves from a preparation of an original tax return, but
suspended or disbarred person as long as also for advice rendered in connection
Knowledge of Client’s Omission the other proscriptions regarding dis- with a position taken or to be taken on an
Section 10.21 of the regulations re- barred or suspended persons are observed. original tax return. A practitioner would
quires a practitioner to advise a client Practitioners who are partners of a law or be permitted, however, to charge a contin-
promptly of any noncompliance by the accountancy partnership, for example, gent fee both for the preparation of, and
client with the revenue laws. Under the would not be required to expel another for advice rendered in connection with a
proposed regulations, a practitioner also partner who was subject to discipline sim- position taken, or to be taken on, an
would be required to advise the client of ply because the disciplined partner might amended tax return or a claim for refund
the manner in which the error or omission otherwise share in fees derived from ser- if the practitioner reasonably anticipates
may be corrected and the possible conse- vices rendered by others before the that the amended tax return or refund
quences of not taking such corrective ac- Internal Revenue Service. claim will receive substantive review by
tion. the Internal Revenue Service. In addition,
Practice by Partners of Government a contingent fee would be defined to
Diligence as to Accuracy Employees include any fee that is based, in whole or
in part, on whether or not a position taken
Section 10.22 of the regulations re- Section 10.25 of the regulations pre-
on a tax return or in a refund claim is sus-
quires a practitioner to exercise due dili- cludes partners of former Government
tained, an indemnity agreement, a guaran-
gence in preparing or assisting in the employees from practice with respect to
tee, recission rights, insurance or any
preparation, approving, and filing of doc- matters in which the employee personally
other arrangement by which the practi-
uments relating to Internal Revenue Ser- and substantially participated. This provi-
tioner will compensate or reimburse the
vice matters. Section 10.22 also requires sion would be removed under the pro-
taxpayer or another person if a position
a practitioner to exercise due diligence in posed regulations because the statutory
taken on a tax return or in a refund claim
determining the correctness of oral or prohibition implemented by this provision
is not sustained.
written representations made to the De- (18 U.S.C. 207(c)) has been repealed.
The proposed regulations would not
partment of Treasury or with reference to Practice by Former Government prohibit confidentiality agreements. Con-
any matter administered by the Internal Employees, Their Partners and Their fidentiality restrictions imposed by clients
Revenue Service. The proposed regula- Associates may raise an ethical inquiry as to the ef-
tions would clarify that a practitioner is fects of such arrangements on a practi-
presumed to have exercised due diligence Section 10.26 of the current regulations tioner’s ability to represent his or her
if the practitioner relies on the work prod- places restrictions on the practice of for- clients. See Illinois State Bar Association
uct of another person and the practitioner mer Government employees, their part- Advisory Opinion on Professional Con-
used reasonable care in engaging, super- ners, and their associates with respect to duct 00-01 (October 2000)(a conflict of
vising, training and evaluating such per- certain matters that the former interest arises with respect to other similar
son. Government employees participated in clients when a lawyer agrees not to dis-
during the course of their Government close ideas of a third party to reduce a
Assistance from Disbarred or Suspended employment. This section would be client’s tax obligations). Commentators
Persons renumbered as §10.25 under the proposed asserted that such confidentiality restric-
Section 10.24 of the regulations pro- regulations and would be amended to tions were not an issue appropriate for
hibits a practitioner, in practice before the reflect changes to the Federal statutes regulation under Circular 230. Commen-
Internal Revenue Service, from employ- governing post-employment restrictions tators also asserted that confidentiality re-
ing, accepting assistance from, accepting applicable to former Government employ- strictions imposed by practitioners on
employment from, or becoming a sub- ees. clients were an appropriate contractual
agent for, a disbarred or suspended per- arrangement for the benefit of practition-
Fees and Confidentiality ers. The Treasury Department remains
son. Section 10.24 also precludes a prac-
titioner from accepting assistance from Paragraph (b) of §10.28 of the current concerned, however, about confidentiality
any former government employee where regulations precludes a practitioner from restrictions and specifically invites com-
the provisions of §10.26 of the current charging his or her client a contingent fee ments on whether the final regulations
regulations (§10.25 of the proposed regu- for the preparation of an original tax should address such restrictions, and, if
lations) or any Federal law would be vio- return, but permits the practitioner to so, in what manner.
lated. Section 10.24 of the proposed reg- charge a contingent fee for the preparation Return of Client’s Records
ulations clarifies that a practitioner is of an amended tax return or a claim for
prohibited from accepting assistance from refund (other than a claim for refund Section 10.28 of the proposed regula-
or assisting a disbarred or suspended prac- made on an original tax return). Section tions would specifically require a practi-
titioner if the assistance relates to matters 10.28 would be renumbered as §10.27 and tioner to return a client’s records when the
constituting practice before the Internal paragraph (b) would be clarified to pro- client makes a request for such records,
Revenue Service. The proposed regula- vide that a practitioner is prohibited from whether or not a dispute regarding fees

2001–11 I.R.B. 837 March 12, 2001


exists. The practitioner may retain a copy ual has with the practitioner, and include if so, the types of other transactions that
of those records. electronic mail, facsimile, and hand-deliv- should be exempted.
ered flyers in the definition of communi-
Conflicting Interests cation. Tax Shelter Opinions Used by Third Par-
ties to Market Tax Shelters
Section 10.29 of the regulations pro- Negotiation of Taxpayer Checks
hibits a practitioner from representing Section 10.33 currently governs advice
conflicting interests before the Internal Section 10.31 of the regulations pro- by a practitioner concerning the Federal
Revenue Service, except with the express hibits a practitioner who prepares income tax aspects of a tax shelter either appear-
consent of all directly interested parties tax returns from negotiating a check with ing or referred to in offering materials, or
after full disclosure. Under the proposed respect to income tax issued to a taxpayer used or referred to in connection with
regulations, a practitioner would be re- other than the practitioner. The proposed sales promotion efforts, and directed to
quired to obtain the written consents of regulations would clarify that this prohibi- persons other than the client who engaged
the clients before representing clients tion is not limited to checks issued for the practitioner to give the advice. The
with conflicting interests. The practi- income taxes, but applies to all checks proposed regulations would revise the
tioner would be required to retain the issued to the practitioner’s clients by the scope of §10.33 to govern a tax shelter
written consents for at least 36 months Government with respect to matters opinion that does not conclude that the
after the conclusion of the representation before the Internal Revenue Service. The Federal tax treatment of an item or items
of the clients and to present copies of such proposed regulations also would clarify is more likely than not the proper treat-
consents to the Internal Revenue Service, that practitioners are not prohibited from ment and that a practitioner knows or has
if requested to do so. negotiating checks issued to their own reason to believe will be used or referred
In addition, the proposed regulations partnerships, corporations, etc. to by persons other than the practitioner to
would provide that a practitioner may not promote, market or recommend the tax
represent a party in his or her practice be- Tax Shelter Opinions
shelter to one or more taxpayers. The pro-
fore the Internal Revenue Service if that Two sections of the proposed regula- posed regulations would clarify that
representation may be materially limited tions would provide standards governing §10.33 governs tax shelter opinions pre-
by the practitioner’s own interests, unless tax shelter opinions. New §10.35 would pared for use by third parties that are pro-
practitioner reasonably believes the repre- apply to all tax shelter opinions that con- moting the tax shelter, irrespective of
sentation will not be adversely affected clude that the Federal tax treatment of a tax whether such promotional efforts are con-
and the client consents after full disclo- shelter item or items is more likely than not ducted publicly or privately. The pro-
sure, including disclosure of the implica- (or at a higher level of confidence) the posed regulations also would modify the
tions of the potential conflict and the risks proper treatment. Section 10.33 would be definition of a material Federal tax issue
involved. revised in scope to apply to all tax shelter and define a tax shelter item as an item of
opinions not governed by §10.35 that a income, gain, loss, deduction or credit if
Solicitation
practitioner knows or has reason to believe the item is directly or indirectly attribut-
Section 10.30 of the regulations gov- will be used or referred to by persons other able to a tax shelter.
erns the manner in which practitioners than the practitioner to promote, market or Section 10.33 would require a practi-
may contact potential business clients. recommend a tax shelter. For purposes of tioner who provides a written opinion
The proposed regulations would update §§10.33 and 10.35 of the proposed regula- with respect to a tax shelter item or items
the solicitation rules to reflect recent court tions, the definition of a tax shelter would to comply with a series of requirements
decisions and to respond to comments conform to the definition found in section with respect to each such item. A practi-
received in connection with this rulemak- 6662(d)(2)(C)(iii) of the Internal Revenue tioner would be required to make inquiry
ing. Under the proposed regulations, a Code. as to all relevant facts, be satisfied that the
practitioner would be permitted to contact The Treasury Department and the Inter- opinion takes account of all relevant facts,
potential business clients using any medi- nal Revenue Service recognize that the and that the material facts are accurately
um that is not prohibited by Federal or proposed rules in §§10.33 and 10.35 of and completely described in the opinion.
state statutes or other rules applicable to the proposed regulations may regulate Furthermore, the opinion could not be
the practitioner regarding the uninvited opinion standards with respect to transac- based, directly or indirectly, on any unrea-
solicitation of prospective clients. The tions that had not previously been subject sonable factual assumptions. An unrea-
proposed regulations also would expand to the rules governing tax shelter opin- sonable factual assumption would include
the prohibition of deceptive solicitation ions. The proposed regulations would ex- a factual assumption that the practitioner
practices to cover private, as well as pub- clude opinions relating to municipal knows or has reason to believe is incor-
lic, solicitations, expand the prohibition bonds and qualified retirement plans. The rect, incomplete, inconsistent or implausi-
against providing assistance to or accept- Treasury Department and the Internal ble. An unreasonable factual assumption
ing assistance from an individual who Revenue Service specifically request also would include a factual assumption
uses deceptive solicitation practices, comment on whether the regulations regarding a fact or facts that the practi-
whether or not such practices are in con- should exempt other transactions from the tioner could reasonably request to be pro-
nection with the relationship the individ- requirements for tax shelter opinions and, vided or to be represented.

March 12, 2001 838 2001–11 I.R.B.


The proposed regulations would permit type to whom the tax shelter is or will be The proposed regulations would require
a practitioner, where it would be reason- marketed will prevail with respect to the that the practitioner be knowledgeable in
able based on all the facts and circum- merits of each material Federal tax issue all of the aspects of Federal tax law rele-
stances, to rely upon factual representa- that involves the reasonable possibility of vant to the opinion being rendered. A
tions, statements, findings or agreements. a challenge by the Internal Revenue practitioner would not be permitted to
The proposed regulations would further Service or clearly state that the practition- provide a tax shelter opinion that does not
provide that a practitioner need not con- er is unable to reach a conclusion with reach a conclusion on all the material
duct an audit or independent verification respect to one or more issues. Further, the Federal tax issues that involve a reason-
of a factual representation, but that re- opinion would be required to fully able possibility of challenge by the
liance would not be permitted on factual describe the reasons for the practitioner’s Internal Revenue Service or does not
representations that the practitioner conclusions or fully describe the reasons reach an overall conclusion (or, alterna-
knows or has reason to believe are unrea- for the inability to reach a conclusion. tively, fails to clearly state that such con-
sonable, incorrect, incomplete, inconsis- The practitioner would be required to clusions cannot be reached), unless at
tent or implausible (e.g., a representation reach an overall conclusion as to the like- least one other competent practitioner
that there are business reasons for a trans- lihood that the Federal tax treatment of provides an opinion with respect to all of
action without describing those reasons, a the tax shelter item or items is the proper the other material Federal tax issues
representation that a transaction is poten- treatment or, where the practitioner is which involve a reasonable possibility of
tially profitable apart from tax benefits unable to reach such a conclusion, clearly challenge by the Internal Revenue
without providing adequate factual sup- state that the practitioner is unable to Service, and with respect to the tax shelter
port, or a valuation that is inconsistent reach such an overall conclusion. Where item or items. The practitioner also would
with the facts of the transaction). an overall conclusion cannot be reached, be required, upon reviewing such other
The proposed regulations would provide the opinion would be required to fully opinion and any written materials that dis-
that the opinion must clearly identify the describe the reasons for the practitioner’s tribute, reflect or refer to such opinion, to
facts upon which the opinion’s conclusions inability to reach an overall conclusion. have no reason to believe that the other
are based, contain a reasoned analysis of the Moreover, the fact that the practitioner’s practitioner has not complied with §10.33
pertinent facts and legal authorities and not opinion does not reach a conclusion that or that the overall conclusion reached by
assume the favorable resolution of any the Federal tax treatment of a tax shelter such practitioner is incorrect on its face.
Federal tax issue material to the analysis or item or items is more likely than not the
otherwise rely on unreasonable legal proper treatment, or that the practitioner is “More Likely Than Not” Tax Shelter
assumptions. The proposed regulations unable to reach an overall conclusion, Opinions
also would require that the opinion not con- would be required to be clearly and Under the proposed regulations, new
tain legal analyses or conclusions that are prominently disclosed on the first page of standards would be applicable to practi-
inconsistent with each other. the opinion. The opinion also would be tioners who provide tax shelter opinions
The practitioner would be required to required to clearly and prominently dis- that conclude that the Federal tax treat-
ascertain that all material Federal tax close that it was not written for the pur- ment of a tax shelter item or items is more
issues with respect to the tax shelter item pose of establishing reasonable belief or likely than not (or at a higher level of con-
or items have been considered and that all reasonable cause and good faith under fidence) the proper treatment. Such opin-
of those material Federal tax issues sections 6662 and 6664, respectively, of ions potentially provide a basis for estab-
involving the reasonable possibility of a the Internal Revenue Code. The proposed lishing reasonable belief and reasonable
challenge by the Internal Revenue Service regulations also would clarify that in cause and good faith under the provisions
are fully and fairly addressed. The opin- ascertaining that all material Federal tax of sections 6662 and 6664 of the Internal
ion would be required to state that the issues have been considered, evaluating Revenue Code, respectively. These pro-
practitioner has considered the possible the merits of those issues and evaluating posed rules would apply to all tax shelter
application to the facts of all potentially whether the Federal tax treatment of the opinions that reach a more likely or not, or
relevant judicial doctrines, including the tax shelter item or items is the proper higher, overall conclusion, regardless of
step transaction, business purpose, eco- treatment, the possibility that a return will whether they were rendered in connection
nomic substance, substance over form, not be audited, that an issue will not be with promotional efforts conducted by a
and sham transaction doctrines, as well as raised on audit, or that an issue will be set- third party or directly to a potential tax
potentially relevant statutory and regula- tled may not be taken into account. shelter investor. The proposed regulations
tory anti-abuse rules, and the opinion The proposed regulations would also would define a material Federal tax
must analyze whether the tax shelter item require the practitioner to take reasonable issue. A tax shelter item would be defined
or items is (are) vulnerable to challenge steps to assure that any written materials in the same manner as in §10.33.
under all such potentially relevant doc- or promotional efforts that distribute, Section 10.35 would require a practi-
trines and anti-abuse rules. reflect or refer to the tax shelter opinion tioner who provides a written opinion
The proposed regulations would correctly and fairly represent the nature with respect to a tax shelter item or items
require that the opinion clearly provide and extent of the opinion. to comply with a series of requirements
the practitioner’s conclusion as to the The proposed regulations also would with respect to each such item. A practi-
likelihood that a typical investor of the address reliance on the opinions of others. tioner would be required to make inquiry

2001–11 I.R.B. 839 March 12, 2001


as to all relevant facts, be satisfied that the The practitioner would be required to (or at a higher level of confidence) is the
opinion takes account of all relevant facts, ascertain that all material Federal tax is- proper treatment may rely on the opinion
and be satisfied that the material facts are sues with respect to the tax shelter item or of another practitioner with respect to cer-
accurately and completely described in items have been considered and that all of tain issues only if the practitioner is satis-
the opinion. Furthermore, the opinion those material Federal tax issues involv- fied that the other practitioner is suffi-
could not be based, directly or indirectly, ing the reasonable possibility of a chal- ciently knowledgeable regarding such
on any unreasonable factual assumptions. lenge by the Internal Revenue Service are issues and the practitioner has no reason
An unreasonable factual assumption fully and fairly addressed. The opinion to believe that such opinion should not be
would include a factual assumption that would be required to state that the practi- relied upon. To the extent the practitioner
the practitioner knows or has reason to tioner has considered the possible appli- relies on such opinion, the opinion ren-
believe is incorrect, incomplete, inconsis- cation to the facts of all potentially rele- dered by the practitioner must identify the
tent or implausible. An unreasonable fac- vant judicial doctrines, including the step other practitioner, state the date on which
tual assumption also would include a fac- transaction, business purpose, economic the opinion was rendered, and set forth
tual assumption regarding a fact or facts substance, substance over form, and sham the conclusions reached in such opinion.
that the practitioner could reasonably re- transaction doctrines, as well as poten- Furthermore, the practitioner must be sat-
quest to be provided or to be represented. tially relevant statutory and regulatory isfied that the combined analysis, taken as
Furthermore, an unreasonable factual as- anti-abuse rules, and the opinion must an- a whole, satisfies the requirements of this
sumption would include a factual assump- alyze whether the tax shelter item or items §10.35.
tion that the transaction has a business is (are) vulnerable to challenge under all The Treasury Department and the Inter-
reason, an assumption with respect to the such potentially relevant doctrines and nal Revenue Service intend to modify the
potential profitability of the transaction anti-abuse rules. advice standards in the regulations under
apart from tax benefits, or an assumption The proposed regulations would re- section 6662 of the Internal Revenue
with respect to a material valuation issue. quire that the opinion clearly provide the Code (pertaining to whether a taxpayer
The proposed regulations would permit practitioner’s conclusion as to the likeli- other than a corporation reasonably be-
a practitioner, where it would be reason- hood that the taxpayer will prevail with lieved at the time a tax return was filed
able based on all the facts and circum- respect to the merits of each material that the tax treatment of a tax shelter item
stances, to rely on factual representations, Federal tax issue that involves a reason- was more likely than not the proper treat-
statements, findings, or agreements of the able possibility of challenge by the Inter- ment of that item) and under section 6664
taxpayer or other persons. The proposed nal Revenue Service and must unambigu- of the Internal Revenue Code (pertaining
regulations would further provide that a ously conclude that the Federal tax to whether a taxpayer acted with reason-
practitioner need not conduct an audit or treatment of the tax shelter item or items able cause and in good faith with respect
independent verification of a factual repre- more likely than not (or at a higher level to a tax shelter item) to provide that opin-
sentation, but that reliance would not be of confidence) is the proper treatment. ions can satisfy those standards only if
permitted on factual representations that The proposed regulations also would such opinions satisfy the standards of Cir-
the practitioner knows or has reason to be- clarify that in ascertaining that all mater- cular 230.
lieve are unreasonable, incorrect, incom- ial Federal tax issues have been consid-
plete, inconsistent or implausible (e.g., a ered, evaluating the merits of those issues Procedures to Ensure Compliance
representation that there are business rea- and evaluating whether the Federal tax Section 10.36 of the proposed regula-
sons for a transaction without describing treatment of the tax shelter item or items tions provides that a practitioner who is a
those reasons, a representation that a trans- is the proper treatment, the possibility member of, associated with, or employed
action is potentially profitable apart from that a tax return will not be audited, that by a firm must take reasonable steps, con-
tax benefits without providing adequate an issue will not be raised on audit, or sistent with his or her authority and re-
factual support, or a valuation that is in- that an issue will be settled may not be sponsibility for the firm’s practice advis-
consistent with the facts of the transac- taken into account. ing clients regarding matters arising under
tion). The proposed regulations would re- the Federal tax laws, to make certain that
The proposed regulations would pro- quire the practitioner to take reasonable the firm has adequate procedures in effect
vide that the opinion must clearly identify steps to assure that any written materials for purposes of ensuring compliance with
the facts upon which the opinion’s con- or promotional efforts that distribute, re- §§10.33, 10.34 and 10.35. The Director
clusions are based, contain a reasoned flect or refer to the tax shelter opinion of Practice would be authorized to take
analysis of the pertinent facts and legal correctly and fairly represent the nature disciplinary action against any practi-
authorities and not assume the favorable and extent of the opinion. The proposed tioner for failing to comply with this re-
resolution of any Federal tax issue mater- regulations also would require that the quirement if the practitioner through will-
ial to the analysis or otherwise rely on un- practitioner be knowledgeable in all of the fulness, recklessness, or gross
reasonable factual assumptions. The pro- relevant aspects of Federal tax law at the incompetence does not take such reason-
posed regulations also would require that time the opinion is rendered. The practi- able steps and one or more persons who
the opinion not contain legal analysis or tioner who is providing an overall conclu- are members of, associated with, or em-
conclusions that are inconsistent with sion that the Federal tax treatment of a tax ployed by the firm have, while they were
each other. shelter item or items more likely than not members of, associated with, or employed

March 12, 2001 840 2001–11 I.R.B.


by the firm, engaged in a pattern or prac- that the Director of Practice also may in- the respondent or the respondent’s autho-
tice of failing to comply with §§10.33, stitute a proceeding to censure the practi- rized representative and include an ac-
10.34 or 10.35. The Director of Practice tioner if the Director believes the practi- knowledgment that knowing and willful
also would be authorized to take discipli- tioner has violated any provisions of the false statements may be punishable under
nary action against any practitioner who laws or regulations governing practice be- 18 U.S.C. 1001.
takes such steps but has actual knowledge fore the Internal Revenue Service. Under
that one or more persons who are mem- the proposed regulations, the procedures Reply to Answer
bers of, associated with, or employed by set forth in §10.60 would apply to pro-
Sections 10.60 and 10.83 permit the
the firm have, while they were members ceedings to disqualify an appraiser.
Director of Practice to file a reply to the
of, associated with, or employed by the
Conferences respondent’s answer at the Director’s dis-
firm, engaged in a pattern or practice of
cretion or at the request of the Adminis-
failing to comply with §§10.33, 10.34 or Section 10.55 authorizes the Director trative Law Judge. Under the proposed
10.35 and the practitioner through willful- of Practice to confer with a practitioner regulations, these provisions would be
ness, recklessness, or gross incompetence regarding allegations of misconduct. The consolidated under §10.66 and that sec-
fails to take prompt action, consistent provision permits a practitioner to offer tion would require the Director of Prac-
with his or her authority and responsibil- his or her consent to voluntary suspension tice to file a reply to the respondent’s an-
ity for the firm’s practice advising clients to prevent the institution or conclusion of swer if the Administrative Law Judge
regarding matters under the Federal tax a disbarment proceeding. The provision orders that a reply be filed.
law, to correct such pattern or practice. would be renumbered as §10.61 and
Sanctions would be changed to permit a practitioner Motions and Requests
to also offer his or her consent to censure
Section 10.50 of the regulations autho- to prevent the institution or conclusion of Sections 10.62 and 10.85 of the regula-
rizes the Secretary of the Treasury to dis- a disbarment proceeding. The provision tions permit the Director of Practice and
bar or suspend any practitioner from prac- also would apply to conferences with an the respondent to file motions and re-
tice before the Internal Revenue Service appraiser regarding allegations of miscon- quests in hearings before an Administra-
after notice and an opportunity for a pro- duct and would permit the appraiser to tive Law Judge with the Director or the
ceeding. Under the proposed regulations, offer his or her voluntary consent to dis- Administrative Law Judge. Under the
the Secretary also would be permitted to qualification. proposed regulations, these provisions
censure the practitioner after notice and would be consolidated under §10.68 and
an opportunity for a proceeding. Censure Service of Complaint and Other Papers would clarify that the Administrative Law
is a public reprimand. Additionally, the Judge may direct that motions or requests
Sections 10.57 and 10.80 of the regula- be filed at a place specified by the Admin-
authority to disqualify an appraiser would tions permit the Director of Practice to
be relocated to paragraph (b) of §10.50 of istrative Law Judge.
serve a complaint or any other paper upon
the regulations. a practitioner or appraiser by certified Effect of Disbarment, Suspension, or
Disreputable Conduct mail. If the certified mail is not claimed, Censure
the Director of Practice may serve the
Section 10.51 of the regulations defines complaint by first class mail. The pro- Section 10.73 of the regulations pro-
disreputable conduct for which a practi- posed regulations would consolidate these hibits a disbarred practitioner from prac-
tioner may be disbarred or suspended. provisions under §10.63 and would spec- ticing before the Internal Revenue Service
The proposed regulations would provide ify that service by first class mail is com- unless and until authorized to do so by the
that a practitioner who engages in disrep- plete if the complaint is mailed to the Director of Practice. The regulations also
utable conduct also may be censured. practitioner or appraiser at his or her last prohibit a suspended practitioner from
The definition of disreputable conduct known address as determined under sec- practicing before the Internal Revenue
also would be modified to include convic- tion 6212 of the Internal Revenue Code. Service during the period of suspension.
tion of any felony involving conduct that Under the proposed regulations, this sec-
renders the practitioner unfit to practice Answer tion would be renumbered as §10.79 and
before the Internal Revenue Service. would also provide that the Director of
Sections 10.58 and 10.81 of the regula-
Practice may make a practitioner’s future
Institution of Proceeding tions require a practitioner or an ap-
right to practice before the Internal Rev-
praiser to file an Answer whenever the
enue Service subject to his or her meeting
Section 10.54 authorizes the Director Director of Practice files a complaint
certain conditions designed to promote
of Practice to institute a proceeding to against him or her under the regulations.
high standards of conduct.
suspend or disbar a practitioner if the Di- These provisions also establish the time
rector believes the practitioner has vio- for filing an Answer and prescribe certain Expedited Suspension Upon Criminal
lated any provisions of the laws or regula- requirements as to the content of an An- Conviction or Loss of License for Cause
tions governing practice before the swer. The proposed regulations would
Internal Revenue Service. The section consolidate these provisions under Paragraph (b)(2) of §10.76 of the regu-
would be renumbered as §10.60 under the §10.64, which section would require that lations permits the Director of Practice to
proposed regulations and would specify the Answer to the complaint be signed by institute a proceeding to suspend any
2001–11 I.R.B. 841 March 12, 2001
practitioner who has, within 5 years of the duct when practicing before the Internal line of the topics to be discussed and the
date on which the complaint instituting Revenue Service. These regulations do time to be devoted to each topic by April 12,
the proceeding is served, been convicted not alter the basic nature of the obliga- 2001. A period of 10 minutes will be allo-
of any crime under title 26 of the United tions and responsibilities of these practi- cated to each person for making comments.
States Code or a felony under title 18 of tioners. These regulations clarify those An agenda showing the scheduling of
the United States Code involving dishon- obligations in response to public com- the speakers will be prepared after the
esty or breach of trust. Under the pro- ments and judicial decisions, and make deadline for receiving outlines has
posed regulations this provision would be other modifications to reflect the develop- passed. Copies of the agenda will be
renumbered as §10.82 and would permit ment of electronic media. In addition, the available free of charge at the hearing.
the Director of Practice to institute a pro- added requirements for tax shelter opin-
ceeding to suspend any practitioner who ions imposed by these regulations will Drafting Information
has been convicted of any crime under the have no impact on the substantial number The principal authors of these regula-
Internal Revenue Code, any crime involv- of small entities who have been satisfying tions are Richard S. Goldstein and Brin-
ing dishonesty or breach of trust (regard- these requirements when they provide ton Warren, Office of Associate Chief
less of whether such crime constituted a such opinions. Therefore, a regulatory Counsel (Procedure & Administration),
felony under title 18 of the United States flexibility analysis under the Regulatory Administrative Provisions and Judicial
Code), or any felony that involved con- Flexibility Act (5 U.S.C. chapter 6) is not Practice Division, but other personnel
duct that renders the practitioner unfit to required. Pursuant to section 7805(f) of from the Internal Revenue Service and
practice before the Internal Revenue Ser- the Internal Revenue Code, this notice of Treasury Department participated in their
vice (regardless of whether such felony proposed rulemaking will be submitted to development.
was pursuant to title 18 of the United the Chief Counsel for Advocacy of the * * * * *
States Code or involved dishonesty or Small Business Administration for com-
breach of trust). ment on its impact on small businesses. Proposed Amendments to the Regula-
tions
Consolidation of Appraiser Disqualifica- Comments and Public Hearing
tion Rules Accordingly, 31 CFR part 10 is pro-
Before the regulations are adopted as posed to be revised to read as follows:
The current regulations contain, in sep- final regulations, consideration will be
arate provisions, virtually identical rules given to any written comments and elec- PART 10 — PRACTICE BEFORE THE
applicable to disciplinary proceedings tronic comments that are submitted timely INTERNAL REVENUE SERVICE
against practitioners and appraisers. The to the Internal Revenue Service. The In-
proposed rules would consolidate the ternal Revenue Service and Treasury De- Sec.
rules regarding sanctions of practitioners partment specifically request comments 10.0 Scope of part.
and appraisers under subpart C and the on the clarity of the proposed regulations
rules regarding the conduct of discipli- and how they can be made easier to under- Subpart A—Rules Governing
nary proceedings under subpart D. stand. All comments will be available for Authority to Practice
public inspection and copying.
Proposed Effective Date The public hearing is scheduled for 10.1 Director of Practice.
May 2, 2001, from 8 am. to 11 am., and 10.2 Definitions.
These regulations are proposed to 10.3 Who may practice.
will be held in the auditorium, Internal
apply on the date that final regulations are 10.4 Eligibility for enrollment.
Revenue Building, 1111 Constitution Av-
published in the Federal Register. 10.5 Application for enrollment.
enue, NW., Washington, DC. Due to
building security procedures, visitors 10.6 Enrollment.
Special Analyses
must enter at the 10th Street entrance, lo- 10.7 Representing oneself; participating
It has been determined that these regu- cated between Constitution and Pennsyl- in rulemaking; limited practice; spe-
lations are not a significant regulatory ac- vania Avenues, NW. All visitors must cial appearances; and return prepa-
tion as defined in Executive Order 12866. present photo identification to enter the ration.
Therefore, a regulatory assessment is not building. Visitors will not be admitted be- 10.8 Customhouse brokers.
required. It is hereby certified that these yond the immediate entrance area more Subpart B—Duties and Restric-
regulations will not have a significant than 15 minutes before the hearing starts. tions Relating to Practice Before
economic impact on a substantial number For information about having your name the Internal Revenue Service
of small entities because the general re- placed on the building access list to attend
quirements, including the collection of in- the hearing, see the FOR FURTHER IN- 10.20 Information to be furnished.
formation requirements, of these regula- FORMATION CONTACT section of this 10.21 Knowledge of client’s omission.
tions are substantially the same as the preamble. 10.22 Diligence as to accuracy.
requirements of the regulations that these The rules of 26 CFR 601.601(a)(3) apply 10.23 Prompt disposition of pending
regulations will replace. Persons autho- to the hearing. Persons who wish to present matters.
rized to practice have long been required oral comments at the hearing must submit 10.24 Assistance from or to disbarred or
to comply with certain standards of con- written or electronic comments and an out- suspended persons and former

March 12, 2001 842 2001–11 I.R.B.


Internal Revenue Service employ- 10.81 Petition for reinstatement. (c) Acting Director of Practice. The
ees. 10.82 Expedited suspension upon crimi- Secretary of the Treasury, or his or her
10.25 Practice by former Government nal conviction or loss of license for designate, will designate an officer or
employees, their partners and their cause. employee of the Treasury Department to
associates. act as Director of Practice in the absence
10.26 Notaries. Subpart E—General Provisions of the Director or a vacancy in that office.
10.27 Fees. 10.90 Records.
10.28 Return of client’s records. §10.2 Definitions.
10.91 Saving clause.
10.29 Conflicting interests. 10.92 Special orders. As used in this part, except where the
10.30 Solicitation. 10.93 Effective date. context clearly indicates otherwise:
10.31 Negotiation of taxpayer checks. Authority: Sec. 3, 23 Stat. 258, secs. (a) Attorney means any person who is a
10.32 Practice of law. 2–12, 60 Stat. 237 et.seq.; 5 U.S.C. 301, member in good standing of the bar of the
10.33 Tax shelter opinions used by third 500, 551–559; 31 U.S.C. 330; Reorg. Plan highest court of any State, possession, ter-
parties to market tax shelters. No. 26 of 1950, 15 FR 4935, 64 Stat. ritory, Commonwealth, or the District of
10.34 Standards for advising with respect 1280, 3 CFR, 1949–1953 Comp., P. 1017. Columbia.
to tax return positions and for (b) Certified public accountant means
preparing or signing returns. §10.0 Scope of part. any person who is duly qualified to prac-
10.35 More likely than not tax shelter
This part contains rules governing the tice as a certified public accountant in any
opinions.
recognition of attorneys, certified public State, possession, territory, Common-
10.36 Procedures to ensure compliance.
accountants, enrolled agents, and other wealth, or the District of Columbia.
Subpart C—Sanctions for Viola- persons representing taxpayers before the (c) Commissioner refers to the
tion of the Regulations Internal Revenue Service. Subpart A of Commissioner of Internal Revenue.
this part sets forth rules relating to author- (d) Director refers to the Director of
10.50 Sanctions. ity to practice before the Internal Revenue Practice.
10.51 Incompetence and disreputable Service; subpart B of this part prescribes (e) Practice before the Internal
conduct. the duties and restrictions relating to such Revenue Service comprehends all matters
10.52 Violation of regulations. practice; subpart C of this part prescribes connected with a presentation to the
10.53 Receipt of information concerning the sanctions for violating the regulations; Internal Revenue Service or any of its
practitioner. subpart D of this part contains the rules officers or employees relating to a taxpay-
applicable to disciplinary proceedings; er’s rights, privileges, or liabilities under
Subpart D—Rules Applicable to
and subpart E of this part contains gener- laws or regulations administered by the
Disciplinary Proceedings
al provisions including provisions relating Internal Revenue Service. Such presenta-
10.60 Institution of proceeding. to the availability of official records. tions include, but are not limited to,
10.61 Conferences. preparing and filing documents, corre-
10.62 Contents of complaint. Subpart A — Rules Governing sponding and communicating with the
10.63 Service of complaint and other Authority to Practice Internal Revenue Service, and represent-
papers. ing a client at conferences, hearings, and
§10.1 Director of Practice.
10.64 Answer. meetings.
10.65 Supplemental charges. (a) Establishment of office. The office (f) Practitioner means any individual
10.66 Reply to answer. of the Director of Practice is established described in paragraphs (a), (b), (c), or (d)
10.67 Proof; variance; amendment of in the Office of the Secretary of the of section 10.3 of this part.
pleadings. Treasury. The Director of Practice is (g) A tax return includes an amended
10.68 Motions and requests. appointed by the Secretary of the tax return and a claim for refund.
10.69 Representation. Treasury, or his or her designate. (h) Service means the Internal Revenue
10.70 Administrative Law Judge. (b) Duties. The Director of Practice acts Service.
10.71 Hearings. on applications for enrollment to practice §10.3 Who may practice.
10.72 Evidence. before the Internal Revenue Service; (a) Attorneys. Any attorney who is not
10.73 Depositions. makes inquires with respect to matters currently under suspension or disbarment
10.74 Transcript. under his or her jurisdiction; institutes and from practice before the Internal Revenue
10.75 Proposed findings and conclusions. provides for the conduct of disciplinary Service may practice before the Service
10.76 Decision of the Administrative proceedings relating to attorneys, certified by filing with the Service a written decla-
Law Judge. public accountants, enrolled agents, ration that he or she is currently qualified
10.77 Appeal to the Secretary. enrolled actuaries and appraisers; and per- as an attorney and is authorized to repre-
10.78 Decision of the Secretary. forms other duties as are necessary or sent the party(ies) on whose behalf he or
10.79 Effect of disbarment, suspension, appropriate to carry out his or her func- she acts.
or censure. tions under this part or as are prescribed (b) Certified public accountants. Any
10.80 Notice of disbarment, suspension, by the Secretary of the Treasury, or his or certified public accountant who is not cur-
censure, or disqualification. her designate. rently under suspension or disbarment

2001–11 I.R.B. 843 March 12, 2001


from practice before the Internal Revenue with certain plans of deferred compensa- (b) Enrollment of former Internal
Service may practice before the Service tion), 6059 (relating to periodic report of Revenue Service employees. The Director
by filing with the Service a written decla- actuary), 6652(e) (relating to the failure to of Practice may grant enrollment to an
ration that he or she is currently qualified file annual registration and other notifica- applicant who, by virtue of his or her past
as a certified public accountant and is tions by pension plan), 6652(f) (relating to service and technical experience in the
authorized to represent the party(ies) on the failure to file information required in Internal Revenue Service, has qualified
whose behalf he or she acts. connection with certain plans of deferred for such enrollment and who has not
(c) Enrolled agents. Any individual compensation), 6692 (relating to the fail- engaged in any conduct that would justify
enrolled as an agent pursuant to this part ure to file actuarial report), and 7805(b) the censure, suspension, or disbarment of
who is not currently under suspension or (relating to the extent to which a Internal any practitioner under the provisions of
disbarment from practice before the Revenue Service ruling or determination this part, under the following circum-
Internal Revenue Service may practice letter coming under the statutory provi- stances—
before the Service. sions listed here will be applied without (1) The former employee applies for
(d) Enrolled actuaries. (1) Any indi- retroactive effect); and 29 U.S.C. 1083 enrollment to the Director of Practice on a
vidual who is enrolled as an actuary by (relating to the waiver of funding for non- form supplied by the Director and sup-
the Joint Board for the Enrollment of qualified plans). plies the information requested on the
Actuaries pursuant to 29 U.S.C. 1242 who (3) An individual who practices before form and such other information regard-
is not currently under suspension or dis- the Internal Revenue Service pursuant to ing the experience and training of the
barment from practice before the Internal paragraph (d)(1) of this section is subject applicant as may be relevant.
Revenue Service may practice before the to the provisions of this part in the same (2) An appropriate office of the Internal
Service by filing with the Service a writ- manner as attorneys, certified public Revenue Service, at the request of the
ten declaration stating that he or she is accountants and enrolled agents. Director of Practice, will provide the
currently qualified as an enrolled actuary (e) Others. Any individual qualifying Director with a detailed report of the
and is authorized to represent the under paragraph (c) of §10.5 or §10.7 is nature and rating of the applicant’s work
party(ies) on whose behalf he or she acts. eligible to practice before the Internal while employed by the Service and a rec-
(2) Practice as an enrolled actuary is Revenue Service to the extent provided in ommendation whether such employment
limited to representation with respect to those sections. qualifies the applicant technically or oth-
issues involving the following statutory (f) Government officers and employees, erwise for the desired authorization.
provisions in title 26 of the United States and others. An individual, who is an offi- (3) Enrollment based on an applicant’s
Code: sections 401 (relating to qualifica- cer or employee of the executive, legisla- former employment with the Internal
tion of employee plans), 403(a) (relating tive, or judicial branch of the United Revenue Service may be of unlimited
to whether an annuity plan meets the States Government; an officer or employ- scope or it may be limited to permit the
requirements of section 404(a)(2)), 404 ee of the District of Columbia; a Member presentation of matters only of the partic-
(relating to deductibility of employer con- of Congress; or a Resident Commissioner ular class or only before the particular unit
tributions), 405 (relating to qualification may not practice before the Internal or division of the Service for which the
of bond purchase plans), 412 (relating to Revenue Service if such practice violates applicant’s former employment has quali-
funding requirements for certain employ- 18 U.S.C. 203 or 205. fied the applicant.
ee plans), 413 (relating to application of (g) State officers and employees. No (4) Application for enrollment based on
qualification requirements to collectively officer or employee of any State, or sub- an applicant’s former employment with
bargained plans and to plans maintained division of any State, whose duties require the Internal Revenue Service must be
by more than one employer), 414 (relating him or her to pass upon, investigate, or made within 3 years from the date of sep-
to definitions and special rules with deal with tax matters for such State or aration from such employment.
respect to the employee plan area), 419 subdivision, may practice before the (5) An applicant for enrollment who is
(relating to treatment of funded welfare Internal Revenue Service, if such employ- requesting such enrollment based on his
benefits), 419A (relating to qualified asset ment may disclose facts or information or her former employment with the
accounts), 420 (relating to transfers of applicable to Federal tax matters. Internal Revenue Service must have had a
excess pension assets to retiree health §10.4 Eligibility for enrollment. minimum of 5 years continuous employ-
accounts), 4971 (relating to excise taxes ment with the Service during which he or
payable as a result of an accumulated (a) Enrollment upon examination. The she must have been regularly engaged in
funding deficiency under section 412), Director of Practice may grant enrollment applying and interpreting the provisions
4972 (relating to tax on nondeductible to an applicant who demonstrates special of the Internal Revenue Code and the reg-
contributions to qualified employer competence in tax matters by written ulations thereunder relating to income,
plans), 4976 (relating to taxes with respect examination administered by, or adminis- estate, gift, employment, or excise taxes.
to funded welfare benefit plans), 4980 tered under the oversight of, the Director (6) For the purposes of paragraph (b)(5)
(relating to tax on reversion of qualified and who has not engaged in any conduct of this section, an aggregate of 10 or more
plan assets to employer), 6057 (relating to that would justify the censure, suspension, years of employment in positions involv-
annual registration of plans), 6058 (relat- or disbarment of any practitioner under ing the application and interpretation of
ing to information required in connection the provisions of this part. the provisions of the Internal Revenue

March 12, 2001 844 2001–11 I.R.B.


Code, at least 3 of which occurred within and it will not be granted, in any cir- before February 1, 1999, are invalid. An
the 5 years preceding the date of applica- cumstance, if the application is not reg- individual is not eligible to practice before
tion, is the equivalent of 5 years continu- ular on its face, if the information stated the Service if his or her enrollment card is
ous employment. in the application, if true, is not suffi- not valid.
(c) Natural persons. Enrollment to cient to warrant enrollment to practice, (c) Term of enrollment. Each individual
practice may be granted only to natural or if there is any information before the enrolled to practice before the Internal
persons. Director indicating that the statements in Revenue Service will be accorded active
the application are untrue or that the enrollment status subject to his or her
§10.5 Application for enrollment. applicant would not otherwise qualify renewal of enrollment as provided in this
(a) Form; address. An applicant for for enrollment. Issuance of temporary part.
enrollment must file an application on recognition does not constitute enroll- (d) Renewal of enrollment. To maintain
Form 23, “Application for Enrollment to ment to practice or a finding of eligibili- active enrollment to practice before the
Practice Before the Internal Revenue ty for enrollment, and the temporary Internal Revenue Service, each individual
Service”, properly executed under oath or recognition may be withdrawn at any enrolled is required to have his or her
affirmation, with the Director of Practice. time by the Director. enrollment renewed. Failure by an indi-
The address of the applicant entered on (e) Appeal from denial of application. vidual to receive notification from the
Form 23 will be the address under which The Director of Practice must inform the Director of Practice of the renewal
a successful applicant is enrolled and is applicant as to the reason(s) for any requirement will not be justification for
the address to which the Director will denial of an application for enrollment. the failure to satisfy this requirement.
send correspondence concerning enroll- The applicant may, within 30 days after (1) All individuals enrolled to practice
ment. An enrolled agent must send notifi- receipt of the notice of denial of enroll- before the Internal Revenue Service must
cation of any change to his or her enroll- ment, file a written appeal of the denial of apply for renewal of enrollment between
ment address to the Director of Practice, enrollment with the Secretary of the November 1, 2001, and January 31, 2002.
Internal Revenue Service, 1111 Treasury. A decision on the appeal will Those who receive initial enrollment
Constitution Avenue, NW., Washington, be rendered by the Secretary of the between November 1, 2001, and January
DC 20224, or at such other address spec- Treasury, or his or her designate, as soon 31, 2002, must apply for renewal of
ified by the Director. This notification as practicable. enrollment by March 1, 2002. The renew-
must include the enrolled agent’s name, al will be effective April 1, 2002.
§10.6 Enrollment.
old address, new address, social security (2) Thereafter, applications for renewal
number, signature, and the date. (a) Roster. The Director of Practice will be required between November 1,
(b) Fee. The application for enrollment will maintain rosters of all individuals— 2004, and January 31, 2005, and between
must be accompanied by a check or (1) Who have been granted active November 1 and January 31 of every sub-
money order in the amount set forth on enrollment to practice before the Internal sequent third year. Those who receive ini-
Form 23, payable to the Internal Revenue Revenue Service; tial enrollment during the renewal appli-
Service, which amount constitutes a fee (2) Whose enrollment has been placed cation period must apply for renewal of
charged to each applicant for enrollment. in inactive status for failure to meet the enrollment by March 1 of the renewal
This fee will be retained by the United requirements for renewal of enrollment; year. Renewed enrollment will be effec-
States whether or not the applicant is (3) Whose enrollment has been placed tive April 1, 2005, and April 1 of every
granted enrollment. in inactive retirement status; subsequent third year.
(c) Additional information; examina- (4) Who have been censured, suspend- (3) The Director of Practice will notify
tion. The Director of Practice, as a condi- ed, or disbarred from practice before the the individual of his or her renewal of
tion to consideration of an application for Internal Revenue Service; enrollment and will issue the individual a
enrollment, may require the applicant to (5) Whose offer of consent to resign card evidencing renewal.
file additional information and to submit from enrollment to practice before the (4) A reasonable nonrefundable fee
to any written or oral examination under Internal Revenue Service has been accept- may be charged for each application for
oath or otherwise. The Director will, on ed by the Director of Practice under renewal of enrollment filed with the
written request filed by an applicant, §10.61 of this part; and Director of Practice.
afford such applicant the opportunity to (6) Whose application for enrollment (5) Forms required for renewal may be
be heard with respect to his or her appli- has been denied. obtained from the Director of Practice,
cation for enrollment. (b) Enrollment card. The Director of Internal Revenue Service, Washington,
(d) Temporary recognition. On Practice will issue an enrollment card to DC 20224.
receipt of a properly executed applica- each individual whose application for (e) Condition for renewal: Continuing
tion, the Director of Practice may grant enrollment to practice before the Internal professional education. In order to quali-
the applicant temporary recognition to Revenue Service is approved after the fy for renewal of enrollment, an individ-
practice pending a determination as to effective date of this regulation. Each ual enrolled to practice before the Internal
whether enrollment to practice should be enrollment card will be valid for the peri- Revenue Service must certify, on the
granted. Temporary recognition will be od stated on the enrollment card. application for renewal form prescribed
granted only in unusual circumstances Enrollment cards issued to individuals by the Director of Practice, that he or she

2001–11 I.R.B. 845 March 12, 2001


has satisfied the following continuing pro- and experience is appropriate for credit will be awarded for publications on
fessional education requirements. instructing or leading a discussion on the Federal taxation or Federal tax related
(1) For renewed enrollment effective subject matter of the particular program; matters, including accounting, financial
April 1, 2002. (i) A minimum of 24 hours and management, tax preparation software,
of continuing education credit must be (C) Provides or requires a written out- and taxation, provided the content of such
completed between January 1, 2001, and line, textbook, or suitable electronic edu- publications is current and designed for
January 31, 2002. cational materials. the enhancement of the professional
(ii) An individual who receives initial (ii) Correspondence or individual study knowledge of an individual enrolled to
enrollment between January 1, 2001, and programs (including taped programs). practice before the Internal Revenue
January 31, 2002, is exempt from the con- Qualifying continuing education pro- Service.
tinuing education requirement for the grams include correspondence or individ- (B) The credit allowed will be on the
renewal of enrollment effective April 1, ual study programs that are conducted by basis of one hour credit for each hour of
2002, but is required to file a timely appli- qualifying sponsors and completed on an preparation time for the material. It is the
cation for renewal of enrollment. individual basis by the enrolled individ- responsibility of the person claiming the
(2) For renewed enrollment effective ual. The allowable credit hours for such credit to maintain records to verify prepa-
April 1, 2005, and every third year there- programs will be measured on a basis ration time.
after. (i) A minimum of 72 hours of con- comparable to the measurement of a sem- (C) The maximum credit for publica-
tinuing education credit must be complet- inar or course for credit in an accredited tions may not exceed 25 percent of the
ed between February 1, 2002, and educational institution. Such programs continuing education requirement of any
January 31, 2005, and during each subse- qualify as continuing education programs enrollment cycle.
quent three year period. Each such three if they— (3) Periodic examination. (i)
year period is known as an enrollment (A) Require registration of the partici- Individuals may establish eligibility for
cycle. pants by the sponsor; renewal of enrollment for any enrollment
(ii) A minimum of 16 hours of continu- (B) Provide a means for measuring cycle by—
ing education credit must be completed in completion by the participants (e.g., a (A) Achieving a passing score on each
each year of an enrollment cycle. written examination), including the part of the Special Enrollment Examina-
(iii) An individual who receives initial issuance of a certificate of completion by tion administered under this part during
enrollment during an enrollment cycle the sponsor; and the three year period prior to renewal; and
must complete two (2) hours of qualifying (C) Provide a written outline, textbook, (B) Completing a minimum of 16 hours
continuing education credit for each or suitable electronic educational materi- of qualifying continuing education during
month enrolled during the enrollment als. the last year of an enrollment cycle.
cycle. Enrollment for any part of a month (iii) Serving as an instructor, discussion (ii) Courses designed to help an appli-
is considered enrollment for the entire leader or speaker. (A) One hour of con- cant prepare for the examination specified
month. tinuing education credit will be awarded in paragraph (a) of §10.4 are considered
(f) Qualifying continuing education— for each contact hour completed as an basic in nature and are not qualifying con-
(1) General. To qualify for continuing instructor, discussion leader, or speaker at tinuing education.
education credit, a course of learning an educational program that meets the (g) Sponsors. (1) Sponsors are those
must— continuing education requirements of responsible for presenting programs.
(i) Be a qualifying program designed to paragraph (f) of this section. (2) To qualify as a sponsor, a program
enhance professional knowledge in (B) Two hours of continuing education presenter must—
Federal taxation or Federal tax related credit will be awarded for actual subject (i) Be an accredited educational institu-
matters, i.e., programs comprised of cur- preparation time for each contact hour tion;
rent subject matter in Federal taxation or completed as an instructor, discussion (ii) Be recognized for continuing edu-
Federal tax related matters, including leader, or speaker at such programs. It is cation purposes by the licensing body of
accounting, tax preparation software and the responsibility of the individual claim- any State, possession, territory, Common-
taxation; and ing such credit to maintain records to ver- wealth, or the District of Columbia re-
(ii) Be conducted by a qualifying spon- ify preparation time. sponsible for the issuance of a license in
sor. (C) The maximum credit for instruction the field of accounting or law;
(2) Qualifying programs—(i) Formal and preparation may not exceed 50 per- (iii) Be recognized by the Director of
programs. A formal program qualifies as cent of the continuing education require- Practice as a professional organization or
continuing education programs if it— ment for an enrollment cycle. society whose programs include offering
(A) Requires attendance. Additionally, (D) An instructor, discussion leader, or continuing professional education oppor-
the program sponsor must provide each speaker who makes more than one pre- tunities in subject matters within the
attendee with a certificate of attendance; sentation on the same subject matter dur- scope of paragraph (f)(1)(i) of this sec-
and ing an enrollment cycle, will receive con- tion; or
(B) Requires that the program be con- tinuing education credit for only one such (iv) File a sponsor agreement with the
ducted by a qualified instructor, discus- presentation for the enrollment cycle. Director of Practice and obtain approval
sion leader, or speaker, i.e., a person (iv) Credit for published articles, of the program as a qualified continuing
whose background, training, education books, etc. (A) Continuing education education program.
March 12, 2001 846 2001–11 I.R.B.
(3) A qualifying sponsor must ensure (4) For university or college courses, (i) Health, which prevented compliance
the program complies with the following each semester hour credit will equal 15 with the continuing education require-
requirements— contact hours and a quarter hour credit ments;
(i) Programs must be developed by will equal 10 contact hours. (ii) Extended active military duty;
individual(s) qualified in the subject mat- (i) Recordkeeping requirements. (1) (iii) Absence from the United States for
ter; Each individual applying for renewal an extended period of time due to
(ii) Program subject matter must be must retain for a period of three years fol- employment or other reasons, provided
current; lowing the date of renewal of enrollment the individual does not practice before the
(iii) Instructors, discussion leaders, and the information required with regard to Internal Revenue Service during such
speakers must be qualified with respect to qualifying continuing professional educa- absence; and
program content; tion credit hours. Such information (iv) Other compelling reasons, which
(iv) Programs must include some includes— will be considered on a case-by-case
means for evaluation of technical content (i) The name of the sponsoring organi- basis.
and presentation; zation; (2) A request for waiver must be
(v) Certificates of completion must be (ii) The location of the program; accompanied by appropriate documenta-
provided those who have successfully (iii) The title of the program and tion. The individual is required to furnish
completed the program; and description of its content; any additional documentation or explana-
(vi) Records must be maintained by the (iv) Written outlines, course syllibi, tion deemed necessary by the Director of
sponsor to verify the participants who textbook, and/or electronic materials pro- Practice. Examples of appropriate docu-
attended and completed the program for a vided or required for the course; mentation could be a medical certificate
period of three years following comple- (v) The dates attended; or military orders.
tion of the program. In the case of con- (vi) The credit hours claimed; (3) A request for waiver must be filed
tinuous conferences, conventions, and the (vii) The name(s) of the instructor(s), no later than the last day of the renewal
like, records must be maintained to verify discussion leader(s), or speaker(s), if application period.
completion of the program and attendance appropriate; and (4) If a request for waiver is not
by each participant at each segment of the (viii) The certificate of completion approved, the individual will be placed in
program. and/or signed statement of the hours of inactive status, so notified by the Director
(4) Professional organizations or soci- attendance obtained from the sponsor. of Practice, and placed on a roster of inac-
eties wishing to be considered as qualified (2) To receive continuing education tive enrolled individuals.
sponsors must request this status from the credit for service completed as an (5) If a request for waiver is approved,
Director of Practice and furnish informa- instructor, discussion leader, or speak- the individual will be notified and issued
tion in support of the request together er, the following information must be a card evidencing renewal.
with any further information deemed nec- maintained for a period of three years fol- (6) Those who are granted waivers are
essary by the Director. lowing the date of renewal of enroll- required to file timely applications for
(5) A professional organization or soci- ment— renewal of enrollment.
ety recognized as a qualified sponsor by (i) The name of the sponsoring organi- (k) Failure to comply. (1) Compliance
the Director of Practice will retain its sta- zation; by an individual with the requirements of
tus for one enrollment cycle. The Direc- (ii) The location of the program; this part is determined by the Director of
tor will publish the names of such spon- (iii) The title of the program and Practice. An individual who fails to meet
sors on a periodic basis. description of its content; the requirements of eligibility for renewal
(h) Measurement of continuing educa- (iv) The dates of the program; and of enrollment will be notified by the
tion coursework. (1) All continuing edu- (v) The credit hours claimed. Director at his or her enrollment address
cation programs will be measured in (3) To receive continuing education by first class mail. The notice will state
terms of contact hours. The shortest rec- credit for publications, the following the basis for the determination of non-
ognized program will be one contact hour. information must be maintained for a compliance and will provide the individ-
(2) A contact hour is 50 minutes of con- period of three years following the date of ual an opportunity to furnish information
tinuous participation in a program. Credit renewal of enrollment— in writing relating to the matter within 60
is granted only for a full contact hour, i.e., (i) The publisher; days of the date of the notice. Such infor-
50 minutes or multiples thereof. For (ii) The title of the publication; mation will be considered by the Director
example, a program lasting more than 50 (iii) A copy of the publication; in making a final determination as to eli-
minutes but less than 100 minutes will (iv) The date of publication; and gibility for renewal of enrollment.
count as one contact hour. (v) Records that substantiate the hours (2) The Director of Practice may
(3) Individual segments at continuous worked on the publication. require any individual, by notice sent by
conferences, conventions and the like will (j) Waivers. (1) Waiver from the con- first class mail to his or her enrollment
be considered one total program. For tinuing education requirements for a address, to provide copies of any records
example, two 90-minute segments (180 given period may be granted by the required to be maintained under this part.
minutes) at a continuous conference will Director of Practice for the following The Director may disallow any continuing
count as three contact hours. reasons— professional education hours claimed if

2001–11 I.R.B. 847 March 12, 2001


the individual fails to comply with this ly application for renewal of enrollment at The circumstances described in this para-
requirement. each applicable renewal or enrollment graph (c)(1) are as follows:
(3) An individual who has not filed a period as provided in this section. An (i) An individual may represent a mem-
timely application for renewal of enroll- individual who is placed in an inactive ber of his or her immediate family.
ment, who has not made a timely response retirement status may be reinstated to an (ii) A regular full-time employee of an
to the notice of noncompliance with the active enrollment status by filing an appli- individual employer may represent the
renewal requirements, or who has not sat- cation for renewal of enrollment and pro- employer.
isfied the requirements of eligibility for viding evidence of the completion of the (iii) A general partner or a regular full-
renewal will be placed on a roster of inac- required continuing professional educa- time employee of a partnership may rep-
tive enrolled individuals. During this tion hours for the enrollment cycle. resent the partnership.
time, the individual will be ineligible to Inactive retirement status is not available (iv) A bona fide officer or a regular full-
practice before the Internal Revenue to an individual who is subject of a disci- time employee of a corporation (including
Service. plinary matter in the Office of Director of a parent, subsidiary, or other affiliated
(4) Individuals placed in inactive Practice. corporation), association, or organized
enrollment status and individuals ineligi- (m) Renewal while under suspension or group may represent the corporation,
ble to practice before the Internal disbarment. An individual who is ineligi- association, or organized group.
Revenue Service may not, directly or indi- ble to practice before the Internal (v) A regular full-time employee of a
rectly, indicate that they are enrolled to Revenue Service by virtue of disciplinary trust, receivership, guardianship, or estate
practice before the Service, or use the action is required to be in conformance may represent the trust, receivership,
term “enrolled agent,” the designation with the requirements for renewal of guardianship, or estate.
“E. A.,” or other form of reference to eli- enrollment before his or her eligibility is (vi) An officer or a regular employee of
gibility to practice before the Service. restored. a governmental unit, agency, or authority
(5) An individual placed in an inactive (n) Verification. The Director of may represent the governmental unit,
status may be reinstated to an active Practice may review the continuing edu- agency, or authority in the course of his or
enrollment status by filing an application cation records of an enrolled individual her official duties.
for renewal of enrollment and providing and/or qualified sponsor in a manner (vii) An individual may represent any
evidence of the completion of the all deemed appropriate to determine compli- individual or entity, who is outside the
required continuing professional educa- ance with the requirements and standards United States, before personnel of the
tion hours for the enrollment cycle. for renewal of enrollment as provided in Internal Revenue Service when such rep-
Continuing education credit under this paragraph (f) of this section. resentation takes place outside the United
subsection may not be used to satisfy the (o) Enrolled Actuaries. The enrollment States.
requirements of the enrollment cycle in and the renewal of enrollment of actuaries (viii) An individual who prepares and
which the individual has been placed back authorized to practice under paragraph (d) signs a taxpayer’s tax return as the prepar-
on the active roster. of §10.3 are governed by the regulations er, or who prepares a tax return but is not
(6) An individual placed in an inactive of the Joint Board for the Enrollment of required (by the instructions to the tax
status must file an application for renewal Actuaries at 20 CFR 901.1 et seq. return or regulations) to sign the tax
of enrollment and satisfy the requirements return, may represent the taxpayer before
§10.7 Representing oneself; participating
for renewal as set forth in this section revenue agents, customer service repre-
in rulemaking; limited practice; special
within three years of being placed in an sentatives or similar officers and employ-
appearances; and return preparation.
inactive status. The name of such indi- ees of the Internal Revenue Service dur-
vidual otherwise will be removed from (a) Representing oneself. Individuals ing an examination of the taxable year or
the inactive enrollment roster and his or may appear on their own behalf before the period covered by that tax return, but this
her enrollment will terminate. Eligibility Internal Revenue Service provided they right does not permit such individual to
for enrollment must then be reestablished present satisfactory identification. represent the taxpayer, regardless of the
by the individual as provided in this sec- (b) Participating in rulemaking. circumstances requiring representation,
tion. Individuals may participate in rulemaking before appeals officers, revenue officers,
(7) Inactive enrollment status is not as provided by the Administrative Counsel or similar officers or employees
available to an individual who is the sub- Procedure Act. See 5 U.S.C. 553. of the Service or the Department of
ject of a disciplinary matter in the Office (c) Limited practice—(1) In general. Treasury.
of Director of Practice. Subject to the limitations in paragraph (2) Limitations. (i) An individual who
(l) Inactive retirement status. An indi- (c)(2) of this section, an individual who is is under suspension or disbarment from
vidual who no longer practices before the not a practitioner may represent a taxpay- practice before the Internal Revenue
Internal Revenue Service may request er before the Internal Revenue Service in Service may not engage in limited prac-
being placed in an inactive status at any the circumstances described in this para- tice before the Service under paragraph
time and such individual will be placed in graph (c)(1), even if the taxpayer is not (c)(1) of this section.
an inactive retirement status. The individ- present, provided the individual presents (ii) The Director, after notice and
ual will be ineligible to practice before the satisfactory identification and proof of his opportunity for a conference, may deny
Service. Such individual must file a time- or her authority to represent the taxpayer. eligibility to engage in limited practice

March 12, 2001 848 2001–11 I.R.B.


before the Internal Revenue Service under request by a duly authorized officer or returns, documents, affidavits, and other
paragraph (c)(1) of this section to any employee of the Internal Revenue Service, papers relating to Internal Revenue
individual who has engaged in conduct promptly submit records or information in Service matters;
that would justify censuring, suspending, any matter before the Internal Revenue (2) In determining the correctness of
or disbarring a practitioner from practice Service unless the practitioner believes in oral or written representations made by
before the Service. good faith and on reasonable grounds that the practitioner to the Department of the
(iii) An individual who represents a tax- the records or information are privileged. Treasury; and
payer under the authority of paragraph Where the requested records or informa- (3) In determining the correctness of
(c)(1) of this section is subject, to the tion are not in the possession or control of oral or written representations made by
extent of his or her authority, to such rules the practitioner or the practitioner’s client, the practitioner to clients with reference to
of general applicability regarding stan- the practitioner must promptly notify the any matter administered by the Internal
dards of conduct and other matters as the requesting officer or employee, and must Revenue Service.
Director of Practice prescribes. provide any information that either the (b) Reliance on others. Except as pro-
(d) Special appearances. The Director practitioner or the practitioner’s client has vided in §§10.33, 10.34, and 10.35, a
of Practice may, subject to such condi- regarding the identity of any person who practitioner will be presumed to have
tions as he or she deems appropriate, may have possession or control of the exercised due diligence for purposes of
authorize an individual who is not other- requested records or information. A practi- this section if the practitioner relies on the
wise eligible to practice before the tioner may not interfere, or attempt to inter- work product of another person and the
Service to represent another person in a fere, with any proper and lawful effort by practitioner used reasonable care in
particular matter. the Service or its officers or employees to engaging, supervising, training, and eval-
(e) Preparing tax returns and furnish- obtain any record or information unless the uating the person, taking proper account
ing information. Any individual may pre- practitioner believes in good faith and on of the nature of the relationship between
pare a tax return, appear as a witness for reasonable grounds that the record or infor- the practitioner and the person.
the taxpayer before the Internal Revenue mation is privileged.
Service, or furnish information at the (b) To the Director of Practice. When a §10.23 Prompt disposition of pending
request of the Service or any of its officers proper and lawful request is made by the matters.
or employees. Director of Practice, a practitioner must pro-
A practitioner may not unreasonably
(f) Fiduciaries. For purposes of this vide the Director with any information the
delay the prompt disposition of any matter
part, a fiduciary (i.e., a trustee, receiver, practitioner has concerning a violation or
before the Internal Revenue Service.
guardian, personal representative, admin- possible violation of the regulations in this
istrator, or executor) is considered to be part by any person, and to testify regarding §10.24 Assistance from or to disbarred or
the taxpayer and not a representative of this information in any proceeding instituted suspended persons and former Internal
the taxpayer. under this part, unless the practitioner Revenue Service employees.
believes in good faith and on reasonable
§10.8 Customhouse brokers. grounds that the information is privileged. A practitioner may not, knowingly and
directly or indirectly:
Nothing contained in the regulations in §10.21 Knowledge of client’s omission. (a) Accept assistance from or assist any
this part will affect or limit the right of a
A practitioner who, having been person who is under disbarment or sus-
customhouse broker, licensed as such by
retained by a client with respect to a mat- pension from practice before the Internal
the Commissioner of Customs in accor-
ter administered by the Internal Revenue Revenue Service if the assistance relates
dance with the regulations prescribed
Service, knows that the client has not to a matter or matters constituting practice
therefor, in any customs district in which
complied with the revenue laws of the before the Service.
he or she is so licensed, at the local office
United States or has made an error in or (b) Accept assistance from any former
of the Internal Revenue Service or before
omission from any return, document, affi- government employee where the provi-
the National Office of the Service, to act
davit, or other paper which the client sub- sions of §10.25 of this part or any Federal
as a representative in respect to any mat-
mitted or executed under the revenue laws law would be violated.
ters relating specifically to the importa-
tion or exportation of merchandise under of the United States, must advise the §10.25 Practice by former Government
the customs or internal revenue laws, for client promptly of the fact of such non- employees, their partners and their
any person for whom he or she has acted compliance, error, or omission, the man- associates.
as a customhouse broker. ner in which corrective action may be
taken, and the possible consequences of (a) Definitions. For purposes of this
Subpart B — Duties and Restrictions not taking corrective action. section—
Relating to Practice Before the (1) Assist means to act in such a way as
Internal Revenue Service §10.22 Diligence as to accuracy.
to advise, furnish information to, or other-
§10.20 Information to be furnished. (a) In general. A practitioner must wise aid another person, directly or indi-
exercise due diligence— rectly.
(a) To the Internal Revenue Service. A (1) In preparing or assisting in the (2) Government employee is an officer
practitioner must, on a proper and lawful preparation of, approving, and filing tax or employee of the United States or any

2001–11 I.R.B. 849 March 12, 2001


agency of the United States, including a to his or her Government employment, (2) When isolation of a former Govern-
special government employee as defined represent anyone in any matter adminis- ment employee is required under para-
in 18 U.S.C. 202(a), or of the District of tered by the Internal Revenue Service if graph (c)(1) of this section, a statement
Columbia, or of any State, or a member of the representation would violate 18 affirming the fact of such isolation must
Congress or of any State legislature. U.S.C. 207 or any other laws of the be executed under oath by the former
(3) Member of a firm is a sole practi- United States. Government employee and by another
tioner or an employee or associate thereof, (2) No former Government employee member of the firm acting on behalf of the
or a partner, stockholder, associate, affili- who participated in a transaction may, sub- firm. The statement must clearly identify
ate or employee of a partnership, joint sequent to his or her Government employ- the firm, the former Government employ-
venture, corporation, professional associ- ment, represent or knowingly assist, in that ee, and the transaction(s) requiring isola-
ation or other affiliation of two or more transaction, any person who is or was a tion and it must be filed with the Director
practitioners who represent nongovern- specific party to that transaction. of Practice and in such other place and in
mental parties. (3) A former Government employee the manner prescribed by rule or regula-
(4) Practitioner includes any individual who within a period of one year prior to tion.
described in paragraph (f) of §10.2. the termination of Government employ- (d) Pending representation. Practice by
(5) Official responsibility means the ment had official responsibility for a former Government employees, their
direct administrative or operating authori- transaction may not, within two years partners and associates with respect to
ty, whether intermediate or final, and after his or her Government employment representation in specific matters where
either exercisable alone or with others, is ended, represent or knowingly assist in actual representation commenced before
and either personally or through subordi- that transaction any person who is or was adoption of this regulation is governed by
nates, to approve, disapprove, or other- a specific party to that transaction. the regulations set forth at 31 CFR Part 10
wise direct Government action, with or (4) No former Government employee immediately preceding the adoption of
without knowledge of the action. may, within one year after his or her these regulations. The burden of showing
(6) Participate or participation means Government employment is ended, that representation commenced before
substantial involvement as a Government appear before any employee of the adoption of the revised regulations lies
employee by making decisions, or prepar- Treasury Department in connection with with the former Government employees,
ing or reviewing documents with or with- the publication, withdrawal, amendment, and their partners and associates.
out the right to exercise a judgment of modification, or interpretation of a rule in
approval or disapproval, or participating the development of which the former §10.26 Notaries.
in conferences or investigations, or ren- Government employee participated or for
A practitioner may not take acknowl-
dering advice of a substantial nature. which, within a period of one year prior to
edgments, administer oaths, certify
(7) Rule includes Treasury Regulations, the termination of his or her Government
papers, or perform any official act as a
whether issued or under preparation for employment, he or she had official
notary public with respect to any matter
issuance as Notices of Proposed Rule responsibility. This paragraph (b)(4) does
administered by the Internal Revenue
Making or as Treasury Decisions; revenue not, however, preclude such former
Service and for which he or she is
rulings; and revenue procedures published employee from appearing on his or her
employed as counsel, attorney, or agent,
in the Internal Revenue Bulletin. Rule own behalf or from representing a taxpay-
or in which he or she may be in any way
does not include a transaction as defined er before the Internal Revenue Service in
interested. (26 Op. Atty. Gen. 236).
in paragraph (a)(8) of this section. connection with a transaction involving
(8) Transaction means any decision, the application or interpretation of such a §10.27 Fees.
determination, finding, letter ruling, tech- rule with respect to that transaction, pro-
nical advice, Chief Counsel advice, or vided that such former employee does not (a) Generally. A practitioner may not
contract or the approval or disapproval utilize or disclose any confidential infor- charge an unconscionable fee for repre-
thereof, relating to a particular factual sit- mation acquired by the former employee senting a client in a matter before the
uation or situations involving a specific in the development of the rule. Internal Revenue Service.
party or parties whose rights, privileges, (c) Firm representation. (1) No mem- (b) Contingent fees. A practitioner may
or liabilities under laws or regulations ber of a firm of which a former Govern- not charge a contingent fee for preparing
administered by the Internal Revenue ment employee is a member may repre- an original tax return or for any advice
Service, or other legal rights, are deter- sent or knowingly assist a person who was rendered in connection with a position
mined or immediately affected therein or is a specific party in any transaction taken or to be taken on an original tax
and to which the United States is a party with respect to which the restrictions of return. A practitioner may charge a con-
or in which it has a direct and substantial paragraph (b)(2) or (3) of this section tingent fee for preparing, or for any advice
interest, whether or not the same taxable apply to the former Government employ- rendered in connection with a position
periods are involved. Transaction does ee, in that transaction, unless the firm iso- taken or to be taken on, an amended tax
not include rule as defined in paragraph lates the former Government employee in return or a claim for refund (other than a
(a)(7) of this section. such a way to ensure that the former claim for refund made on an original tax
(b) General rules. (1) No former Government employee cannot assist in the return) if the practitioner reasonably
Government employee may, subsequent representation. anticipates at the time the fee arrangement

March 12, 2001 850 2001–11 I.R.B.


is entered into that the amended tax return affected and the client consents after the (B) Hourly rates.
or refund claim will receive substantive practitioner has fully disclosed the poten- (C) Range of fees for particular ser-
review by the Internal Revenue Service. tial conflict, including disclosure of the vices.
For purposes of this section, a contingent implications of the potential conflict and (D) Fee charged for an initial consulta-
fee is any fee that is based, in whole or in the risks involved. tion.
part, on whether or not a position taken on (ii) Any statement of fee information
a tax return or in a refund claim is sus- §10.30 Solicitation. concerning matters in which costs may be
tained by the Service or in litigation. A (a) Advertising and solicitation restric- incurred must include a statement disclos-
contingent fee includes an indemnity tions. (1) A practitioner may not, with ing whether clients will be responsible for
agreement, a guarantee, rescission rights, respect to any Internal Revenue Service such costs.
insurance, or any other arrangement under matter, in any way use or participate in the (2) A practitioner may charge no more
which the taxpayer or other person would use of any form of public communication than the rate(s) published under paragraph
be entitled to be compensated or reim- or private solicitation containing a false, (b)(1) of this section for a reasonable
bursed by the practitioner in the event a fraudulent, or coercive statement or period of time after the last date on which
position taken on a tax return or in a claim; or a misleading or deceptive state- the schedule of fees was published
refund claim is not sustained, or any other ment or claim. Enrolled agents, in (which, in no event, may be shorter than
arrangement that has a similar effect. 30 days).
describing their professional designation,
may not utilize the term of art “certified” (c) Communication of fee information.
§10.28 Return of client’s records.
or “licensed” or indicate an Fee information may be communicated in
On the request of a client, a practition- employer/employee relationship with the professional lists, telephone directories,
er must promptly return any and all Service. Examples of acceptable descrip- print media, mailings, electronic mail,
records of the client. The existence of a tions are “enrolled to represent taxpayers facsimile, hand delivered flyers, radio,
dispute over fees does not relieve the before the Internal Revenue Service,” television, and any other method. The
practitioner of his or her responsibility “enrolled to practice before the Internal method chosen, however, must not cause
under this section. The practitioner may Revenue Service,” and “admitted to prac- the communication to become untruthful,
retain copies of the records returned to a tice before the Internal Revenue Service.” deceptive, or otherwise in violation of
client. Enrolled agents and enrolled actuaries these regulations. A practitioner may not
may abbreviate such designation as either persist in attempting to contact a prospec-
§10.29 Conflicting interests. tive client if the prospective client has
EA or E.A. Examples of unacceptable
descriptions are “Internal Revenue made it known to the practitioner that he
(a) A practitioner may not represent
Service (or IRS) Enrolled Agent,” or she does not desire to be solicited. In
potential conflicting interests in his or her
“Enrolled Agent of the Internal Revenue the case of radio and television broadcast-
practice before the Internal Revenue
Service (or IRS),” “Certified Enrolled ing, the broadcast must be recorded and
Service, unless—
Agent,” or “Licensed to practice before the practitioner must retain a recording of
(1) The practitioner reasonably believes
the Internal Revenue Service (or IRS).” the actual transmission. In the case of
that the representation of any party before
(2) A practitioner may not make, direct- direct mail and e-commerce communica-
the Service will not be adversely affected;
ly or indirectly, an uninvited written or tions, the practitioner must retain a copy
and
oral solicitation of employment in matters of the actual communication, along with a
(2) All parties represented by the prac-
related to the Internal Revenue Service if list or other description of persons to
titioner who have an interest in the matter
the solicitation violates Federal or State whom the communication was mailed or
before the Service expressly consent in
law or other applicable rule, e.g., attor- otherwise distributed. The copy must be
writing to the representation after the
neys are precluded from making a solici- retained by the practitioner for a period of
practitioner has fully disclosed the poten-
tial conflict. tation that is prohibited by the rules of the at least 36 months from the date of the last
(b) Copies of the written consents must State bar to which they are members. Any transmission or use.
be retained by the practitioner for at least lawful solicitation made by or on behalf (d) Improper associations. A practi-
36 months from the date of the conclusion of a practitioner eligible to practice before tioner may not, in matters related to the
of the representation of the affected the Service must, nevertheless, clearly Internal Revenue Service, assist, or accept
clients and the written consents must be identify the solicitation as such and, if assistance from, any person or entity who,
provided to any officer or employee of the applicable, identify the source of the to the knowledge of the practitioner,
Internal Revenue Service on request. information used in choosing the recipi- obtains clients or otherwise practices in a
(c) A practitioner may not represent a ent. manner forbidden under this section.
party in his or her practice before the (b) Fee information. (1)(i) A practi- §10.31 Negotiation of taxpayer checks.
Internal Revenue Service if the represen- tioner may publish the availability of a
tation of the party may be materially lim- written schedule of fees and disseminate A practitioner who prepares tax returns
ited by the practitioner’s own interests, the following fee information— may not endorse or otherwise negotiate
unless the practitioner reasonably believes (A) Fixed fees for specific routine ser- any check issued to a client by the govern-
the representation will not be adversely vices. ment in respect of a Federal tax liability.

2001–11 I.R.B. 851 March 12, 2001


§10.32 Practice of law. but the practitioner may not rely on factu- (iv) The opinion must not contain legal
al representations if the practitioner analyses or conclusions with respect to
Nothing in the regulations in this part knows or has reason to believe, based on Federal tax issues that are inconsistent
may be construed as authorizing persons his or her background and knowledge, with each other.
not members of the bar to practice law. that the relevant information is, or other- (3) Analysis of material Federal tax
§10.33 Tax shelter opinions used by third wise appears to be, unreasonable, incor- issues. The practitioner must ascertain
parties to market tax shelters. rect, incomplete, inconsistent with an that all material Federal tax issues have
important fact or another factual represen- been considered, and that all of those
(a) In general. A practitioner who pro- tation, or implausible in any material issues that involve the reasonable possi-
vides a tax shelter opinion that does not respect. For example, a representation is bility of a challenge by the Internal
conclude that the Federal tax treatment of incomplete if it states that there are busi- Revenue Service have been fully and fair-
a tax shelter item or items is more likely ness reasons for the transaction without ly addressed. The opinion must state that
than not the proper treatment must com- describing those reasons, or if it states that the practitioner has considered the possi-
ply with each of the following require- a transaction is potentially profitable apart ble application to the facts of all poten-
ments with respect to each such item. from tax benefits without providing ade- tially relevant judicial doctrines, includ-
(1) Factual matters. (i) The practition- quate factual support. In addition, a valu- ing the step transaction, business purpose,
er must make inquiry as to all relevant ation is inconsistent with an important economic substance, substance over form,
facts, be satisfied that the opinion takes fact or factual assumption or is implausi- and sham transaction doctrines, as well as
account of all relevant facts, and be satis- ble if it appears to be based on facts that potentially relevant statutory and regula-
fied that the material facts (including fac- are inconsistent with the facts of the trans- tory anti-abuse rules, and the opinion
tual assumptions and representations) are action. must analyze whether the tax shelter item
accurately and completely described in (iv) If the fair market value of property is vulnerable to challenge under all poten-
the opinion and in any related offering or the expected financial performance of tially relevant doctrines and anti-abuse
materials or sales promotion materials. an investment is relevant to the tax shelter rules. In analyzing such judicial doctrines
(ii) The opinion must not be based, item, a practitioner may not accept an and statutory and regulatory anti-abuse
directly or indirectly, on any unreasonable appraisal or financial projection as sup- rules, the opinion must take into account
factual assumptions (including assump- port for the matters claimed therein the typical investor’s non-tax and tax pur-
tions as to future events). Unreasonable unless— poses (and the relative weight of such pur-
factual assumptions include— (A) The appraisal or financial projec- poses) for entering into a transaction and
(A) A factual assumption that the prac- tion makes sense on its face; for structuring a transaction in a particular
titioner knows or has reason to believe is (B) The practitioner reasonably be- manner.
incorrect, incomplete, inconsistent with lieves that the person making the (4) Evaluation of material Federal tax
an important fact or another factual appraisal or financial projection is rep- issues. The practitioner must, where pos-
assumption, or implausible in any materi- utable and competent to perform the sible, clearly provide his or her conclusion
al respect; or appraisal or projection; and as to the likelihood that a typical investor
(B) A factual assumption regarding a (C) The appraisal is based on the defin- of the type to whom the tax shelter is or
fact or facts that the practitioner could ition of fair market value prescribed under will be marketed will prevail on the mer-
reasonably request to be provided or to be the relevant Federal tax provisions. its with respect to each material Federal
represented. (v) If the fair market value of purchased tax issue that involves the reasonable pos-
(iii) A practitioner may, where it would property is to be established by reference sibility of a challenge by the Internal
be reasonable based on all the facts and to its stated purchase price, the practition- Revenue Service. If the practitioner is
circumstances, rely upon factual represen- er must examine the terms and conditions unable to reach such a conclusion with
tations, statements, findings, or agree- on which the property was (or is to be) respect to one or more Federal tax issues,
ments (factual representations) (including purchased to determine whether the stated he or she must clearly state that he or she
representations describing the specific purchase price reasonably may be consid- is unable to reach such a conclusion with
business reasons for the transaction, the ered to be its fair market value. respect to those issues. The practitioner’s
potential profitability of the transaction (2) Relate law to facts. (i) The opinion opinion must fully describe the reasons
apart from tax benefits, or a valuation pre- must relate the applicable law to the rele- for the practitioner’s conclusions or fully
pared by an independent party). Factors vant facts. describe the reasons for his or her inabili-
relevant to whether such factual represen- (ii) The opinion must clearly identify ty to reach a conclusion as to one or more
tations are reasonable include, but are not the facts upon which the opinion’s con- issues.
limited to, whether the person making the clusions are based. (5) Overall conclusion. (i) The practi-
factual representations is knowledgeable (iii) The opinion must contain a reasoned tioner must, where possible, clearly pro-
as to the facts being represented and is the analysis of the pertinent facts and legal vide an overall conclusion as to the likeli-
appropriate person to make such factual authorities and must not assume the favor- hood that the Federal tax treatment of the
representations. A practitioner does not able resolution of any Federal tax issue tax shelter item or items is the proper
need to conduct an audit or independent material to the analysis or otherwise rely on treatment. If the practitioner is unable to
verification of a factual representation, any unreasonable legal assumptions. reach such an overall conclusion, he or

March 12, 2001 852 2001–11 I.R.B.


she must clearly state that he or she is ed will prevail on the merits with respect practitioner rendering such other opinion
unable to reach such an overall conclusion to each material Federal tax issue that has not complied with the standards of
and the opinion must fully describe the involves the reasonable possibility of a paragraph (a) of this §10.33, and the
reasons for the practitioner’s inability to challenge by the Internal Revenue requirements of paragraphs (b)(1)(i)(A)
reach a conclusion. Service (or, alternatively, if the practi- and (B) and the first sentence of para-
(ii) The fact that the practitioner’s opin- tioner is unable to reach a conclusion graph (b)(1)(ii) of this section are satis-
ion does not reach an overall conclusion with respect to one or more material fied. The practitioner’s report must dis-
that the Federal tax treatment of the tax Federal tax issues, an opinion that does close any material Federal tax issue not
shelter item or items is more likely than not clearly state that he or she is unable to covered by, or incorrectly opined on, by
not the proper treatment, or the fact that reach a conclusion with respect to those the other opinion, and shall set forth his or
the practitioner is unable to reach an over- issues), or does not provide an overall her opinion with respect to each such
all conclusion, must be clearly and promi- conclusion as to the likelihood that the issue in a manner that satisfies the
nently disclosed on the first page of the Federal tax treatment of the tax shelter requirements of paragraph (a) of this sec-
opinion. item or items is the proper treatment (or, tion.
(iii) The opinion must clearly and alternatively, if the practitioner is unable (c) Definitions. For purposes of this
prominently disclose on the first page of to reach an overall conclusion, an opinion section—
the opinion that the opinion was not writ- that does not clearly state that he or she is (1) Practitioner includes any individual
ten for the purpose of establishing— unable to reach such an overall conclu- described in paragraph (f) of §10.2.
(A) Under section 6662(d)(2)(C)(i)(II) sion), unless— (2) The definition of tax shelter is set
of the Internal Revenue Code and 26 CFR (A) At least one other competent prac- forth in section 6662(d)(2)(C)(iii) of the
1.6662–4(g)(4), that a taxpayer other than titioner provides an opinion on the likely Internal Revenue Code.
a corporation reasonably believed at the outcome with respect to all of the other (3) A tax shelter item is an item of
time a tax return was filed that the tax material Federal tax issues which involve income, gain, loss, deduction or credit if
treatment of a tax shelter item was more a reasonable possibility of challenge by the item is directly or indirectly attribut-
likely than not the proper treatment of that the Internal Revenue Service, and with able to a tax shelter as defined in section
item; or respect to the tax shelter item or items; 6662(d)(2)(C)(iii) of the Internal Revenue
(B) Under section 6664(c)(1) of the and Code.
Internal Revenue Code and 26 CFR (B) The practitioner, on reviewing such (4) A tax shelter opinion, as the term is
1.6664–4(e), that a corporate taxpayer other opinions and any written materials used in this section, is written advice by a
acted with reasonable cause and in good that distribute, reflect or refer to such practitioner concerning the Federal tax
faith with respect to a tax shelter item. other opinions, has no reason to believe aspects of a tax shelter item or items that
(iv) In ascertaining that all material that the other practitioner did not comply a practitioner knows or has reason to
Federal tax issues have been considered, with the standards of paragraph (a) of this believe will be used or referred to by a
evaluating the merits of those issues and section. person other than the practitioner (or per-
evaluating whether the Federal tax treat- (ii) Notwithstanding the foregoing, a son who is a member of, associated with,
ment of the tax shelter item or items is the practitioner who has not been retained to or employed by the practitioner’s firm or
proper treatment, the possibility that a tax provide an overall evaluation may issue company) in promoting, marketing or rec-
return will not be audited, that an issue an opinion on less than all the material tax ommending the tax shelter to one or more
will not be raised on audit, or that an issue issues only if he or she has no reason to taxpayers, irrespective of whether such
will be settled may not be taken into believe, based on his or her knowledge promotional, marketing, or similar activi-
account. and experience, that an overall conclusion ties are conducted privately or publicly.
(6) Description of opinion. The practi- given by the practitioner who reaches an The term tax shelter opinion includes the
tioner must take reasonable steps to assure overall conclusion is incorrect on its face. Federal tax aspects or tax risks portion of
that any written materials or promotional Such practitioner also must ensure that the offering materials prepared for the person
efforts that distribute, reflect or refer to limited opinion satisfies the requirements who is promoting, marketing or recom-
the tax shelter opinion, correctly and fair- of this section that are otherwise applica- mending the tax shelter by or at the direc-
ly represent the nature and extent of the ble. tion of a practitioner, whether or not a sep-
opinion. (2) Financial forecasts and projections. arate opinion letter is issued or whether or
(b) Competence to provide opinion; A practitioner who makes financial fore- not the practitioner’s name is referred to
reliance on opinions of others. (1) The casts or projections relating to or based on in offering materials or in connection with
practitioner must be knowledgeable in all the tax consequences of the tax shelter sales promotion efforts. Similarly, a
of the aspects of Federal tax law relevant item that are included in written materials financial forecast or projection prepared
to the opinion being rendered. disseminated to any or all of the same per- by a practitioner is a tax shelter opinion if
(i) A practitioner may not provide a tax sons as the opinion may rely on the opin- it is predicated on assumptions regarding
shelter opinion that does not clearly pro- ion of another practitioner as to any or all Federal tax aspects of the investment and
vide his or her conclusion as to the likeli- material Federal tax issues, provided that that meets the other requirements of the
hood that a typical investor of the type to the practitioner who desires to rely on the first sentence of this paragraph. The term
whom the tax shelter is or will be market- other opinion has no reason to believe the tax shelter opinion does not include

2001–11 I.R.B. 853 March 12, 2001


advice provided in connection with the bility standard) unless the position is not or any successor provision, of the sub-
review of portions of offering or sales pro- frivolous and is adequately disclosed to stantial understatement penalty regula-
motion materials, provided neither the the Internal Revenue Service. A practi- tions may be taken into account for pur-
name of the practitioner or the practition- tioner may not advise a client to take a poses of this analysis. The possibility that
er’s firm, nor the fact that a practitioner position on a tax return, or prepare the a tax return will not be audited, that an
has rendered advice concerning the portion of a tax return on which a position issue will not be raised on audit, or that an
Federal tax aspects, is referred to in the is taken, unless— issue will be settled may not be taken into
offering materials or related sales promo- (1) The practitioner determines that the account.
tion efforts. position satisfies the realistic possibility (2) Frivolous. A position is frivolous if
(5) A material Federal tax issue, as the standard; or it is patently improper.
term is used in this section, is any Federal (2) The position is not frivolous and the
tax issue the resolution of which could practitioner advises the client of any §10.35 More likely than not tax shelter
have a significant impact (whether benefi- opportunity to avoid the accuracy-related opinions.
cial or adverse) on a taxpayer under any penalty in section 6662 of the Internal (a) In general. A practitioner who pro-
reasonably foreseeable circumstance. A Revenue Code by adequately disclosing vides a tax shelter opinion that concludes
material Federal tax issue includes the the position and of the requirements for that the Federal tax treatment of a tax
potential applicability of penalties, addi- adequate disclosure. shelter item or items is more likely than
tions to tax, or interest charges that rea- (b) Advising clients on potential penal- not (or at a higher level of confidence) the
sonably could be asserted by the Internal ties. A practitioner advising a client to proper treatment must comply with each
Revenue Service with respect to the tax take a position on a tax return, or prepar- of the following requirements with
shelter item. ing or signing a tax return as a preparer, respect to each such item.
(6) The following examples illustrate must inform the client of the penalties rea- (1) Factual matters. (i) The practition-
this section— sonably likely to apply to the client with er must make inquiry as to all relevant
Example 1. A practitioner is requested by a third respect to the position advised, prepared,
party to prepare a memorandum evaluating whether facts, be satisfied that the opinion takes
the purported Federal tax treatment of a tax shelter
or reported. The practitioner also must account of all relevant facts, and be satis-
item arising from a series of transactions will be sus- inform the client of any opportunity to fied that the material facts (including fac-
tained if challenged by the Internal Revenue Service. avoid any such penalty by disclosure, if tual assumptions and representations) are
The practitioner concludes that there is a realistic relevant, and of the requirements for ade- accurately and completely described in
possibility that the purported treatment of the tax
quate disclosure. This paragraph (b) the opinion, and, where appropriate, in
shelter item is the proper treatment and has reason to
believe that the third party will use or refer to the applies even if the practitioner is not sub- any related offering materials or sales pro-
memorandum he prepares in promoting, marketing ject to a penalty with respect to the posi- motion materials.
or recommending the transaction to one or more tax- tion. (ii) The opinion must not be based,
payers. The memorandum is a tax shelter opinion (c) Relying on information furnished by directly or indirectly, on any unreasonable
for purposes of this section.
clients. A practitioner advising a client to factual assumptions (including assump-
Example 2. A practitioner writes a memorandum
that evaluates whether a hypothetical taxpayer which take a position on a tax return, or prepar- tions as to future events). Unreasonable
enters into a series of transactions can offset a pre- ing or signing a tax return as a preparer, factual assumptions include—
existing capital gain against certain losses arising generally may rely in good faith without (A) A factual assumption that the prac-
from the series of transactions. The practitioner con- verification upon information furnished titioner knows or has reason to believe is
cludes that, while a significant purpose for entering
into the series of transactions is the avoidance or
by the client. The practitioner may not, incorrect, incomplete, inconsistent with
evasion of Federal income tax within the meaning of however, ignore the implications of infor- an important fact or another factual
section 6662(d)(2)(C)(iii) of the Internal Revenue mation furnished to, or actually known by, assumption, or implausible in any materi-
Code, there is a realistic possibility that the tax loss the practitioner, and must make reason- al respect; or
arising from this series of transactions is the proper able inquiries if the information as fur- (B) A factual assumption regarding a
treatment. The practitioner plans to provide this
memorandum directly to clients who have capital
nished appears to be incorrect, inconsis- fact or facts that the practitioner could
gains. The memorandum is not a tax shelter opinion tent with an important fact or another reasonably request to be provided or to be
for purposes of this section because the promoting, factual assumption, or incomplete. represented.
marketing or recommending of the tax shelter is not (d) Definitions. For purposes of this (C) A factual assumption that the trans-
being done by a person other than the practitioner.
section— action has a business reason, an assump-
§10.34 Standards for advising with (1) Realistic possibility. A position is tion that the transaction is potentially
respect to tax return positions and for considered to have a realistic possibility profitable apart from tax benefits, or an
preparing or signing returns. of being sustained on its merits if a rea- assumption with respect to a material val-
sonable and well informed analysis by a uation issue.
(a) Realistic possibility standard. A person knowledgeable in the tax law (iii) A practitioner may, where it would
practitioner may not sign a tax return as a would lead such a person to conclude that be reasonable based on all the facts and
preparer if the practitioner determines that the position has approximately a one in circumstances, rely on factual representa-
the tax return contains a position that does three, or greater, likelihood of being sus- tions, statements, findings, or agreements
not have a realistic possibility of being tained on its merits. The authorities of the taxpayer or other persons ((factual
sustained on its merits (the realistic possi- described in 26 CFR 1.6662–4(d)(3)(iii), representations) (including representa-

March 12, 2001 854 2001–11 I.R.B.


tions describing the specific business rea- purchase price reasonably may be consid- Internal Revenue Service. This require-
sons for the transaction, the potential ered to be its fair market value. ment is not satisfied by including a state-
profitability of the transaction apart from (2) Relate law to facts. (i) The opinion ment in the opinion that the practitioner
tax benefits, or a valuation prepared by an must relate the applicable law to the rele- was unable to opine with respect to cer-
independent party). Factors relevant to vant facts. tain material Federal tax issues, including
whether such factual representations are (ii) The opinion must clearly identify but not limited to whether the transaction
reasonable include, but are not limited to, the facts upon which the opinion’s con- has a business purpose or economic sub-
whether the person making the factual clusions are based. stance.
representations is knowledgeable as to (iii) The opinion must contain a rea- (ii) The opinion must unambiguously
the facts being represented and is the soned analysis of the pertinent facts and conclude that the Federal tax treatment of
appropriate person to make such factual legal authorities and must not assume the the tax shelter item or items is more like-
representations. A practitioner does not favorable resolution of any Federal tax ly than not (or at a higher level of confi-
need to conduct an audit or independent issue material to the analysis or otherwise dence) the proper tax treatment. A favor-
verification of a factual representation, rely on any unreasonable legal assump- able overall conclusion may not be based
but the practitioner may not rely on factu- tions. solely on the conclusion that the taxpayer
al representations if the practitioner (iv) The opinion must not contain legal more likely than not will prevail on the
knows or has reason to believe, based on analyses or conclusions with respect to merits of each material Federal tax issue.
his or her background and knowledge, Federal tax issues that are inconsistent (iii) In ascertaining that all material
that the relevant information is, or other- with each other. Federal tax issues have been considered,
wise appears to be, unreasonable, incor- (3) Analysis of material Federal tax evaluating the merits of those issues and
rect, incomplete, inconsistent with an issues. The practitioner must ascertain evaluating whether the Federal tax treat-
important fact or another factual repre- that all material Federal tax issues have ment of the tax shelter item or items is the
sentation, or implausible in any material been considered, and that all of those proper tax treatment, the possibility that a
respect. For example, a representation is issues which involve the reasonable possi- tax return will not be audited, that an issue
incomplete if it states that there are busi- bility of a challenge by the Internal will not be raised on audit, or that an issue
ness reasons for the transaction without Revenue Service have been fully and fair- will be settled may not be taken into
describing those reasons, or if it states ly addressed. The opinion must state that account.
that a transaction is potentially profitable the practitioner has considered the possi- (5) Description of opinion. The practi-
apart from tax benefits without providing ble application to the facts of all poten- tioner must take reasonable steps to assure
adequate factual support. In addition, a tially relevant judicial doctrines, includ- that any written materials or promotional
valuation is inconsistent with an impor- ing the step transaction, business purpose, efforts that distribute, reflect or refer to
tant fact or factual assumption or is economic substance, substance over form, the tax shelter opinion, correctly and fair-
implausible if it appears to be based on and sham transaction doctrines, as well as ly represent the nature and extent of the
facts that are inconsistent with the facts potentially relevant statutory and regula- opinion.
of the transaction. tory anti-abuse rules, and the opinion (b) Competence to provide opinion;
(iv) If the fair market value of property must analyze whether the tax shelter item reliance on opinions of others. (1) The
or the expected financial performance of is vulnerable to challenge under all poten- practitioner must be knowledgeable in all
an investment is relevant to the tax shelter tially relevant doctrines and anti-abuse of the aspects of Federal tax law relevant
item, a practitioner may not accept an rules. In analyzing such judicial doctrines to the opinion being rendered. If the prac-
appraisal or financial projection as sup- and statutory and regulatory anti-abuse titioner is not sufficiently knowledgeable
port for the matters claimed therein rules, the opinion must take into account to render an informed opinion with
unless— the taxpayer’s non-tax and tax purposes respect to particular material Federal tax
(A) The appraisal or financial projec- (and the relative weight of such purposes) issues, then the practitioner may rely on
tion makes sense on its face; for entering into a transaction and for the opinion of another practitioner with
(B) The practitioner reasonably structuring a transaction in a particular respect to such issues, provided the prac-
believes that the person making the manner. titioner is satisfied that the other practi-
appraisal or financial projection is rep- (4) Evaluation of material Federal tax tioner is sufficiently knowledgeable
utable and competent to perform the issues and overall conclusion. (i) The regarding such issues and the practitioner
appraisal or projection; and practitioner must clearly provide his or does not know and has no reason to
(C) The appraisal is based on the defin- her conclusion as to the likelihood that an believe that such opinion should not be
ition of fair market value prescribed under investor (or, where the practitioner is rely- relied on.
the relevant Federal tax provisions. ing on a representation as to the charac- (2) To the extent the practitioner relies
(v) If the fair market value of purchased teristics of potential investors, a typical on an opinion of another practitioner, the
property is to be established by reference investor of the type to whom the tax shel- opinion rendered by the practitioner must
to its stated purchase price, the practition- ter is or will be marketed) will prevail on identify the other practitioner, state the
er must examine the terms and conditions the merits with respect to each material date on which the opinion was rendered,
on which the property was (or is to be) Federal tax issue that involves the reason- and set forth the conclusions reached in
purchased to determine whether the stated able possibility of a challenge by the such opinion.

2001–11 I.R.B. 855 March 12, 2001


(3) The practitioner also must be satis- tion prepared by a practitioner is a tax the requirements of the preceding sen-
fied that the combined analysis, taken as a shelter opinion if it is predicated on as- tence if, and only if—
whole, satisfies the requirements of this sumptions regarding Federal tax aspects (a) The practitioner through willful-
§10.35. of the investment and that meets the ness, recklessness, or gross incompetence
(4) Financial forecasts and projections. other requirements of the first sentence does not take such reasonable steps and
A practitioner who makes financial fore- of this paragraph. The term tax shelter the practitioner and one or more persons
casts or projections relating to or based on opinion does not include advice provided who are members of, associated with, or
the tax consequences of the tax shelter in connection with the review of portions employed by the firm have, in connection
item that are included in written materials of offering materials or sales promotion with their practice with the firm, engaged
disseminated to any or all of the same per- materials, provided neither the name of in a pattern or practice of failing to com-
sons as the opinion may rely on the opin- the practitioner or the practitioner’s firm ply with §10.33, 10.34 or 10.35; or
ion of another practitioner as to any or all nor the fact that a practitioner has ren- (b) The practitioner takes such reason-
material Federal tax issues, provided that dered advice concerning the Federal tax able steps but has actual knowledge that
the practitioner who desires to rely on the aspects, is referred to in the offering ma- one or more persons who are members of,
other opinion has no reason to believe the terials or related sales promotion materi- associated with, or employed by the firm
practitioner rendering such other opinion als. have, in connection with their practice
has not complied with the standards of (5) A material Federal tax issue, as the with the firm, engaged in a pattern or
paragraph (a) of this §10.35, is satisfied term is used in this section, is any Federal practice of failing to comply with §10.33,
that the other practitioner is sufficiently tax issue the resolution of which could 10.34 or 10.35 and the practitioner,
knowledgeable and does not know and have a significant impact (whether benefi- through willfulness, recklessness, or gross
has no reason to believe that the opinion cial or adverse) on a taxpayer under any incompetence, fails to take prompt action,
of the other practitioner should not be re- reasonably foreseeable circumstance. consistent with his or her authority and re-
lied on. The practitioner’s report must (d) Effect of opinion that meets these sponsibility for the firm’s practice advis-
disclose any material Federal tax issue not standards. An opinion of a practitioner ing clients regarding matters under the
covered by, or incorrectly opined on, by that meets these requirements will satisfy Federal tax laws, to correct such pattern
the other opinion, and shall set forth his or the practitioner’s responsibilities under or practice.
her opinion with respect to each such this section, but the persuasiveness of the
issue in a manner that satisfies the re- opinion with regard to the tax issues in Subpart C — Sanctions for Violation
quirements of paragraph (a) of this sec- question and the taxpayer’s good faith re- of the Regulations
tion. liance on the opinion will be separately
§10.50 Sanctions.
(c) Definitions. For purposes of this determined under applicable provisions of
section— the law and regulations. (a) Authority to censure, suspend, or
(1) Practitioner includes any individual (e) For purposes of advising the Direc- disbar. The Secretary of the Treasury, or
described in paragraph (f) of §10.2. tor of Practice whether an individual may his or her designate, after notice and an
(2) The definition of tax shelter is set have violated §10.33 or 10.35, the Direc- opportunity for a proceeding, may cen-
forth in section 6662(d)(2)(C)(iii) of the tor is authorized to establish an Advisory sure, suspend or disbar any practitioner
Internal Revenue Code. Excluded from Committee composed of at least five indi- from practice before the Internal Revenue
the term are municipal bonds and quali- viduals authorized to practice before the Service if the practitioner is shown to be
fied retirement plans. Internal Revenue Service. Under proce- incompetent or disreputable, fails to com-
(3) A tax shelter item is an item of in- dures established by the Director, such ply with any regulation in this part, or
come, gain, loss, deduction or credit if the Advisory Committee will, at the request with intent to defraud, willfully and
item is directly or indirectly attributable of the Director, review and make recom- knowingly misleads or threatens a client
to a tax shelter as defined in section mendations with regard to the alleged vio- or prospective client. Censure is a public
6662(d)(2)(C)(iii) of the Internal Revenue lations of §10.33 or 10.35. reprimand.
Code. (b) Authority to disqualify. The Secre-
§10.36 Procedures to ensure compliance.
(4) A tax shelter opinion, as the term is tary of the Treasury, or his or her desig-
used in this section, is written advice by A practitioner who is a member of, as- nate, after due notice and opportunity for
a practitioner concerning the Federal tax sociated with, or employed by a firm must hearing, may disqualify any appraiser
aspects of a tax shelter item or items. take reasonable steps, consistent with his with respect to whom a penalty has been
The term tax shelter opinion includes the or her authority and responsibility for the assessed under section 6701(a) of the In-
Federal tax aspects or tax risks portion of firm’s practice advising clients regarding ternal Revenue Code.
offering materials prepared by or at the matters arising under the Federal tax (1) If any appraiser is disqualified pur-
direction of a practitioner, whether or not laws, to make certain that the firm has ad- suant to this subpart C, such appraiser is
a separate opinion letter is issued and equate procedures in effect for purposes barred from presenting evidence or testi-
whether or not the practitioner’s name is of ensuring compliance with §10.33, mony in any administrative proceeding
referred to in offering materials or in 10.34, and 10.35. The Director of Prac- before the Department of Treasury or the
connection with sales promotion efforts. tice may take disciplinary action against Internal Revenue Service, regardless of
Similarly, a financial forecast or projec- any practitioner for failing to comply with whether such evidence or testimony

March 12, 2001 856 2001–11 I.R.B.


would pertain to an appraisal made prior tempting to evade, or participating in any pressed in the tax opinion or offering ma-
to or after such date. way in evading or attempting to evade terial are false or misleading. For pur-
(2) Any appraisal made by a disqualified any assessment or payment of any Federal poses of this paragraph, reckless conduct
appraiser after the effective date of dis- tax, or knowingly counseling or suggest- is a highly unreasonable omission or mis-
qualification will not have any probative ing to a client or prospective client an ille- representation involving an extreme de-
effect in any administrative proceeding be- gal plan to evade Federal taxes or pay- parture from the standards of ordinary
fore the Department of the Treasury or the ment thereof. care that a practitioner should observe
Internal Revenue Service. However, an (g) Misappropriation of, or failure under the circumstances. A pattern of
appraisal otherwise barred from admission properly and promptly to remit funds re- conduct is a factor that will be taken into
into evidence pursuant to this section may ceived from a client for the purpose of account in determining whether a practi-
be admitted into evidence solely for the payment of taxes or other obligations due tioner acted knowingly, recklessly, or
purpose of determining the taxpayer’s re- the United States. through gross incompetence. Gross in-
liance in good faith on such appraisal. (h) Directly or indirectly attempting to competence includes conduct that reflects
influence, or offering or agreeing to at- gross indifference, preparation which is
§10.51 Incompetence and disreputable tempt to influence, the official action of grossly inadequate under the circum-
conduct. any officer or employee of the Internal stances, and a consistent failure to per-
Incompetence and disreputable conduct Revenue Service by the use of threats, form obligations to the client.
for which a practitioner may be censured, false accusations, duress or coercion, by
the offer of any special inducement or §10.52 Violation of regulations.
suspended or disbarred from practice be-
fore the Internal Revenue Service in- promise of advantage or by the bestowing A practitioner may be censured, sus-
cludes, but is not limited to— of any gift, favor or thing of value. pended or disbarred from practice before
(a) Conviction of any criminal offense (i) Disbarment or suspension from the Internal Revenue Service for any of
under the revenue laws of the United practice as an attorney, certified public the following—
States; accountant, public accountant, or actuary (a) Willfully violating any of the regu-
(b) Conviction of any criminal offense by any duly constituted authority of any lations contained in this part.
involving dishonesty, or breach of trust; State, possession, territory, Common- (b) Recklessly or through gross incom-
(c) Conviction of any felony under wealth, the District of Columbia, any Fed- petence (within the meaning of §10.51(l))
Federal or State law for which the con- eral court of record or any Federal violating §10.33, 10.34, or 10.35.
duct involved renders the practitioner agency, body or board.
unfit to practice before the Internal Rev- (j) Knowingly aiding and abetting an- §10.53 Receipt of information concerning
enue Service; other person to practice before the Inter- practitioner.
(d) Giving false or misleading informa- nal Revenue Service during a period of
suspension, disbarment, or ineligibility of (a) Officer or employee of the Internal
tion, or participating in any way in the giv-
such other person. Revenue Service. If an officer or em-
ing of false or misleading information to
(k) Contemptuous conduct in connec- ployee of the Internal Revenue Service
the Department of the Treasury or any offi-
cer or employee thereof, or to any tribunal tion with practice before the Internal Rev- has reason to believe that a practitioner
authorized to pass upon Federal tax mat- enue Service, including the use of abusive has violated any provision of this part, the
ters, in connection with any matter pending language, making false accusations and officer or employee will promptly make a
or likely to be pending before them, know- statements, knowing them to be false, or written report to the Director of Practice
ing such information to be false or mis- circulating or publishing malicious or li- of the alleged violation.
leading. Facts or other matters contained belous matter. (b) Other persons. Any person other
in testimony, Federal tax returns, financial (l) Giving a false opinion, knowingly, than an officer or employee of the Internal
statements, applications for enrollment, af- recklessly, or through gross incompe- Revenue Service having information of a
fidavits, declarations, or any other docu- tence, including an opinion which is in- violation of any provision of this part may
ment or statement, written or oral, are in- tentionally or recklessly misleading, or make an oral or written report of the al-
cluded in the term information. engaging in a pattern of providing incom- leged violation to the Director of Practice
(e) Solicitation of employment as pro- petent opinions on questions arising under or any officer or employee of the Service.
hibited under §10.30, the use of false or the Federal tax laws. False opinions de- If the report is made to an officer or em-
misleading representations with intent to scribed in this paragraph (l) include those ployee of the Service, the officer or em-
deceive a client or prospective client in which reflect or result from a knowing ployee will make a written report of the
order to procure employment, or intimat- misstatement of fact or law, from an as- alleged violation to the Director.
ing that the practitioner is able improperly sertion of a position known to be unwar-
Subpart D — Rules Applicable to
to obtain special consideration or action ranted under existing law, from counsel-
Disciplinary Proceedings
from the Internal Revenue Service or offi- ing or assisting in conduct known to be
cer or employee thereof. illegal or fraudulent, from concealing §10.60 Institution of proceeding.
(f) Willfully failing to make a Federal matters required by law to be revealed, or
tax return in violation of the revenue laws from consciously disregarding informa- (a) Whenever the Director of Practice
of the United States, willfully evading, at- tion indicating that material facts ex- determines that a practitioner violated any

2001–11 I.R.B. 857 March 12, 2001


provision of the laws or regulations gov- proceeding under paragraph (b) of §10.60, rized representative in person, by leaving
erning practice before the Internal Rev- an appraiser may offer his or her consent the complaint at the office or place of
enue Service, the Director may reprimand to disqualification. It is within the discre- business of the respondent or the respon-
the practitioner or, in accordance with tion of the Director of Practice to accept dent’s authorized representative, or by
§10.62, institute a proceeding for censure, the offered disqualification in accordance other means agreed to by the respondent,
suspension, or disbarment of the practi- with the consent offered. the sworn or affirmed written statement of
tioner. service by the person making service, set-
(b) Whenever the Director of Practice §10.62 Contents of complaint. ting forth the manner of service, including
is advised or becomes aware that a penal- (a) Charges. A complaint must name the place, recipient, date and time of ser-
ty has been assessed against an appraiser the respondent, give a plain and concise vice, will be proof of service.
under section 6701(a) of the Internal description of the allegations that consti- (b) Service of papers other than com-
Revenue Code, the Director may repri- tute the basis for the proceeding, and be plaint. Any paper other than the com-
mand the appraiser or, in accordance with signed by the Director of Practice. A plaint may be served on the respondent
§10.62, institute a proceeding for disqual- complaint is sufficient if it fairly informs as provided in paragraph (a) of this sec-
ification of the appraiser. the respondent of the charges brought so tion or by mailing the paper by first class
(c) A proceeding for censure, suspen- that he or she is able to prepare a defense. mail to the respondent at his or her last
sion, or disbarment of a practitioner or In the case of a complaint filed against an known address as determined under sec-
disqualification of an appraiser is institut- appraiser, the complaint is sufficient if it tion 6212 of the Internal Revenue Code
ed by the filing of a complaint, the con- refers to a penalty imposed previously on and the regulations thereunder, or by
tents of which are more fully described in the respondent under section 6701(a) of mailing the paper by first class mail to
§10.62. Except as provided in §10.82, a the Internal Revenue Code. the respondent’s authorized representa-
proceeding will not be instituted under (b) Demand for answer. The Director tive. This mailing constitutes complete
this section unless the proposed respon- of Practice must notify the respondent of service.
dent previously has been advised in writ- the place and time for answering the com- (c) Filing of papers. Whenever the fil-
ing of the facts or conduct warranting plaint, the time for which may not be less ing of a paper is required or permitted in
such action and has been accorded an than 15 days from the date of service of connection with a proceeding under this
opportunity to provide an explanation or the complaint, and notice must be given part, and the place of filing is not speci-
description of mitigating circumstances. that a decision by default may be rendered fied by these regulations, rule, or order of
against the respondent in the event an the Administrative Law Judge, the paper
§10.61 Conferences. must be filed with the Director of
answer is not filed as required.
(a) In general. The Director of Practice Practice, Internal Revenue Service, 1111
§10.63 Service of complaint and other Constitution Avenue, NW., Washington,
may confer with a practitioner or an
papers. DC 20224. All papers must be filed in
appraiser concerning allegations of mis-
conduct irrespective of whether a pro- duplicate.
(a) Complaint. The complaint or a
ceeding for censure, suspension, disbar- copy of the complaint must be served on §10.64 Answer.
ment, or disqualification has been the respondent by certified mail or first
instituted against the practitioner or class mail, as provided below; by deliver- (a) Filing. The respondent’s answer
appraiser. If the conference results in a ing it to the respondent or the respon- must be filed in writing within the time
stipulation in connection with a proceed- dent’s authorized representative in person; specified in the complaint unless, on
ing in which the practitioner or appraiser by leaving it at the office or place of busi- application of the respondent, the time is
is the respondent, the stipulation may be ness of the respondent or the respondent’s extended by the Director of Practice or the
entered in the record by either party to the authorized representative; or in any other Administrative Law Judge. The answer is
proceeding. manner that has been agreed to by the to be filed in duplicate with the Director.
(b) Resignation or voluntary suspen- respondent. Where service is by certified (b) Contents. The answer must contain
sion or censure. To avoid the institution mail, the returned post office receipt duly a statement of facts that constitute the
or conclusion of a proceeding under para- signed by or on behalf of the respondent respondent’s grounds of defense. The
graph (a) of §10.60, a practitioner may will be proof of service. If the certified respondent must specifically admit or
offer his or her consent to the issuance of mail is not claimed or accepted by the deny each allegation set forth in the com-
a censure, suspension or disbarment, or respondent and is returned undelivered, plaint, except that the respondent may
may resign, as the case may be, from complete service may be made on the state that the respondent is without suffi-
practice before the Internal Revenue respondent by mailing the complaint to cient information to admit or deny a spe-
Service. It is within the discretion of the the respondent by first class mail, provid- cific allegation. The respondent, never-
Director of Practice to accept the offered ed the complaint is addressed to the theless, may not deny a material
censure, suspension, disbarment, or resig- respondent at the respondent’s last known allegation in the complaint which the
nation, in accordance with the consent address as determined under section 6212 respondent knows to be true, or state that
offered. of the Internal Revenue Code and the reg- the respondent is without sufficient infor-
(c) Voluntary disqualification. To ulations thereunder. If service is made on mation to form a belief, when the respon-
avoid the institution or conclusion of a the respondent or the respondent’s autho- dent possesses the required information.

March 12, 2001 858 2001–11 I.R.B.


The respondent also must state affirma- §10.67 Proof; variance; amendment of (5) Rule on offers of proof, receive rel-
tively any special matters of defense on pleadings. evant evidence, and examine witnesses;
which he or she relies. (6) Take or authorize the taking of de-
(c) Failure to deny or answer allega- In the case of a variance between the positions;
tions in the complaint. Every allegation allegations in pleadings and the evidence (7) Receive and consider oral or written
in the complaint that is not denied in the adduced in support of the pleadings, the argument on facts or law;
answer is deemed admitted and may be Administrative Law Judge may order or (8) Hold or provide for the holding of
considered proved; no further evidence in authorize amendment of the pleadings to conferences for the settlement or simplifi-
respect of such allegation need be ad- conform to the evidence. The party who cation of the issues with the consent of the
duced at a hearing. Failure to file an an- would otherwise be prejudiced by the parties;
swer within the time prescribed (or within amendment must be given a reasonable (9) Perform such acts and take such
the time for answer as extended by the Di- opportunity to address the allegations of measures as are necessary or appropriate
rector of Practice or the Administrative the pleadings as amended and the Admin- to the efficient conduct of any proceed-
Law Judge), constitutes an admission of istrative Law Judge must make findings ing; and
the allegations of the complaint and a on any issue presented by the pleadings as (10) Make decisions.
waiver of hearing, and the Administrative amended.
Law Judge may make the decision by de- §10.71 Hearings.
§10.68 Motions and requests.
fault without a hearing or further proce- (a) In general. An Administrative Law
dure. Unless the Administrative Law Judge Judge will preside at the hearing on a
(d) Signature. The answer must be directs otherwise, motions and requests complaint filed under paragraph (c) of
signed by the respondent or the respon- may be filed with the Director of Practice §10.60 for the censure, suspension, or dis-
dent’s authorized representative and must or with the Administrative Law Judge. barment of a practitioner or disqualifica-
include a statement directly above the sig- tion of an appraiser. Hearings will be
nature acknowledging that the statements §10.69 Representation.
stenographically recorded and transcribed
made in the answer are true and correct A respondent or proposed respondent and the testimony of witnesses will be
and that knowing and willful false state- may appear in person or he or she may be taken under oath or affirmation. Hearings
ments may be punishable under 18 U.S.C. represented by a practitioner. The Direc- will be conducted pursuant to 5 U.S.C.
1001. tor of Practice may be represented by an 556. A hearing in a proceeding requested
§10.65 Supplemental charges. attorney or other employee of the Internal under paragraph (g) of §10.82 will be
Revenue Service. conducted de novo.
If it appears that the respondent, in his (b) Failure to appear. If either party to
or her answer, falsely and in bad faith, de- §10.70 Administrative Law Judge. the proceeding fails to appear at the hear-
nies a material allegation of fact in the (a) Appointment. Proceedings on com- ing, after notice of the proceeding has
complaint or states that the respondent plaints for the censure, suspension or dis- been sent to him or her, the party will be
has insufficient knowledge to form a be- barment of a practitioner or the disqualifi- deemed to have waived the right to a
lief, when the respondent in fact pos- cation of an appraiser will be conducted hearing and the Administrative Law
sesses such information, or if it appears by an Administrative Law Judge ap- Judge may make his or her decision
that the respondent has knowingly intro- pointed as provided by 5 U.S.C. 3105. against the absent party by default.
duced false testimony during proceedings (b) Powers of the Administrative Law
for his or her censure, suspension, disbar- §10.72 Evidence.
Judge. The Administrative Law Judge,
ment, or disqualification, the Director of among other powers, has the authority, in (a) In general. The rules of evidence
Practice may file supplemental charges connection with any proceeding under prevailing in courts of law and equity are
against the respondent. The supplemental §10.60 assigned or referred to him or her, not controlling in hearings on complaints
charges may be tried with other charges in to do the following— filed under paragraph (c) of §10.60.
the case, provided the respondent is given (1) Administer oaths and affirmations; However, the Administrative Law Judge
due notice of the charges and is afforded (2) Make rulings on motions and re- may exclude evidence that is irrelevant,
an opportunity to prepare a defense to quests, which rulings may not be ap- immaterial, or unduly repetitious.
such charges. pealed prior to the close of a hearing ex- (b) Depositions. The deposition of any
§10.66 Reply to answer. cept in extraordinary circumstances and at witness taken pursuant to §10.73 may be
the discretion of the Administrative Law admitted into evidence in any proceeding
The Director of Practice may file a Judge; instituted under §10.60.
reply to the respondent’s answer, but un- (3) Determine the time and place of (c) Proof of documents. Official docu-
less otherwise ordered by the Administra- hearing and regulate its course and con- ments, records, and papers of the Internal
tive law Judge, no reply to the respon- duct; Revenue Service and the Office of Direc-
dent’s answer is required. If a reply is not (4) Adopt rules of procedure and mod- tor of Practice are admissible in evidence
filed, new matter in the answer is deemed ify the same from time to time as needed without the production of an officer or
denied. for the orderly disposition of proceedings; employee to authenticate them. Any such

2001–11 I.R.B. 859 March 12, 2001


documents, records, and papers may be ponent. Expenses in the reporting of de- ther proceedings become the decision of
evidenced by a copy attested or identified positions will be borne by the party that the Secretary of the Treasury 30 days
by an officer or employee of the Service requested the deposition. after the date of the Administrative Law
or the Treasury Department, as the case Judge’s decision.
may be. §10.74 Transcript.
(d) Exhibits. If any document, record, §10.77 Appeal to the Secretary.
In cases where the hearing is steno-
or other paper is introduced in evidence as
graphically reported by a Government Within 30 days from the date of the Ad-
an exhibit, the Administrative Law Judge
contract reporter, copies of the transcript ministrative Law Judge’s decision, either
may authorize the withdrawal of the
may be obtained from the reporter at rates party may appeal to the Secretary of the
exhibit subject to any conditions that he or
not to exceed the maximum rates fixed by Treasury, or his or her designate. The re-
she deems proper.
contract between the Government and the spondent must file his or her appeal with
(e) Objections. Objections to evidence
reporter. Where the hearing is steno- the Director of Practice in duplicate and
are to be made in short form, stating the
graphically reported by a regular em- notice of appeal must include exceptions
grounds for the objection. Except as or-
ployee of the Internal Revenue Service, a to the decision of the Administrative Law
dered by the Administrative Law Judge,
copy will be supplied to the respondent Judge and supporting reasons for such ex-
argument on objections will not be
either without charge or upon the pay- ceptions. If the Director files an appeal,
recorded or transcribed. Rulings on ob-
ment of a reasonable fee. Copies of ex- he or she must transmit a copy to the re-
jections are to be a part of the record, but
hibits introduced at the hearing or at the spondent. Within 30 days after receipt of
no exception to a ruling is necessary to
taking or depositions will be supplied to an appeal or copy thereof, the other party
preserve the rights of the parties.
the parties upon the payment of a reason- may file a reply brief in duplicate with the
§10.73 Depositions. able fee (Sec. 501, Public Law Director. If the reply brief is filed by the
82–137)(65 Stat. 290)(31 U.S.C. 483a). Director, he or she must transmit a copy
(a) Depositions for use at a hearing of it to the respondent. The Director must
may be taken, with the written approval §10.75 Proposed findings and conclu- transmit the entire record to the Secretary
of the Administrative Law Judge, by ei- sions. of the Treasury, or his or her designate,
ther the Director of Practice or the respon- after the appeal and any reply brief has
Except in cases where the respondent
dent or their duly authorized representa- been filed.
has failed to answer the complaint or
tives. Depositions may be taken before
where a party has failed to appear at the §10.78 Decision of the Secretary.
any officer duly authorized to administer
hearing, the parties must be afforded a
an oath for general purposes or before an
reasonable opportunity to submit pro- On appeal from or review of the deci-
officer or employee of the Internal Rev-
posed findings and conclusions and their sion of the Administrative Law Judge, the
enue Service who is authorized to admin-
supporting reasons to the Administrative Secretary of the Treasury, or his or her
ister an oath in internal revenue matters.
Law Judge. designate, will make the agency decision.
(b) The party taking the deposition
A copy of the agency’s decision will be
must provide the deponent and the other §10.76 Decision of the Administrative transmitted to the respondent by the Di-
party with 10 days written notice of the Law Judge. rector of Practice.
deposition, unless the deponent and the
parties agree otherwise. The notice must As soon as practicable after the con- §10.79 Effect of disbarment, suspension,
specify the name of the deponent, the clusion of a hearing and the receipt of or censure.
time and place where the deposition is to any proposed findings and conclusions
be taken, and whether the deposition will timely submitted by the parties, the Ad- (a) Disbarment. Where the final order
be taken by oral or written interrogatories. ministrative Law Judge will make the in a case is against the respondent and is
When a deposition is taken by written in- decision in the case. The decision must for disbarment, the respondent will not be
terrogatories, any cross-examination also include a statement of findings and con- permitted to practice before the Internal
will be by written interrogatories. Copies clusions, as well as the reasons or basis Revenue Service unless and until autho-
of the written interrogatories must be for making such findings and conclu- rized to do so by the Director of Practice
served on the other party with the notice sions, and an order of censure, suspen- pursuant to §10.81.
of deposition, and copies of any written sion, disbarment, disqualification, or dis- (b) Suspension. Where the final order
cross-interrogation must be mailed or de- missal of the complaint. The in a case is against the respondent and is
livered to the opposing party at least 5 Administrative Law Judge will file the for suspension, the respondent will not be
days before the date that the deposition decision with the Director of Practice, permitted to practice before the Internal
will be taken, unless the parties mutually who will transmit a copy of the decision Revenue Service during the period of sus-
agree otherwise. A party on whose behalf to the respondent or the respondent’s au- pension.
a deposition is taken must file the re- thorized representative. In the absence (c) Censure. Where the final order in
sponses to the written interrogatories or a of an appeal to the Secretary of the Trea- the case is against the respondent and is
transcript of the oral deposition with the sury, or review of the decision on motion for censure, the respondent may be per-
Administrative Law Judge and serve of the Secretary, the decision of the Ad- mitted to practice before the Internal Rev-
copies on the opposing party and the de- ministrative Law Judge will without fur- enue Service, but the respondent’s future

March 12, 2001 860 2001–11 I.R.B.


representations may be subject to condi- (b) To whom applicable. This section in the answer or the answer is not timely
tions prescribed by the Director of Prac- applies to any practitioner who, within 5 filed, the respondent will be deemed to
tice designed to promote high standards years of the date a complaint instituting have waived his or her right to a confer-
of conduct. For example, where a practi- a proceeding under this section is ence and the Director may suspend such
tioner is censured because he or she failed served— respondent at any time following the date
to advise his or her clients about a poten- (1) Has had his or her license to prac- on which the answer was due.
tial conflict of interest and obtain the tice as an attorney, certified public ac- (e) Conference. The Director of Prac-
clients’ written consents, the Director of countant, or actuary suspended or re- tice or his or her designee will preside at a
Practice may require the practitioner to voked for cause (not including a failure to conference described in this section. The
provide the Director or another Internal pay a professional licensing fee) by any conference will be held at a place and
Revenue Service official with a copy of authority or court, agency, body, or board time selected by the Director, but no
all future consents obtained by the practi- described in §10.51(i); or sooner than 14 calendar days after the
tioner, whether or not such consents are (2) Has been convicted of any crime date by which the answer must be filed
specifically requested. under title 26 of the United States Code, with the Director, unless the respondent
any crime involving dishonesty or breach agrees to an earlier date. An authorized
§10.80 Notice of disbarment, suspension, of trust, or any felony for which the con- representative may represent the respon-
censure, or disqualification. duct involved renders the practitioner dent at the conference. Following the
On the issuance of a final order censur- unfit to practice before the Internal Rev- conference, upon a finding that the re-
ing, suspending, or disbarring a practi- enue Service. spondent is described in paragraph (b) of
tioner or a final order disqualifying an ap- (c) Instituting a proceeding. A pro- this section, or upon the respondent’s fail-
praiser, the Director of Practice may give ceeding under this section will be insti- ure to appear at the conference either per-
notice of the censure, suspension, disbar- tuted by a complaint that names the re- sonally or through an authorized repre-
ment, or disqualification to appropriate spondent, is signed by the Director of sentative, the Director may immediately
officers and employees of the Internal Practice, is filed in the Director’s office, suspend the respondent from practice be-
Revenue Service and to interested depart- and is served according to the rules set fore the Internal Revenue Service.
ments and agencies of the Federal govern- forth in paragraph (a) of §10.63. The (f) Duration of suspension. A suspen-
ment. The Director may determine the complaint must give a plain and concise sion under this section will commence on
manner of giving notice to the proper au- description of the allegations that consti- the date that written notice of the suspen-
thorities of the State by which the cen- tute the basis for the proceeding. The sion is issued. A practitioner’s suspension
sured, suspended, or disbarred person was complaint must notify the respondent— will remain effective until the earlier of
licensed to practice. (1) Of the place and due date for filing the following—
an answer; (1) The Director of Practice lifts the
§10.81 Petition for reinstatement. (2) That a decision by default may be suspension after determining that the
rendered if the respondent fails to file an practitioner is no longer described in
The Director of Practice may entertain answer as required; paragraph (b) of this section or for any
a petition for reinstatement from any per- (3) That the respondent may request a other reason; or
son disbarred from practice before the In- conference with the Director of Practice (2) The suspension is lifted by an Ad-
ternal Revenue Service or any disquali- to address the merits of the complaint and ministrative Law Judge or the Secretary
fied appraiser after the expiration of 5 that any such request must be made in the of the Treasury in a proceeding referred to
years following such disbarment or dis- answer; and in paragraph (g) of this section and insti-
qualification. Reinstatement may not be (4) That the respondent may be sus- tuted under §10.60.
granted unless the Director is satisfied pended either immediately following the (g) Proceeding instituted under §10.60.
that the petitioner, thereafter, is not likely expiration of the period by which an an- If the Director of Practice suspends a
to conduct himself contrary to the regula- swer must be filed or, if a conference is practitioner under this section, the practi-
tions in this part, and that granting such requested, immediately following the tioner may ask the Director to issue a
reinstatement would not be contrary to the conference. complaint under §10.60. The request
public interest. (d) Answer. The answer to a complaint must be made in writing within 2 years
§10.82 Expedited suspension upon crimi- described in this section must be filed no from the date on which the practitioner’s
nal conviction or loss of license for later than 30 calendar days following the suspension commences. The Director
cause. date the complaint is served, unless the must issue a complaint requested under
Director of Practice extends the time for this paragraph within 30 calendar days of
(a) When applicable. Whenever the filing. The answer must be filed in accor- receiving the request.
Director of Practice determines that a dance with the rules set forth in §10.64,
practitioner is described in paragraph (b) except as otherwise provided in this sec- Subpart E — General Provisions
of this section, the Director may institute tion. A respondent is entitled to a confer- §10.90 Records.
a proceeding under this section to suspend ence with the Director only if the confer-
the practitioner from practice before the ence is requested in a timely filed answer. (a) Availability. The Director of Prac-
Internal Revenue Service. If a request for a conference is not made tice will make available for public inspec-

2001–11 I.R.B. 861 March 12, 2001


tion at the Office of Director of Practice the Federal Register for January 12, 2001, 66 F.R. tions, Kate Y. Hwa (202), 622-3840 (not a
the roster of all persons enrolled to prac- 3276) toll free number); concerning submissions
tice, the roster of all persons censured, of comments, the hearing, and/or to be
suspended, or disbarred from practice be- placed on the building access list to attend
fore the Internal Revenue Service, and the Notice of Proposed Rulemaking the hearing, Lanita Vandyke, (202) 622-
roster of all disqualified appraisers. Other and Notice of Public Hearing 7180 (not a toll free number).
records of the Director may be disclosed
upon specific request, in accordance with Guidance on Reporting of SUPPLEMENTARY INFORMATION:
the applicable disclosure rules of the In- Deposit Interest Paid to Paperwork Reduction Act
ternal Revenue Service and the Treasury Nonresident Aliens
Department. The collection of information con-
(b) Disciplinary procedures. A request
REG–126100–00 tained in this notice of proposed rulemak-
by a practitioner or appraiser that a hear- AGENCY: Internal Revenue Service ing has been submitted to the Office of
ing in a disciplinary proceeding concern- (IRS), Treasury. Management and Budget for review in ac-
ing him or her be public, and that the cordance with the Paperwork Reduction
record of such disciplinary proceeding be ACTION: Notice of proposed rulemak- Act of 1995 (44 U.S.C. 3507(d)). Com-
made available for inspection by interest- ing and notice of public hearing. ments on the collection of information
ed persons may be granted by the Director should be sent to the Office of Manage-
SUMMARY: This document contains
of Practice where the parties stipulate in ment and Budget, Attn: Desk Officer for
proposed regulations that provide guid-
advance to protect from disclosure confi- the Department of the Treasury, Office of
ance on the reporting requirements for
dential tax information in accordance with Information and Regulatory Affairs,
interest on deposits maintained at the U.S.
all applicable statutes and regulations. Washington, DC 20503, with copies to
office of certain financial institutions and
the Internal Revenue Service, Attn:
paid to nonresident alien individuals.
§10.91 Saving clause. IRS Reports Clearance Officer,
These proposed regulations affect persons
W:CAR:MP:FP:S:O, Washington, DC
Any proceeding instituted under this making payments of interest with respect
20224. Comments on the collections of
part, but not closed prior to the effective to such a deposit. This document also
information should be received by April
date of these revised regulations, will not provides a notice of public hearing on
16, 2001. Comments are specifically re-
be affected by the revisions. Any pro- these proposed regulations.
quested concerning:
ceeding under this part based on conduct DATES: Written or electronic comments Whether the proposed collection of
engaged in prior to the effective date of must be received by February 27, 2001. information is necessary for the proper
these regulations may be instituted subse- Requests to speak (with outlines of oral operation of the functions of the IRS,
quent to the effective date of these revi- comments to be discussed) at the public including whether the information will
sions. Conduct engaged in prior to the hearing scheduled for 10 a.m. on March have practical utility;
effective date of these regulations is sub- 21, 2001, must be received by February The accuracy of the estimated burden
ject to the regulations in effect at the time 27, 2001. associated with the proposed collection of
the conduct occurred.
information (see below);
ADDRESSES: Send submissions to:
§10.92 Special orders. How the quality, utility, and clarity of
CC:M&SP:RU (REG–126100–00), Room
the information to be collected may be
5226, Internal Revenue Service, POB
The Secretary of the Treasury reserves enhanced;
7604, Ben Franklin Station, Washington,
the power to issue such special orders as How the burden of complying with the
DC 20044. Submissions also may be hand
he or she deems proper in any cases with- proposed collection of information may
delivered Monday through Friday between
in the purview of this part. be minimized, including through the
the hours of 8 a.m. and 5 p.m. to:
application of automated collection tech-
§10.93 Effective date. CC:M&SP:RU (REG–126100–00),
niques or other forms of information tech-
Courier’s Desk, Internal Revenue Service
Subject to §10.91, Part 10 is applicable nology; and
1111 Constitution Avenue, NW., Washing-
on the date final regulations are published Estimates of capital or start-up costs
ton, DC. Alternatively, taxpayers may sub-
in the Federal Register. and costs of operation, maintenance, and
mit comments electronically via the Inter-
purchase of service to provide informa-
net by selecting the “Tax Regs” option on
Robert E. Wenzel, tion.
the IRS Home Page, or by submitting com-
Deputy Commisioner The collection of information in these
ments directly to the IRS Internet site at
of Internal Revenue. proposed regulations is in §§1.6049–4(b)
http://www.irs.gov/tax_regs/regslist.html.
(5)(i), 1.6049–6(e)(4)(i), and (ii). This in-
Approved January 3, 2001. The public hearing will be held in Room
formation is required to determine if tax-
4718, Internal Revenue Building, 1111
payers have properly reported amounts
Jonathan Talisman, Constitution Avenue, NW., Washington,
received as income. The collection of in-
Assistant Secretary (Tax Policy). DC.
formation is mandatory. The likely re-
(Filed by the Office of the Federal Register on Janu- FOR FURTHER INFORMATION CON- spondents are businesses and other for-
ary 11, 2001, 8:45 a.m., and published in the issue of TACT: Concerning the proposed regula- profit institutions.
March 12, 2001 862 2001–11 I.R.B.
The estimated average annual burden other agreements that provide for the Section 1.6049–8(a) provides that
per respondent and/or recordkeeper re- exchange of tax information with the interest paid with respect to a deposit
quired by §§1.6049–4(b)(5)(i), 1.6049–6 United States have requested informa- maintained at an office within the United
(e)(4)(i), and (ii) will be reflected in the tion concerning bank deposits of indi- States to individuals who are Canadian
burdens of Forms W-8, 1042, 1042–S, vidual residents of their countries. Be- residents must be reported. The payor or
and the income tax return of a foreign per- cause of the importance that the United middleman may rely on the permanent
son. States attaches to exchanging tax infor- address found on Form W-8 to make the
Further, the estimated average annual mation as a way of encouraging volun- determination of whether the nonresident
burden per respondent and/or record- tary compliance and furthering trans- alien individual resides in Canada.
keeper for the statement required by parency, see e.g. S. Exec. Rep. No. However, the regulation also provides that
§1.6049–6(e)(4)(i) is as follows: 106–8, at 15 (1st Sess. 1999), Treasury a payor or middleman may rely on its
Estimated total annual reporting bur- and the IRS believe it is important for actual knowledge of the individual’s resi-
den: 500 hours. the United States to facilitate, wherever dence address in Canada, even if a valid
Estimated average annual burden per possible, the effective exchange of all Form W-8 has not been provided, to make
respondent: 15 minutes. relevant tax information with our treaty such a determination. This “actual
Estimated number of respondents: partners. knowledge of the individual’s residence
2,000. In addition to extending the informa- address” rule has been eliminated because
Estimated annual frequency of re- tion reporting requirement for interest it creates a result that is contrary to the
sponses: annually. paid on deposits maintained at a bank’s presumption rules contained in
An agency may not conduct or sponsor, office within the United States to all non- §1.1441–1(b)(3)(iii) (and made applicable
and a person is not required to respond to, resident alien individuals, the proposed to reportable payments by §1.6049–
a collection of information unless the col- regulations also make the following 5(d)(2)). Accordingly, §1.6049– 8(a) has
lection of information displays a valid minor changes and clarifications. been clarified to provide that, while
control number assigned by the Office of Section 1.6049–6 provides that a copy amounts described in §1.6049–8(a) gener-
Management and Budget. of Form 1042–S must be furnished to the ally are not subject to backup withholding
Books or records relating to a collec- recipient for interest paid on deposits under section 3406, the payor must report
tion of information must be retained as maintained at a bank’s office within the the payment on a Form 1099 as made to a
long as their contents may become mater- United States. Paragraph (e)(4)(i) of that U.S. non-exempt recipient in accordance
ial in the administration of any internal section has been revised to clarify that the with the presumption rules of §§1.6049–
revenue law. Generally, tax returns and payor or middleman can satisfy this 5(d)(2) and 1.1441–1(b)(3)(iii) if the
tax return information are confidential, as requirement by furnishing a copy of Form payor or middleman does not have either
required by 26 U.S.C. 6103. 1042–S either in person or to the last a valid Form W-8 or valid Form W-9.
known address of the recipient. Further, such payment is subject to back-
Background and Explanation of Provi-
A new paragraph (e)(4)(ii) has been up withholding under section 3406.
sions
added to §1.6049–6 to provide guidance
The IRS previously determined that in- on the manner in which a Form 1042–S Proposed Effective Date
formation concerning interest paid on de- is furnished when there are joint account
These regulations are proposed to apply
posits from U.S. bank accounts to nonres- holders. Specifically, if any joint
to payments made after December 31 of
ident alien individuals who are residents account holder is a U.S. non-exempt
the year in which they are published as
of Canada would be significant in further- recipient, the payor or middleman must
final regulations in the Federal Register.
ing its compliance efforts. Consequently, report the entire payment to that person.
§1.6049–8(a) requires the reporting of If all joint account holders are foreign Special Analyses
such interest on a Form 1042–S. persons, the payor or middleman must
The proposed regulations extend the report the payment to the nonresident It has been determined that this notice
information reporting requirement for alien individual that is a resident of a of proposed rulemaking is not a signifi-
bank deposit interest paid to nonresi- country with which the United States has cant regulatory action as defined in
dent alien individuals who are residents an income tax treaty or a tax information Executive Order 12866. Therefore, a reg-
of other foreign countries. This exten- exchange agreement (TIEA). If more ulatory assessment is not required. It has
sion is appropriate for two reasons. than one of the joint account holders is a also been determined that section 553(b)
First, requiring routine reporting to the foreign person and is a resident of a of the Administrative Procedure Act (5
IRS of all bank deposit interest paid country with which the United States has U.S.C. chapter 5) does not apply to these
within the United States will help to en- an income tax treaty or a TIEA, the regulations, and, because the regulations
sure voluntary compliance by U.S. tax- payor or middleman must report the pay- do not impose a collection of information
payers by minimizing the possibility of ment to the person that is the primary on small entities, the Regulatory
avoidance of the U.S. information re- account holder. The payor or middle- Flexibility Act (5 U.S.C. chapter 6) does
porting system (such as through false man must, however, furnish a Form not apply. Pursuant to section 7805(f) of
claims of foreign status). Second, sev- 1042–S to any account holder who the Code, this notice of proposed rule-
eral countries that have tax treaties or requests it. making will be submitted to the Chief

2001–11 I.R.B. 863 March 12, 2001


Counsel for Advocacy of the Small Department participated in their develop- *****
Business Administration for comment on ment. Par. 3. Section 1.6049–6 is amended as
its impact on small business. follows:
Proposed Amendments to the 1. Paragraph (e)(4) is revised.
Comments and Public Hearing Regulations 2. In paragraph (e)(5), the first sen-
Accordingly, 26 CFR parts 1 and 31 are tence is revised and a new sentence is
Before these proposed regulations are
proposed to be amended as follows: added at the end of the paragraph.
adopted as final regulations, considera-
The addition and revisions read
tion will be given to any written com-
PART 1 — INCOME TAXES as follows:
ments (a signed original and eight (8)
copies) that are submitted timely (in the Paragraph 1. The authority citation for §1.6049–6 Statements to recipients of
manner described in the “ADDRESSES” part 1 continues to read in part as follows: interest payments and holders of
portion of this preamble) to the IRS. Authority: 26 U.S.C. 7805 * * * obligations for attributed original issue
The IRS and Treasury Department Par. 2. In section 1.6049–4, paragraph discount.
request comments on the clarity of the (b)(5) is revised to read as follows:
proposed rules and how they can be *****
made easier to understand. All com- §1.6049–4 Return of information as to (e) * * *
ments will be available for public interest paid and original issue discount (4) Special rule for amounts described
inspection and copying. includible in gross income after in §1.6049–8(a)—(i) In general. In the
A public hearing has been scheduled December 31, 1982. case of amounts described in §1.6049–
for March 31, 2001, beginning at 10 a.m. 8(a) (relating to payments of deposit inter-
***** est to nonresident alien individuals) paid
in Room 4718, Internal Revenue
(b) * * * after December 31 of the year in which
Building, 1111 Constitution Avenue, NW.,
(5) Interest payments to nonresident the final regulations are published in the
Washington, DC. Due to building securi-
alien individuals—(i) General rule. In Federal Register, any person who makes
ty procedures, visitors must enter at the
the case of interest aggregating $10 or a Form 1042–S under section 6049(a) and
10th Street entrance, located between
more paid to a nonresident alien individ- §1.6049–4(b)(5) shall furnish a statement
Constitution and Pennsylvania Avenues,
ual (as defined in section 7701(b)(1)(B)) to the recipient either in person or by first-
NW. In addition, all visitors must present
that is reportable under §1.6049–8(a), the class mail to the recipient’s last known
photo identification to enter the building.
payor shall make an information return on address. The statement shall include a
Because of access restrictions, visitors
Form 1042–S for the calendar year in copy of the Form 1042–S required to be
will not be admitted beyond the immedi-
which the interest is paid. The payor or prepared pursuant to §1.6049–4(b)(5) and
ate entrance area more than 15 minutes
middleman shall prepare and file Form a statement to the effect that the informa-
before the hearing starts. For information
1042–S at the time and in the manner pre- tion on the form is being furnished to the
about having your name placed on the
scribed by section 1461 and the regula- United States Internal Revenue Service
building access list to attend the hearing,
tions under that section and by the form and may be furnished to the government
see the “FOR FURTHER INFORMA-
and its accompanying instructions. See of the foreign country where the recipient
TION CONTACT” portion of this pream-
§§1.1461–1(b) (rules regarding the prepa- resides.
ble.
ration of a Form 1042) and 1.6049– (ii) Joint account holders. In the case
The rules of 26 CFR 601.601(a)(3)
6(e)(4) (rules for furnishing a copy of the of joint account holders, a payor or mid-
apply to the hearing. Persons who wish to
Form 1042–S to the payee). To determine dleman must report the entire amount of
present oral comments must submit writ-
whether an information return is required interest as paid to any joint account hold-
ten comments and an outline of the topics
for original issue discount, see §§1.6049– er that provides a valid Form W-9, or, if
to be discussed and the time to be devoted
5(f) and 1.6049–8(a). any account holder has not furnished a
to each topic (a signed original and eight
(ii) Effective date. Paragraph (b)(5)(i) Form W-8 or Form W-9, any account
(8) copies) by February 27, 2001. A peri-
of this section shall be effective for pay- holder that is presumed to be a U.S. non-
od of 10 minutes will be allotted to each
ments made after December 31 of the year exempt recipient under §§1.6049–5(d)(2)
person for making comments. An agenda
in which the final regulations are pub- and1.1441–1(b)(3)(iii). If all of the joint
showing the scheduling of the speakers
lished in the Federal Register with account holders are foreign persons, then
will be prepared after the deadline for
respect to a Form W-8 (Certificate of the payor or middleman must report the
reviewing outlines has passed. Copies of
Foreign Status) furnished to the payor or payment to the nonresident alien individ-
the agenda will be available free of charge
middleman after that date. (For interest ual that is a resident of a country with
at the hearing.
paid to a Canadian nonresident alien indi- which the United States has an income tax
Drafting Information vidual on or before December 31 of the treaty or a tax information exchange
year in which final regulations are pub- agreement. If more than one of the joint
The principal author of the regulations lished in the Federal Register, see account holders is a foreign person and is
is Kate Y. Hwa, Office of Associate Chief §1.6049–4(b)(5) as in effect and con- a resident of a country with which the
Counsel (International). However, other tained in 26 CFR part 1 revised April 1, United States has an income tax treaty or
personnel from the IRS and Treasury 2000.) a tax information exchange agreement,

March 12, 2001 864 2001–11 I.R.B.


then the payor or middleman may report §1.1441–1(b)(3)(iii) and must also ACTION: Notice of proposed rulemaking
the interest as paid to any such account backup withhold under section 3406. and notice of public hearing.
holder that is treated as the primary (For interest paid to a Canadian nonresi-
SUMMARY: This document contains
account holder under §31.3406(h)–2(a). dent alien individual on or before De-
proposed regulations relating to required
If, however, any account holder requests cember 31 of the year in which final reg-
minimum distributions from qualified
its own Form 1042–S, the payor or mid- ulations are published in the Federal
plans, individual retirement plans,
dleman must furnish a Form 1042–S to Register, see §1.6049–8(a) as in effect
deferred compensation plans under sec-
the account holder who requests it. and contained in 26 CFR part 1 revised
tion 457, and section 403(b) annuity con-
(5) Effective date. This paragraph April 1, 2000.)
tracts, custodial accounts, and retirement
(e)(4) is effective for payee statements *****
income accounts. These regulations will
due after December 31 of the year in
PART 31 — EMPLOYMENT TAXES provide the public with guidance neces-
which the final regulations are pub-
AND COLLECTION OF INCOME TAX sary to comply with the law and will
lished in the Federal Register, without
AT SOURCE affect administrators of, participants in,
regard to extensions. * * * (For interest
and beneficiaries of qualified plans; insti-
paid to a Canadian nonresident alien in-
Par. 5. The authority citation for part tutions that sponsor and individuals who
dividual on or before December 31 of administer individual retirement plans,
31 continues to read in part as follows:
the year in which final regulations are individuals who use individual retirement
Authority: 26 U.S.C. 7805 * * *
published in the Federal Register, see plans for retirement income, and benefi-
Par. 6. In section 31.3406(g)–1, para-
§1.6049– 6(e)(4) as in effect and con- ciaries of individual retirement plans; and
graph (d) is revised to read as follows:
tained in 26 CFR part 1 revised April 1, employees for whom amounts are con-
2000.) §31.3406(g)–1 Exceptions for payments tributed to section 403(b) annuity con-
***** to certain payees and certain other tracts, custodial accounts, or retirement
Par. 4. In section 1.6049–8, the section payment. income accounts and beneficiaries of such
heading and paragraph (a) are revised to contracts and accounts.
read as follows: *****
(d) Reportable payments made to non- DATES: Written and electronic com-
§1.6049–8 Interest and original issue resident alien individuals. A payment of ments must be received by April 19, 2001.
discount paid to nonresident alien interest that is reported on Form 1042–S Outlines of topics to be discussed at the
individuals. as paid to a nonresident alien individual public hearing scheduled for June 1, 2001,
under §1.6049–8(a) of this chapter is not at 10 a.m. must be received by May 11,
(a) Interest subject to reporting re-
subject to withholding under section 2001.
quirement. For purposes of §§1.6049–4,
1.6049–6, and this section and except as 3406. (For interest paid to a Canadian ADDRESSES: Send submissions to:
provided in paragraph (b) of this section, nonresident alien individual on or before CC:M&SP:RU (REG–130477–00/REG–
the term interest means interest paid to a December 31 of the year in which final 130481–00) room 5226, Internal Revenue
nonresident alien individual after De- regulations are published in the Federal Service, POB 7604, Ben Franklin Station,
cember 31 of the year in which the final Register, see §31.3406(g)–1(d) as in Washington, DC 20044. Submissions may
regulations are published in the Federal effect and contained in 26 CFR part 1 be hand delivered Monday through Friday
Register, where the interest is described revised April 1, 2000.) between the hours of 8 a.m. and 5 p.m. to:
in section 871(i)(2)(A) with respect to a CC:M&SP:RU (REG–130477–00/
Robert E. Wenzel,
deposit maintained at an office within REG–130481–00), Courier’s Desk, Internal
Deputy Commissioner
the United States. For purposes of the Revenue Service, 1111 Constitution Avenue
of Internal Revenue.
regulations under section 6049, a nonres- NW, Washington, DC. Alternatively, tax-
ident alien individual is a person de- (Filed by the Office of the Federal Register on Janu- payers may submit comments electronically
scribed in section 7701(b) (1)(B). The ary 16, 2001, 8:45 a.m., and published in the issue of via the Internet by selecting the “Tax Regs”
payor or middleman may rely upon a the Federal Register for January 17, 2001, 66 F.R. option of the IRS Home Page, or by submit-
3925)
valid Form W-8 to determine whether ting comments directly to the IRS Internet
the payment is made to a nonresident site at: http://www.irs.gov/tax_regs/
alien individual. Generally, amounts de- reglist.html. The public hearing on June 1,
scribed in this paragraph (a) are not sub- Notice of Proposed Rulemaking 2001, will be held in the IRS Auditorium
ject to backup withholding under section and Notice of Public Hearing (7th Floor), Internal Revenue Building, 1111
3406. See §31.3406(g)–1(d) of this Constitution Avenue NW, Washington,
chapter. However, if the payor or mid-
Required Distributions From DC.
dleman does not have either a valid Form Retirement Plans
FOR FURTHER INFORMATION CON-
W-8 or valid Form W-9, the payor or REG–130477–00; TACT: Concerning the regulations, Cathy
middleman must report the payment as
REG–130481–00 A. Vohs, 202-622-6090; concerning sub-
made to a U.S. non-exempt recipient if it
missions and the hearing, and/or to be
must so treat the payee under the pre- AGENCY: Internal Revenue Service placed on the building access list to attend
sumption rules of §1.6049–5(d)(2) and (IRS), Treasury.

2001–11 I.R.B. 865 March 12, 2001


the hearing, Guy Traynor, 202-622-7180 of 1984) (98 Stat. 865 and 955), and sec- individual designated as a beneficiary by
(not toll-free numbers). tions 242 and 243 of the Tax Equity and the employee.
Fiscal Responsibility Act of 1982 Section 401(a)(9)(G) provides that any
Paperwork Reduction Act (TEFRA) (96 Stat. 521). The regulations distribution required to satisfy the inci-
provide guidance on the required mini- dental death benefit requirement of sec-
The collections of information con-
mum distribution requirements under sec- tion 401(a) is a required minimum distrib-
tained in these proposed regulations have
tion 401(a)(9) for plans qualified under ution.
been reviewed and approved by the Office
section 401(a). The rules are incorporated Section 401(a)(9)(B)(i) provides that, if
of Management and Budget in accordance
by reference in section 408(a)(6) and the employee dies after distributions have
with the Paperwork Reduction Act (44
(b)(3) for individual retirement accounts begun, the employee’s interest must be
U.S.C. 3507) under control number
and annuities (IRAs), section 408A(c)(5) distributed at least as rapidly as under the
1545–0996, in conjunction with the notice
for Roth IRAs, section 403(b)(10) for sec- method used by the employee.
of proposed rulemaking published on July
tion 403(b) annuity contracts, and section Section 401(a)(9)(B)(ii) and (iii) pro-
27, 1987, 52 F.R. 28070, REG–EE–
457(d) for eligible deferred compensation vides that, if the employee dies before
113–82, Required Distributions From
plans. required minimum distributions have
Qualified Plans and Individual Retirement
For purposes of this discussion of the begun, the employee’s interest must be
Plans, and control number 1545–1573, in
background of the regulations in this pre- either: distributed (in accordance with
conjunction with the notice of proposed
amble, as well as the explanation of pro- regulations) over the life or life expectan-
rulemaking published on December 30,
visions below, whenever the term employ- cy of the designated beneficiary with the
1997, 62 F.R. 67780, REG–209463–82
ee is used, it is intended to include not distributions beginning no later than 1
(1998–1 C.B. 376), Required Distribu-
only an employee but also an IRA owner. year after the date of the employee’s
tions from Qualified Plans and Individual
Section 401(a)(9) provides rules for death, or distributed within 5 years after
Retirement Plans.
distributions during the life of the the death of the employee. However,
An agency may not conduct or spon-
employee in section 401(a)(9)(A) and under section 401(a)(9)(B)(iv), a surviv-
sor, and a person is not required to
rules for distributions after the death of ing spouse may wait until the date the
respond to, a collection of information
the employee in section 401(a)(9)(B). employee would have attained age 70 1/2
unless it displays a valid control number
Section 401(a)(9)(A)(ii) provides that the to begin taking required minimum distrib-
assigned by the Office of Management
entire interest of an employee in a quali- utions.
and Budget.
fied plan must be distributed, beginning Comprehensive proposed regulations
Books and records relating to the col-
not later than the employee’s required under section 401(a)(9) were previously
lection of information must be retained
beginning date, in accordance with regu- published in the Federal Register on July
as long as their contents may become
lations, over the life of the employee or 27, 1987, 52 F.R. 28070. Many of the
material in the administration of any
over the lives of the employee and a des- comments on the 1987 proposed regula-
internal revenue law. Generally, tax
ignated beneficiary (or over a period not tions expressed concerns that the required
returns and tax return information are
extending beyond the life expectancy of minimum distribution must be satisfied
confidential, as required by 26 U.S.C.
the employee and a designated beneficia- separately for each IRA owned by an indi-
6103.
ry). vidual by taking distributions from each
Background Section 401(a)(9)(C) defines required IRA. In response, Notice 88–38 (1988–1
beginning date for employees (other than C.B. 524) provided that the amount of the
This document contains proposed 5-percent owners and IRA owners) as required minimum distribution must be
amendments to the Income Tax Regula- April 1 of the calendar year following the calculated for each IRA, but permitted
tions (26 CFR Part 1) and to the Pension later of the calendar year in which the that amount to be taken from any IRA.
Excise Tax Regulations (26 CFR Part 54) employee attains age 70 1/2 or the calen- Amendments to the 1987 proposed regu-
under sections 401, 403, 408, and 4974 of dar year in which the employee retires. lations published in the Federal Register
the Internal Revenue Code of 1986. It is For 5-percent owners and IRA owners, the on December 30, 1997, 62 F.R. 67780, re-
contemplated that proposed rules similar required beginning date is April 1 of the sponded to comments on the use of trusts
to those in these proposed regulations calendar year following the calendar year as beneficiaries. Notice 96–67 (1996–2
applicable to section 401 will be pub- in which the employee attains age 70 1/2, C.B. 235) and Notice 97–75 (1997–2 C.B.
lished in the near future for purposes of even if the employee has not retired. 337) provided guidance on the changes
applying the distribution requirements of Section 401(a)(9)(D) provides that made to section 401(a)(9) by the SBJPA.
section 457(d). These amendments are (except in the case of a life annuity) the The guidance in Notice 88–38, Notice
proposed to conform the regulations to life expectancy of an employee and the 96–67, and Notice 97–75 is incorporated
section 1404 of the Small Business Job employee’s spouse that is used to deter- in these proposed regulations with some
Protection Act of 1996 (SBJPA) (110 Stat. mine the period over which payments modifications.
1791), sections 1121 and 1852 of the Tax must be made may be redetermined, but Even though the distribution require-
Reform Act of 1986 (TRA of 1986) (100 not more frequently than annually. ments added by TEFRA were retroactive-
Stat. 2464 and 2864), sections 521 and Section 401(a)(9)(E) provides that the ly repealed by TRA of 1984, the transition
713 of the Tax Reform Act of 1984 (TRA term designated beneficiary means any election rule in section 242(b) of TEFRA

March 12, 2001 866 2001–11 I.R.B.


was preserved. Notice 83–23 (1983–2 proposed regulations would make major Under these proposed regulations and
C.B. 418) continues to provide guidance simplifications to the rules, including the the 1987 proposed regulations, for distrib-
for distributions permitted by this transi- calculation of the required minimum dis- utions from an individual account, the
tion election rule. These proposed regula- tribution during the individual’s lifetime required minimum distribution is deter-
tions retain the additional guidance on the and the determination of a designated mined by dividing the account balance by
transition rule provided in the 1987 pro- beneficiary for distributions after death. the distribution period. For lifetime
posed regulations. The new proposed regulations simplify required minimum distributions, these
As discussed below, in response to the rules by proposed regulations provide a uniform
extensive comments, the rules for calcu- • Providing a simple, uniform table that distribution period for all employees of
lating required minimum distributions all employees can use to determine the the same age. The uniform distribution
from individual accounts under the 1987 minimum distribution required during period table is the required minimum dis-
proposed regulations have been substan- their lifetime. This makes it far easier tribution incidental benefit (MDIB) divi-
tially simplified. Certain other 1987 rules to calculate the required minimum dis- sor table originally prescribed in
have also been simplified and modified, tribution because employees would §1.401(a)(9)–2 of the 1987 proposed reg-
although many of the 1987 rules remain • no longer need to determine their ulations and now included in A–4 of
unchanged. In particular, due to the rela- beneficiary by their required be- §1.401(a)(9)–5 of the new proposed regu-
tively small number of comments on prac- ginning date, lations. An exception applies if the
tices with respect to annuity contracts, and • no longer need to decide whether employee’s sole beneficiary is the
the effect of the 1987 proposed regula- or not to recalculate their life ex- employee’s spouse and the spouse is more
tions on these practices, the basic struc- pectancy each year in determining than 10 years younger than the employee.
ture of the 1987 proposed regulation pro- required minimum distributions, In that case, the employee is permitted to
visions with respect to annuity payments and use the longer distribution period mea-
is retained in these proposed regulations. • no longer need to satisfy a sepa- sured by the joint life and last survivor life
The IRS and Treasury are continuing to rate incidental death benefit rule. expectancy of the employee and spouse.
study these rules and specifically request • Permitting the required minimum distri- These changes provide a simple admin-
updated comments on current practices bution during the employee’s lifetime to istrable rule for plans and individuals.
and issues relating to required minimum be calculated without regard to the ben- Using the MDIB table, most employees
distributions from annuity contracts. eficiary’s age (except when required will be able to determine their required
distributions can be reduced by taking minimum distribution for each year based
Explanation of Provisions on nothing more than their current age
into account the age of a beneficiary
Overview who is a spouse more than 10 years and their account balance as of the end of
younger than the employee). the prior year (which IRA trustees report
Many of the comments on the 1987 • Permitting the beneficiary to be deter- annually to IRA owners). Under the 1987
proposed regulations addressed the rules mined as late as the end of the year fol- proposed regulations, some employees
for required minimum distributions dur- lowing the year of the employee’s already use the MDIB table to determine
ing an employee’s life, including calcula- death. This allows required minimum distributions. Under
tion of life expectancy and determination • the employee to change desig- the new proposed regulations, they would
of designated beneficiary. In particular, nated beneficiaries after the re- continue to do so. For the majority of
comments raised concerns about the de- quired beginning date without in- other employees, required minimum dis-
fault provisions, election requirements, creasing the required minimum tributions would be reduced as a result of
and plan language requirements. In gen- distribution and the changes.
eral, the need to make decisions at age 70 • the beneficiary to be changed For years after the year of the employ-
1/2, which under the 1987 proposed regu- after the employee’s death, such ee’s death, the distribution period is gen-
lations would bind the employee in future as by one or more beneficiaries erally the remaining life expectancy of the
years during which financial circum- disclaiming or being cashed out. designated beneficiary. The beneficiary’s
stances could change significantly, was • Permitting the calculation of post-death remaining life expectancy is calculated
perceived as unreasonably restrictive. In minimum distributions to take into using the age of the beneficiary in the year
addition, the determination of life ex- account an employee’s remaining life following the year of the employee’s
pectancy and designated beneficiary and expectancy at the time of death, thus death, reduced by one for each subsequent
the resulting required minimum distribu- allowing distributions in all cases to be year. If the employee’s spouse is the
tion calculation for individual accounts spread over a number of years after employee’s sole beneficiary at the end of
were viewed as too complex. death. the year following the year of death, the
To respond to these concerns, these These simplifications would also have distribution period during the spouse’s life
proposed regulations would make it much the effect of reducing the required mini- is the spouse’s single life expectancy. For
easier for individuals — both plan partic- mum distributions for the vast majority of years after the year of the spouse’s death,
ipants and IRA owners — and plan employees. the distribution period is the spouse’s life
administrators to understand and apply expectancy calculated in the year of death,
the minimum distribution rules. The new The uniform distribution period reduced by one for each subsequent year.

2001–11 I.R.B. 867 March 12, 2001


If there is no designated beneficiary as of life expectancy tables, those tables may the benefit or through disclaimer (or oth-
the end of the year after the employee’s already overstate the average life ex- erwise) during the period between the
death, the distribution period is the pectancy of the class of individuals who employee’s death and the end of the year
employee’s life expectancy calculated in are subject to these required minimum following the year of death is disregarded
the year of death, reduced by one for each distribution rules (qualified plan partici- in determining the employee’s designated
subsequent year. pants, IRA owners, et al.). That is be- beneficiary for purposes of calculating
The MDIB table is based on the joint cause those existing section 72 tables required minimum distributions. If, as of
life expectancies of an individual and a were derived from the particular mortality the end of the year following the year of
survivor 10 years younger at each age experience of the select population of in- the employee’s death, the employee has
beginning at age 70. Allowing the use of dividuals who purchase individual annu- more than one designated beneficiary and
this table reflects the fact that an employ- ities, as opposed to the population who the account or benefit has not been divid-
ee’s beneficiary is subject to change until are subject to the required minimum dis- ed into separate accounts or shares for
the death of the employee and ultimately tribution rules. In any event, as noted ear- each beneficiary, the beneficiary with the
may be a beneficiary more than 10 years lier, the new proposed uniform distribu- shortest life expectancy is the designated
younger than the employee. The pro- tion period—equal to the joint life beneficiary, consistent with the approach
posed regulations would allow lifetime expectancy of an individual and a sur- in the 1987 proposed regulations.
distributions at a rate consistent with this vivor 10 years younger at each age— This approach for determining the des-
possibility. Consistent with the require- would lengthen the lifetime distribution ignated beneficiary following the death of
ments of section 401(a)(9)(A)(ii), the dis- period for most employees and beneficia- an employee after the employee’s re-
tribution period after death is measured by ries. In fact, the new proposed regula- quired beginning date is simpler in sev-
the life expectancy of the employee’s des- tions would lengthen that period more for eral respects than the approach in the
ignated beneficiary in the year following many individuals than would an update to 1987 proposed regulations and responds
death, or the employee’s remaining life reflect recent increases in longevity. The to concerns raised with respect to the ef-
expectancy if there is no designated bene- IRS and Treasury believe that this length- fects of beneficiary designation at the re-
ficiary. This ensures that the employee’s ening of the distribution period for most quired beginning date. Under this ap-
entire benefit is distributed over a period employees provides further justification proach, the determination of the
described in section 401(a)(9)(A)(ii), i.e., for retaining the existing life expectancy designated beneficiary and the calculation
the life expectancy of the employee or the tables at this time. of the beneficiary’s life expectancy gener-
joint life expectancy of the employee and Some commentators suggested that the ally are contemporaneous with com-
a designated beneficiary. calculation of required minimum distribu- mencement of required distributions to
The approach in these proposed regula- tions include credit for any distribution in a the beneficiary. Any prior beneficiary
tions allowing the use of a uniform life- prior year that exceeded that year’s re- designation is irrelevant for distributions
time distribution period addresses con- quired minimum distribution. However, from individual accounts, unless the em-
cerns raised in comments on the 1987 such a “credit” carryforward would require ployee takes advantage of a lifetime dis-
proposed regulations that the rules are too significant additional data retention and tribution period measured by the joint life
complex. It eliminates the use of two would add substantial complexity to the expectancy of the employee and a spouse
tables and the interaction of the multiple calculation of required minimum distribu- more than 10 years younger than the em-
beneficiary and change in beneficiary tions. By using the prior year’s ending ac- ployee. Further, for an employee with a
rules. Finally, it generally eliminates the count balance for calculating required min- designated beneficiary, this approach pro-
need to fix the amount of the distribution imum distributions, distribution of vides the same rules for distributions after
during the employee’s lifetime based on amounts in excess of the required mini- the employee’s death, regardless of
the beneficiary designated on the required mum distribution has the effect of reducing whether death occurs before or after an
beginning date and eliminates the need to future required minimum distributions employee’s required beginning date. Fi-
elect recalculation or no recalculation of over the remaining distribution period to nally, in the case of an employee who
life expectancies at the required beginning some extent. Accordingly, these proposed elects or defaults into recalculation of life
date. regulations do not provide for a credit car- expectancy and who dies without a desig-
Suggestions have been received that ryforward. nated beneficiary, the requirement that the
the life expectancy table used to calculate employee’s entire remaining account bal-
Determination of the designated ance be distributed in the year after an
required minimum distributions should be
beneficiary employee’s death has been eliminated and
revised to reflect recent increases in
longevity. These proposed regulations in- These proposed regulations provide replaced with a distribution period equal
stead provide authority for the Commis- that, generally, the designated beneficiary to the employee’s remaining life ex-
sioner to issue guidance of general applic- is determined as of the end of the year fol- pectancy recalculated immediately before
ability revising the life expectancy tables lowing the year of the employee’s death death.
and the uniform distribution table in the rather than as of the employee’s required Default rule for post-death distributions
future if it becomes appropriate. While beginning date or date of death, as under
life expectancy has increased in the 14 the 1987 proposed regulations. Thus, any As requested by some commentators,
years since the issuance of the section 72 beneficiary eliminated by distribution of these proposed regulations would change

March 12, 2001 868 2001–11 I.R.B.


the default rule in the case of death before after the required beginning date, the de- into segregated shares for purposes of sec-
the employee’s required beginning date termination of the designated beneficiary tion 401(a)(9) is useful and appropriate
for a nonspouse designated beneficiary is contemporaneous with the annuity for defined benefit plans.
from the 5-year rule in section starting date and any intervening changes
401(a)(9)(B)(ii) to the life expectancy rule in the beneficiary designation since the Trust as beneficiary
in section 401(a)(9)(B)(iii). Thus, absent required beginning date are ignored. These proposed regulations retain the
a plan provision or election of the 5-year Second, as requested in comments, these provision in the proposed regulations, as
rule, the life expectancy rule would apply regulations extend to all annuity payment amended in 1997, allowing an underlying
in all cases in which the employee has a streams the rule in the 1987 proposed beneficiary of a trust to be an employee’s
designated beneficiary. As in the case of regulations that allows a life annuity with
designated beneficiary for purposes of
death on or after the employee’s required a period certain not exceeding 20 years to
determining required minimum distribu-
beginning date, the designated beneficiary commence on the required beginning
tions when the trust is named as the bene-
whose life expectancy is used to deter- date with no makeup for the first distribu-
ficiary of a retirement plan or IRA, pro-
mine the distribution period would be tion calendar year. For this purpose, the
vided that certain requirements are met.
determined as of the end of the year fol- regulations clarify that only accruals as
One of these requirements is that docu-
lowing the year of the employee’s death, of the end of the prior calendar year must
rather than as of the employee’s date of mentation of the underlying beneficiaries
be taken into account in calculating the
death (as would have been required under of the trust be provided timely to the plan
amount of an annuity commencing on the
the 1987 proposed regulations). The 5- administrator. In the case of individual
required beginning date. Subsequent ac-
year rule would apply automatically only accounts, unless the lifetime distribution
cruals are treated as additional accruals
if the employee did not have a designated period for an employee is measured by the
that must be taken into account in the
beneficiary as of the end of the year fol- joint life expectancy of the employee and
next calendar year. Also as requested in
lowing the year of the employee’s death. the employee’s spouse, the deadline under
comments, the regulations provide that,
Finally, in the case of death before the these proposed regulations for providing
although additional accruals need to be
employee’s required beginning date, these taken into account in the first payment in the beneficiary documentation would be
proposed regulations allow a waiver, the calendar year following the year of the end of the year following the year of
unless the Commissioner determines oth- the accrual, actual payment in the form of the employee’s death. This is consistent
erwise, of any excise tax resulting from a make-up payment need only be com- with the deadline for determining the
the life expectancy rule during the first pleted by the end of that calendar year. employee’s designated beneficiary.
five years after the year of the employee’s The permitted increase in annuity pay- Because the designated beneficiary during
death if the employee’s entire benefit is ments to an employee upon the death of an employee’s lifetime is not relevant for
distributed by the end of the fifth year fol- the survivor annuitant has been expanded determining lifetime required minimum
lowing the year of the employee’s death. to cover the elimination of the survivor distributions in most cases under these
portion of a joint and survivor annuity due proposed regulations, the burden of life-
Annuity payments time documentation requirements con-
to a qualified domestic relations order.
These proposed regulations make sev- Further, in response to comments, in the tained in the previous proposed regula-
eral changes to the rules for determining case of an annuity contract purchased tions is significantly reduced.
whether annuity payments satisfy section from an insurance company, an exception A significant number of commentators
401(a)(9). The changes are designed to to the nonincreasing-payment require- on the 1997 amendment to the proposed
make these rules more administrable ment in these proposed regulations has regulations requested clarification that a
without adverse effects on the basic struc- been added to accommodate a cash refund testamentary trust named as an em-
ture and application of the rules. The IRS upon the employee’s death of the amount ployee’s beneficiary is a trust that quali-
and Treasury are continuing to study and of the premiums paid for the contract. fies for the look-through rule to the under-
evaluate whether additional changes One of the rules in the 1987 proposed lying beneficiaries, as permitted in the
would be appropriate for determining regulations that the IRS and Treasury are 1997 proposed regulations. These pro-
whether annuity payments satisfy section continuing to study and evaluate is the posed regulations provide examples in
401(a)(9). Some comments were re- rule providing that if the distributions which a testamentary trust is named as an
ceived on the annuity rules in 1987, but from a defined benefit plan are not in the employee’s beneficiary and the look-
updated comments that include a discus- form of an annuity, the employee’s bene- through trust rules apply. As previously
sion of current industry practices, prod- fit will be treated as an individual account illustrated in the facts of Rev. Rul.
ucts, and concerns would be helpful. for purposes of determining required min- 2000–2, 2000–3 I.R.B. 305, the examples
These proposed regulations provide imum distributions. The IRS and Treasury also clarify that remaindermen of a
that the designated beneficiary for deter- are continuing to consider whether reten- “QTIP” trust must be taken into account
mining the distribution period for annuity tion of this rule is appropriate for defined as beneficiaries in determining the distrib-
payments generally is the beneficiary as benefit plans. Similarly, the IRS and ution period for required minimum distri-
of the annuity starting date, even if that Treasury are continuing to consider butions if amounts are accumulated for
date is after the required beginning date. whether the rule permitting the benefit their benefit during the life of the income
Thus, if annuity payments commence under a defined benefit plan to be divided beneficiary under the trust.

2001–11 I.R.B. 869 March 12, 2001


Rules for qualified domestic relations owner as the spouse’s own IRA. The 1987 year’s required minimum distribution for
orders proposed regulations provide that this each IRA. To improve compliance and
election is deemed to have been made if further reduce the burden imposed on
These proposed regulations retain the the surviving spouse contributes to the IRA owners and beneficiaries, under the
basic rules in the 1987 proposed regula- IRA or does not take the required mini- authority provided in section 408(i), these
tion for a qualified domestic relations mum distribution for a year under section proposed regulations would require the
order (QDRO). Thus, for example, the 401(a)(9)(B) as a beneficiary of the IRA. trustee, custodian, or issuer of each IRA
proposed regulations continue to provide These new proposed regulations clarify to report the amount of the required mini-
that a former spouse to whom all or a por- that this deemed election is permitted to mum distribution from the IRA to the IRA
tion of the employee’s benefit is payable be made only after the distribution of the owner or beneficiary and to the IRS at the
pursuant to a QDRO will be treated as a required minimum amount for the time and in the manner provided under
spouse (including a surviving spouse) of account, if any, for the year of the individ- IRS forms and instructions. This report-
the employee for purposes of section ual’s death. Further these new proposed ing would be required regardless of
401(a)(9), including the minimum distrib- regulations clarify that this deemed elec- whether the IRA owner is planning to take
ution incidental benefit requirement, tion is permitted only if the spouse is the the required minimum distribution from
regardless of whether the QDRO specifi- sole beneficiary of the account and has an that IRA or from another IRA, and would
cally provides that the former spouse is unlimited right to withdrawal from the indicate that the IRA owner is permitted
treated as the spouse for purposes of sec- account. This requirement is not satisfied to take the required minimum distribution
tions 401(a)(11) and 417. This rule if a trust is named as beneficiary of the from any other IRA of the owner. During
applies regardless of the number of for- IRA, even if the spouse is the sole benefi- year 2001, the IRS will be receiving pub-
mer spouses an employee has who are ciary of the trust. These clarifications lic comments and consulting with inter-
alternate payees with respect to the make the election consistent with the ested parties to assist the IRS in evaluat-
employee’s retirement benefits. Further, underlying premise that the surviving ing what form best accommodates this
for example, if a QDRO divides the indi- spouse could have received a distribution reporting requirement, what timing is ap-
vidual account of an employee in a of the entire decedent IRA owner’s propriate (e.g., the beginning of the calen-
defined contribution plan into a separate account and rolled it over to an IRA estab- dar year for which the required amount is
account for the employee and a separate lished in the surviving spouse’s own name being calculated), and what effective date
account for the alternate payee, the as IRA owner. would be most appropriate for the report-
required minimum distribution to the These new proposed regulations also ing requirement. In this context, after
alternate payee during the lifetime of the clarify that, except for the required mini- thorough consideration of comments and
employee must nevertheless be deter- mum distribution for the year of the indi- consultation with interested parties, the
mined using the same rules that apply to vidual’s death, the spouse is permitted to IRS intends to develop procedures and a
distribution to the employee. Thus, roll over the post-death required mini- schedule for reporting that provides ade-
required minimum distributions to the mum distribution under section quate lead time, and minimizes the report-
alternate payee must commence by the 401(a)(9)(B) for a year if the spouse is es- ing burden, for IRA trustees, issuers, and
employee’s required beginning date. tablishing the IRA rollover account in the custodians in complying with this new re-
However, the required minimum distribu- name of the spouse as IRA owner. How- porting requirement while providing the
tion for the alternate payee will be sepa- ever, if the surviving spouse is age 70 1/2 most useful information to the IRA own-
rately determined. The required mini- or older, the minimum lifetime distribu- ers and beneficiaries.
mum distributions for the alternate payee tion required under section 401(a)(9)(A) The IRS and Treasury are also consid-
during the lifetime of the employee may must be made for the year and, because it ering whether similar reporting would be
be determined either using the uniform is a required minimum distribution, that appropriate for section 403(b) contracts.
distribution period discussed above based amount may not be rolled over. These
on the age of the employee in the distrib- proposed regulations provide that this Permitted Delays Relative to QDROs and
ution calendar year, or, if the alternate election by a surviving spouse eligible to State Insurer Delinquency Proceedings
payee is the employee’s former spouse treat an IRA as the spouse’s own may also
and is more than 10 years younger than The regulations permit the required
be accomplished by redesignating the minimum distribution for a year to be de-
the employee, using the joint life IRA with the name of the surviving
expectancy of the employee and the alter- layed to a later year in certain circum-
spouse as owner rather than beneficiary. stances. Specifically, commentators re-
nate payee.
IRA reporting of required minimum dis- quested a delay during a period of up to
Election of surviving spouse to treat an tributions 18 months during which an amount is
inherited IRA as spouse’s own IRA segregated in connection with the review
Because these regulations substantially of a domestic relations order pursuant to
These proposed regulations clarify the simplify the calculation of required mini- section 414(p)(7). Commentators also re-
rule in the 1987 proposed regulations that mum distributions from IRAs, IRA quested that a delay be permitted while
allows the surviving spouse of a decedent trustees, custodians, and issuers determin- annuity payments under an annuity con-
IRA owner to elect to treat an IRA inher- ing the account balance as of the end of tract issued by a life insurance company
ited by the surviving spouse from that the year can also calculate the following in state insurer delinquency proceedings

March 12, 2001 870 2001–11 I.R.B.


have been reduced or suspended by rea- amendment may be adopted by plan spon- 401(a)(9) will generally avoid the need
son of state proceedings. These proposed sors, practitioners who sponsor volume for plan sponsors, volume submitter
regulations allow delay in these circum- submitter specimen plans and sponsors of practitioners and M&P plan sponsors to
stances. master and prototype (M&P) plans. request another determination, opinion
These proposed regulations permit or advisory letter subsequent to their
Correction of failures under section
plans to make distributions under either application for a GUST letter. In addi-
401(a)(9)
default provisions or under permissible tion, to the extent such a subsequent let-
The proposed regulations do not set optional provisions. A plan that has been ter is needed or desired, the IRS intends
forth the special rule relieving a plan from amended by adoption of the model that its procedures will provide that the
disqualification for isolated instances of amendment will be treated as operating in application for the letter will not have to
failure to satisfy section 401(a)(9) be- conformance with a requirement of the be submitted prior to the next time the
cause all failures for qualified plans and proposed regulations that permits the use plan is otherwise amended or required to
section 403(b) accounts under section of either default or optional provisions if be amended.
401(a)(9) are now permitted to be cor- the plan is operated consistently in accor- The model amendment described above
rected through the Employee Plans Com- dance with either the default rule or a spe- is set forth below:
pliance Resolution System (EPCRS). See cific permitted alternative, notwithstand- “With respect to distributions under
Rev. Proc. 2000–16 (2000–6 I.R.B. 518). ing the plan’s terms. the Plan made for calendar years
The Service will not issue determina- beginning on or after January 1, 2001
Amendment of Qualified Plans tion, opinion or advisory letters on the (ALTERNATIVELY, SPECIFY A
These regulations are proposed to be basis of the changes in these proposed LATER CALENDAR YEAR FOR
effective for distributions for calendar regulations until the publication of final WHICH THE AMENDMENT IS TO
years beginning on or after January 1, regulations. Until such time, the IRS will BE INITIALLY EFFECTIVE), the
2002. For distributions for calendar years continue to issue such letters on the basis Plan will apply the minimum distrib-
beginning before the effective date of of the 1987 proposed regulations and ution requirements of section
final regulations, plan sponsors can con- SBJPA. Although the IRS will not issue 401(a)(9) of the Internal Revenue
tinue to rely on the 1987 proposed regula- determination, opinion or advisory letters Code in accordance with the regula-
tions, to the extent those proposed regula- with respect to the model amendment, the tions under section 401(a)(9) that
tions are not inconsistent with the changes adoption of the model amendment will were proposed in January 2001,
to section 401(a)(9) made by the Small not affect a determination letter issued for notwithstanding any provision of the
Business Job Protection Act of 1996 a plan whose terms otherwise satisfy the Plan to the contrary. This amend-
(SBJPA) and guidance related to those 1987 proposed regulations and SBJPA. ment shall continue in effect until the
changes. Alternatively, for distributions Plan sponsors should not adopt other end of the last calendar year begin-
for the 2001 and subsequent calendar amendments to attempt to conform their ning before the effective date of final
years beginning before the effective date plans to the changes in these proposed regulations under section 401(a)(9)
of final regulations, plan sponsors are per- regulations before the publication of final or such other date as may be speci-
mitted, but not required, to follow these regulations. The IRS intends to publish fied in guidance published by the
proposed regulations in the operation of procedures at a later date that will allow Internal Revenue Service.”
their plans by adopting the model amend- qualified plans to be amended to reflect Amendment of IRAs and Effective Date
ment set forth below. the regulations under section 401(a)(9)
The Treasury Department and the IRS when they are finalized. These regulations are proposed to be
are making the model amendment set Qualified plans are required to be effective for distributions for calendar
forth below available to plan sponsors to amended for changes in the plan qualifi- years beginning on or after January 1,
permit them to apply these proposed reg- cation requirements made by GUST by 2002. For distributions for the 2001 cal-
ulations in the operation of their plans the end of the GUST remedial amend- endar year, IRA owners are permitted, but
without violating the requirement that a ment period under section 401(b), which not required, to follow these proposed
plan be operated in accordance with its is generally the end of the first plan year regulations in operation, notwithstanding
terms. Plan sponsors who adopt the beginning on or after January 1, 2001, or, the terms of the IRA documents. IRA
model amendment will have reliance that, if applicable, a later date determined owners may therefore rely on these pro-
during the term of the amendment, opera- under the provisions of section 19 of posed regulations for distributions for the
tion of their plans in a manner that satis- Rev. Proc. 2000–20 (2000–6 I.R.B. 553). 2001 calendar year. However, IRA spon-
fies the minimum distribution require- Many plans have been operated in a sors should not amend their IRA docu-
ments in these proposed regulations will manner that reflects the changes to sec- ments to conform their IRAs to the
not cause their plans to fail to be qualified. tion 401(a)(9) made by SBJPA and will changes in these proposed regulations
In addition, distributees will have reliance have to be amended for these changes by before the publication of final regulations.
that distributions that are made during the the end of the GUST remedial amend- The IRS will not issue model IRAs on the
term of the amendment that satisfy the ment period. The IRS intends that its basis of the changes in these proposed
minimum distribution requirements in procedures for amending qualified plans regulations until the publication of final
these proposed regulations. The model for the final regulations under section regulations. Until such time, IRA owners

2001–11 I.R.B. 871 March 12, 2001


can continue to use the current model Comments and Public Hearing Adoption of Amendments of the
IRAs which are based on the 1987 pro- Regulations
posed regulations under section 401(a)(9). Before these proposed regulations are
The IRS will publish procedures at a later adopted as final regulations, consideration Accordingly, 26 CFR part 1 is amended
date that will allow IRAs to be amended will be given to any electronic or written as follows:
to reflect final regulations under section comments (preferably a signed original
and eight (8) copies) that are submitted PART 1—INCOME TAXES
401(a)(9).
timely to the IRS. In addition to the other Paragraph 1. The authority citation for
Proposed Effective Date requests for comments set forth in this doc- part 1 is amended by adding entries in
ument, the IRS and Treasury also request numerical order to read in part as follows:
The regulations are proposed to be comments on the clarity of the proposed Authority: 26 U.S.C. 7805 * * *
applicable for determining required mini- rule and how it may be made easier to §1.401(a)(9)–1 is also issued under 26
mum distributions for calendar years understand. All comments will be avail- U.S.C. 401(a)(9).
beginning on or after January 1, 2002. able for public inspection and copying. §1.401(a)(9)–2 is also issued under 26
For determining required minimum distri- A public hearing has been scheduled for U.S.C. 401(a)(9).
butions for calendar year 2001, taxpayers June 1, 2001, at 10 a.m. in the IRS §1.401(a)(9)–3 is also issued under 26
may rely on these proposed regulations or Auditorium (7th Floor), Internal Revenue U.S.C. 401(a)(9).
on the 1987 proposed regulations. If, and Building, 1111 Constitution Avenue NW., §1.401(a)(9)–4 is also issued under 26
to the extent, future guidance is more Washington, DC. Due to building securi- U.S.C. 401(a)(9).
restrictive than the guidance in these pro- ty procedures, visitors must enter at the §1.401(a)(9)–5 is also issued under 26
posed regulations, the future guidance 10th street entrance, located between U.S.C. 401(a)(9).
will be issued without retroactive effect. Constitution and Pennsylvania Avenues, §1.401(a)(9)–6 is also issued under 26
NW. In addition, all visitors must present U.S.C. 401(a)(9).
Special Analyses
photo identification to enter the building. §1.401(a)(9)–7 is also issued under 26
It has been determined that this notice Because of access restrictions, visitors will U.S.C. 401(a)(9).
of proposed rulemaking is not a signifi- not be admitted beyond the immediate §1.401(a)(9)–8 is also issued under 26
cant regulatory action as defined in entrance area more than 15 minutes before U.S.C. 401(a)(9). * * *
Executive Order 12866. Therefore, a reg- the hearing starts. For information about §1.403(b)–2 is also issued under 26
ulatory assessment is not required. It is having your name placed on the building U.S.C. 403(b)(10). * * *
hereby certified that these regulations will access list to attend the hearing, see the §1.408–8 is also issued under 26 U.S.C.
not have a significant economic impact on “FOR FURTHER INFORMATION CON- 408(a)(6) and (b)(3). * * *
a substantial number of small entities. TACT” section of this preamble. Par. 2. Sections 1.401(a)(9)–0 through
This certification is based on the fact that, The rules of 26 CFR 601.601(a)(3) 1.401(a)(9)–8 are added to read as fol-
when determining the minimum required apply to the hearing. lows:
distribution in cases where a plan partici- Persons who wish to present oral com-
ments at the hearing must submit written §1.401(a)(9)–0 Required minimum
pant wishes to designate a trust as benefi-
comments and an outline of the topics to distributions; table of contents.
ciary of the participant’s benefit, the
reporting burden is primarily on the plan be discussed and the time to be devoted to
This table of contents lists the regula-
participant, or trustee of the trust named each topic (signed original and eight (8)
tions relating to required minimum distri-
as beneficiary, to supply information copies) by May 11, 2001.
butions under section 401(a)(9) of the
rather than on the entity maintaining the A period of 10 minutes will be allotted
Internal Revenue Code as follows:
retirement plan and the fact that the num- to each person for making comments.
§1.401(a)(9)–0 Required minimum dis-
ber of participants per plan to whom the An agenda showing the scheduling of
tributions; table of contents.
burden applies is insignificant. The the speakers will be prepared after the
§1.401(a)(9)–1 Required minimum dis-
recordkeeping burden with respect to sec- deadline for receiving outlines has passed.
tribution requirement in general.
tion 403(b) contracts under the pre-1987 Copies of the agenda will be available
§1.401(a)(9)–2 Distributions commenc-
account balance must be maintained only free of charge at the hearing.
ing before an employee’s death.
applies to issuers and custodians of those Drafting Information §1.401(a)(9)–3 Death before required
contracts, which generally are not small beginning date.
entities. Accordingly, a Regulatory The principal authors of these regula- §1.401(a)(9)–4 Determination of the
Flexibility Analysis is not required. tions are Marjorie Hoffman and Cathy A. designated beneficiary.
Pursuant to section 7805(f) of the Code, Vohs of the Office of the Division §1.401(a)(9)–5 Required minimum dis-
these proposed regulations will be submit- Counsel/Associate Chief Counsel (Tax tributions from defined contribution
ted to the Chief Counsel for Advocacy of Exempt and Government Entities). How- plans.
the Small Business Administration for ever, other personnel from the IRS and §1.401(a)(9)–6 Required minimum dis-
comment on their impact on small busi- Treasury participated in their development. tributions from defined benefit plans.
ness. * * * * * §1.401(a)(9)–7 Rollovers and transfers.

March 12, 2001 872 2001–11 I.R.B.


§1.401(a)(9)–8 Special rules. reflecting section 401(a)(9) as are prescribed isfy section 401(a)(9)(A) and (G) general-
by the Commissioner in revenue rulings, ly depends on whether a distribution is in
§1.401(a)(9)–1 Required minimum dis-
notices, and other guidance published in the the form of distributions under a defined
tribution requirement in general.
Internal Revenue Bulletin. See §601.601 contribution plan or annuity payments
Q-1. What plans are subject to the (d)(2)(ii)(b) of this chapter. under a defined benefit plan. For the
required minimum distribution require- (b) Optional provisions. The plan may method of determining the required mini-
ment under section 401(a)(9) and also include written provisions regarding mum distribution in accordance with sec-
§§1.401(a)(9)–1 through 1.401(a)(9)–8? any optional provisions governing plan tion 401(a)(9)(A) and (G) from an indi-
A-1. All stock bonus, pension, and distributions that do not conflict with sec- vidual account under a defined
profit-sharing plans qualified under sec- tion 401(a)(9) and the regulations there- contribution plan, see §1.401(a)(9)–5.
tion 401(a) and annuity contracts under. For the method of determining the
described in section 403(a) are subject to (c) Absence of optional provisions. required minimum distribution in accor-
the required minimum distribution rules Plan distributions commencing after an dance with section 401(a)(9)(A) and (G)
in section 401(a)(9) and §§1.401(a)(9)–1 employee’s death will be required to be in the case of annuity payments from a
through 1.401(a)(9)–8. See §1.403(b)–2 made under the default provision set forth defined benefit plan or an annuity con-
for the distribution rules applicable to in §1.401(a)(9)–3 for distributions unless tract, see §1.401(a)(9)–6.
annuity contracts or custodial accounts the plan document contains optional pro- Q-2. For purposes of section
described in section 403(b), see §1.408–8 visions that override such default provi- 401(a)(9)(C), what does the term required
for the distribution rules applicable to sions. Thus, if distributions have not beginning date mean?
individual retirement plans, see commenced to the employee at the time of A-2. (a) Except as provided in para-
§1.408A–6 described for the distribution the employee’s death, distributions after graph (b) of this A-2 with respect to a 5-
rules applicable to Roth IRAs under sec- the death of an employee are to be made percent owner, as defined in paragraph
tion 408A, and see section 457(d)(2)(A) automatically in accordance with the (c), the term required beginning date
for distribution rules applicable to certain default provisions in A-4(a) of means April 1 of the calendar year fol-
deferred compensation plans for employ- §1.401(a)(9)–3 unless the plan either lowing the later of the calendar year in
ees of tax exempt organizations or state specifies in accordance with A-4(b) of which the employee attains age 70 1/2, or
and local government employees. §1.401(a)(9)–3 the method under which the calendar year in which the employee
Q-2. Which employee account bal- distributions will be made or provides for retires from employment with the
ances and benefits held under qualified elections by the employee (or beneficiary) employer maintaining the plan.
trusts and plans are subject to the distrib- in accordance with A-4(c) of §1.401(a) (b) In the case of an employee who is a
ution rules of section 401(a)(9) and (9)–3 and such elections are made by the 5-percent owner, the term required begin-
§§1.401(a)(9)–1 through 1.401(a)(9)–8? employee or beneficiary. ning date means April 1 of the calendar
A-2. The distribution rules of section year following the calendar year in which
§1.401(a)(9)–2 Distributions
401(a)(9) apply to all account balances the employee attains age 70 1/2 .
commencing before an employee’s death.
and benefits in existence on or after (c) For purposes of section 401(a)(9), a
January 1, 1985. Sections 1.401(a)(9)–1 Q-1. In the case of distributions com- 5-percent owner is an employee who is a
through 1.401(a)(9)–8 apply for purposes mencing before an employee’s death, how 5-percent owner (as defined in section
of determining required minimum distrib- must the employee’s entire interest be dis- 416) with respect to the plan year ending
utions for calendar years beginning on or tributed in order to satisfy section in the calendar year in which the employ-
after January 1, 2002. 401(a)(9)(A)? ee attains age 70 1/2.
Q-3. What specific provisions must a A-1. (a) In order to satisfy section (d) Paragraph (b) of this A-2 does not
plan contain in order to satisfy section 401(a)(9)(A), the entire interest of each apply in the case of a governmental plan
401(a)(9)? employee must be distributed to such (within the meaning of section 414(d)) or
A-3. (a) Required provisions. In order to employee not later than the required a church plan. For purposes of this para-
satisfy section 401(a)(9), the plan must beginning date, or must be distributed, graph, the term church plan means a plan
include several written provisions reflecting beginning not later than the required maintained by a church for church
section 401(a)(9). First, the plan must gen- beginning date, over the life of the employees, and the term church means
erally set forth the statutory rules of section employee or joint lives of the employee any church (as defined in section
401(a)(9), including the incidental death and a designated beneficiary or over a 3121(w)(3)(A)) or qualified church-con-
benefit requirement in section 401(a)(9)(G). period not extending beyond the life trolled organization (as defined in section
Second, the plan must provide that distribu- expectancy of the employee or the joint 3121(w)(3)(B)).
tions will be made in accordance with life and last survivor expectancy of the (e) A plan is permitted to provide that
§§1.401(a)(9)–1 through 1.401(a)(9)–8. The employee and the designated beneficiary. the required beginning date for purposes
plan document must also provide that the (b) Section 401(a)(9)(G) provides that of section 401(a)(9) for all employees is
provisions reflecting section 401(a)(9) over- lifetime distributions must satisfy the inci- April 1 of the calendar year following the
ride any distribution options in the plan dental death benefit requirements. calendar year in which the employee
inconsistent with section 401(a)(9). The (c) The amount required to be distrib- attained age 70 1/2 regardless of whether
plan also must include any other provisions uted for each calendar year in order to sat- the employee is a 5-percent owner.

2001–11 I.R.B. 873 March 12, 2001


Q-3. When does an employee attain year following the calendar year of mined under the plan terms is treated as
age 70 1/2? death generally depends on whether a dying after the employee’s required
A-3. An employee attains age 70 1/2 as distribution is in the form of distribu- beginning date for purposes of A-5(a) of
of the date six calendar months after the tions from an individual account under a this section even though the employee
70th anniversary of the employee’s birth. defined contribution plan or annuity dies before the April 1 following the cal-
For example, if an employee’s date of payments under a defined benefit plan. endar year in which the employee retires.
birth was June 30, 1932, the 70th anniver- For the method of determining the re-
sary of such employee’s birth is June 30, quired minimum distribution in accor- §1.401(a)(9)–3 Death before required
2002. Such employee attains age 70 1/2 dance with section 401(a)(9)(B)(i) from beginning date.
on December 30, 2002. Consequently, if an individual account, see A-5(a) of Q-1. If an employee dies before the
the employee is a 5–percent owner or §1.401(a)(9)–5 for the calculation of the employee’s required beginning date, how
retired, such employee’s required begin- distribution period that applies when an must the employee’s entire interest be dis-
ning date is April 1, 2003. However, if the employee dies after the employee’s re- tributed in order to satisfy section
employee’s date of birth was July 1, 1932, quired beginning date. In the case of an- 401(a)(9)?
the 70th anniversary of such employee’s nuity payments from a defined benefit A-1. (a) Except as otherwise provided
birth would be July 1, 2002. Such plan or an annuity contract, see in A-10 of §1.401(a)(9)–6, if an employee
employee would then attain age 70 1/2 on §1.401(a)(9)–6. dies before the employee’s required
January 1, 2003, and such employee’s Q-6. For purposes of section beginning date (and, thus, generally
required beginning date would be April 1, 401(a)(9)(B), when are distributions con- before distributions are treated as having
2004. sidered to have begun to the employee in begun in accordance with section
Q-4. Must distributions made before accordance with section 401(a)(9)(A)(ii)? 401(a)(9)(A)(ii)), distribution of the
the employee’s required beginning date A-6. (a) General rule. Except as other- employee’s entire interest must be made
satisfy section 401(a)(9)? wise provided in A-10 of §1.401(a) (9)–6, in accordance with one of the methods
A-4. Lifetime distributions made distributions are not treated as having described in section 401(a)(9)(B)(ii) or
before the employee’s required beginning begun to the employee in accordance with (iii). One method (the five-year rule in
date for calendar years before the employ- section 401(a)(9)(A)(ii) until the em- section 401(a)(9)(B)(ii)) requires that the
ee’s first distribution calendar year, as ployee’s required beginning date, without entire interest of the employee be distrib-
defined in A-1(b) of §1.401(a)(9)–5, need regard to whether payments have been uted within five years of the employee’s
not be made in accordance with section made before that date. For example, if em- death regardless of who or what entity
401(a)(9). However, if distributions com- ployee A upon retirement in 2002, the cal- receives the distribution. Another method
mence before the employee’s required endar year A attains age 65 1/2, begins re- (the life expectancy rule in section
beginning date under a particular distribu- ceiving installment distributions from a 401(a)(9)(B)(iii)) requires that any por-
tion option, such as in the form of an profit-sharing plan over a period not ex- tion of an employee’s interest payable to
annuity, the distribution option fails to sat- ceeding the joint life and last survivor ex- (or for the benefit of) a designated benefi-
isfy section 401(a)(9) at the time distribu- pectancy of A and A’s beneficiary, benefits ciary be distributed, commencing within
tions commence if, under terms of the par- are not treated as having begun in accor- one year of the employee’s death, over the
ticular distribution option, distributions to dance with section 401(a)(9)(A)(ii) until life of such beneficiary (or over a period
be made for the employee’s first distribu- April 1, 2008 (the April 1 following the cal- not extending beyond the life expectancy
tion calendar year or any subsequent dis- endar year in which A attains age 70 1/2). of such beneficiary). Section 401(a)(9)
tribution calendar year will fail to satisfy Consequently, if such employee dies before (B)(iv) provides special rules where the
section 401(a)(9). April 1, 2008 (A’s required beginning date), designated beneficiary is the surviving
Q-5. If distributions have begun to an distributions after A’s death must be made spouse of the employee, including a spe-
employee before the employee’s death (in in accordance with section 401(a)(9)(B)(ii) cial commencement date for distributions
accordance with section 401(a)(9)(A)(ii)), or (iii) and (iv) and §1.401(a)(9)–3, and not under section 401(a)(9)(B)(iii) to the sur-
how must distributions be made after an section 401(a)(9)(B)(i). This is the case viving spouse.
employee’s death? without regard to whether the plan has dis- (b) See A-4 of this section for the rules
A-5. Section 401(a)(9)(B)(i) provides tributed the minimum distribution for the for determining which of the methods
that if the distribution of the employee’s first distribution calendar year (as defined described in paragraph (a) applies. See
interest has begun in accordance with in A-1(b) of §1.401(a)(9)–5) before A’s A-3 of this section to determine when dis-
section 401(a)(9)(A)(ii) and the em- death. tributions under the exception to the five-
ployee dies before his entire interest has (b) If a plan provides, in accordance year rule in section 401(a)(9)(B)(iii) and
been distributed to him, the remaining with A-2(e) of this section, that the (iv) must commence. See A-2 of this sec-
portion of such interest must be distrib- required beginning date for purposes of tion to determine when the five-year peri-
uted at least as rapidly as under the dis- section 401(a)(9) for all employees is od in section 401(a)(9)(B)(ii) ends. For
tribution method being used under sec- April 1 of the calendar year following the distributions using the life expectancy
tion 401(a)(9)(A)(ii) as of the date of his calendar year in which the employee rule in section 401(a)(9)(B)(iii) and (iv),
death. The amount required to be dis- attains age 70 1/2, an employee who dies see §1.401(a)(9)–4 in order to determine
tributed for each distribution calendar after the required beginning date deter- the designated beneficiary under section

March 12, 2001 874 2001–11 I.R.B.


401(a)(9)(B)(iii) and (iv), see §1.401(a) A-4. (a) No plan provision. If a plan applies, distribution must be made in
(9)–5 for the rules for determining the does not adopt an optional provision accordance with paragraph (a).
required minimum distribution under a described in paragraph (b) or (c) of this Q-5. If the employee’s surviving
defined contribution plan, and see A-4 specifying the method of distribution spouse is the employee’s designated ben-
§1.401(a)(9)–6 for required minimum dis- after the death of an employee, distribu- eficiary and such spouse dies after the
tributions under defined benefit plans. tion must be made as follows: employee, but before distributions have
Q-2. By when must the employee’s (1) If the employee has a designated begun to the surviving spouse under sec-
entire interest be distributed in order to beneficiary, as determined under tion 401(a)(9)(B)(iii) and (iv), how is the
satisfy the five-year rule in section §1.401(a)(9)–4, distributions are to be employee’s interest to be distributed?
401(a)(9)(B)(ii)? made in accordance with the life A-5. Pursuant to section 401(a)(9)(B)
A-2. In order to satisfy the five-year expectancy rule in section 401(a)(9) (iv)(II), if the surviving spouse dies after
rule in section 401(a)(9)(B)(ii), the (B)(iii) and (iv). the employee, but before distributions to
employee’s entire interest must be distrib- (2) If the employee has no designated such spouse have begun under section
uted by the end of the calendar year which beneficiary, distributions are to be made 401(a)(9)(B)(iii) and (iv), the five-year
contains the fifth anniversary of the date in accordance with the five-year rule in rule in section 401(a)(9)(B)(ii) and the life
of the employee’s death. For example, if section 401(a)(9)(B)(ii). expectancy rule in section 401(a)(9)(B)
an employee dies on January 1, 2002, the (b) Optional plan provisions. The plan (iii) are to be applied as if the surviving
entire interest must be distributed by the may adopt a provision specifying either spouse were the employee. In applying
end of 2007, in order to satisfy the five- that the five-year rule in section this rule, the date of death of the surviving
year rule in section 401(a)(9)(B)(ii). 401(a)(9)(B)(ii) will apply to certain dis- spouse shall be substituted for the date of
Q-3. When are distributions required to tributions after the death of an employee death of the employee. However, in such
commence in order to satisfy the life even if the employee has a designated case, the rules in section 401(a)(9)(B)(iv)
expectancy rule in section 401(a)(9) beneficiary or that distribution in every are not available to the surviving spouse
(B)(iii) and (iv)? case will be made in accordance with the of the deceased employee’s surviving
A-3. (a) Nonspouse beneficiary. In five-year rule in section 401(a)(9)(B)(ii). spouse.
order to satisfy the life expectancy rule in Further, a plan need not have the same Q-6. For purposes of section 401(a)(9)
section 401(a)(9)(B)(iii), if the designated method of distribution for the benefits of (B)(iv)(II), when are distributions consid-
beneficiary is not the employee’s surviv- all employees. ered to have begun to the surviving
ing spouse, distributions must commence (c) Elections. A plan may adopt a pro- spouse?
on or before the end of the calendar year vision that permits employees (or benefi- A-6. Distributions are considered to
immediately following the calendar year ciaries) to elect on an individual basis have begun to the surviving spouse of an
in which the employee died. This rule whether the five-year rule in section employee, for purposes of section
also applies to the distribution of the 401(a)(9)(B)(ii) or the life expectancy 401(a)(9)(B)(iv)(II), on the date, deter-
entire remaining benefit if another indi- rule in section 401(a)(9)(B)(iii) and (iv) mined in accordance with A-3 of this sec-
vidual is a designated beneficiary in addi- applies to distributions after the death of tion, on which distributions are required
tion to the employee’s surviving spouse. an employee who has a designated benefi- to commence to the surviving spouse,
See A-2 and A-3 of §1.401(a)(9)–8, how- ciary. Such an election must be made no even though payments have actually been
ever, if the employee’s benefit is divided later than the earlier of, the end of the cal- made before that date. See A-11 of
into separate accounts (or segregated endar year in which distribution would be §1.401(a)(9)–6 for a special rule for annu-
shares, in the case of a defined benefit required to commence in order to satisfy ities.
plan). the requirements for the life expectancy
§1.401(a)(9)–4 Determination of the
(b) Spousal beneficiary. In order to rule in section 401(a)(9)(B)(iii) and (iv)
designated beneficiary.
satisfy the rule in section 401(a)(9)(B)(iii) (see A-3 of this section for the determina-
and (iv), if the sole designated beneficiary tion of such calendar year), or the end of Q-1. Who is a designated beneficiary
is the employee’s surviving spouse, distri- the calendar year which contains the fifth under section 401(a)(9)(E)?
butions must commence on or before the anniversary of the date of death of the A-1. A designated beneficiary is an
later of- - employee. As of the date determined individual who is designated as a benefi-
(1) The end of the calendar year imme- under the life expectancy rule, the election ciary under the plan. An individual may
diately following the calendar year in must be irrevocable with respect to the be designated as a beneficiary under the
which the employee died; and beneficiary (and all subsequent beneficia- plan either by the terms of the plan or, if
(2) The end of the calendar year in ries) and must apply to all subsequent cal- the plan so provides, by an affirmative
which the employee would have attained endar years. If a plan provides for the election by the employee (or the employ-
age 70 1/2. election, the plan may also specify the ee’s surviving spouse) specifying the ben-
Q-4. How is it determined whether the method of distribution that applies if nei- eficiary. A beneficiary designated as such
five-year rule in section 401(a)(9)(B)(ii) ther the employee nor the beneficiary under the plan is an individual who is
or the life expectancy rule in section makes the election. If neither the employ- entitled to a portion of an employee’s ben-
401(a)(9)(B)(iii) and (iv) applies to a dis- ee nor the beneficiary elects a method and efit, contingent on the employee’s death
tribution? the plan does not specify which method or another specified event. For example,

2001–11 I.R.B. 875 March 12, 2001


if a distribution is in the form of a joint described in A-5(a)(2) of §1.401(a)(9)–5 apply if more than one beneficiary is des-
and survivor annuity over the life of the (the remaining life expectancy of the ignated with respect to an employee as of
employee and another individual, the plan employee determined in accordance with the date on which the designated benefi-
does not satisfy section 401(a)(9) unless A-5(c)(3) of §1.401(a)(9)–5). Further, in ciary is to be determined in accordance
such other individual is a designated ben- such case, except as provided in A-10 of with paragraphs (a) and (b) of this A-4.
eficiary under the plan. A designated ben- §1.401(a)(9)–6, if the employee dies Q-5. If a trust is named as a beneficia-
eficiary need not be specified by name in before the employee’s required beginning ry of an employee, will the beneficiaries
the plan or by the employee to the plan in date, distribution must be made in accor- of the trust with respect to the trust’s inter-
order to be a designated beneficiary so dance with the 5-year rule in section est in the employee’s benefit be treated as
long as the individual who is to be the 401(a)(9)(B)(ii). having been designated as beneficiaries of
beneficiary is identifiable under the plan Q-4. When is the designated beneficia- the employee under the plan for purposes
as of the date the beneficiary is deter- ry determined? of determining the distribution period
mined under A-4 of this section. The A-4. (a) General rule. Except as pro- under section 401(a)(9)?
members of a class of beneficiaries capa- vided in paragraph (b) and §1.401(a) A-5. (a) Only an individual may be a
ble of expansion or contraction will be (9)–6, the employee’s designated benefi- designated beneficiary for purposes of
treated as being identifiable if it is possi- ciary will be determined based on the ben- determining the distribution period under
ble, as of the date the beneficiary is deter- eficiaries designated as of the last day of section 401(a)(9). Consequently, a trust is
mined, to identify the class member with the calendar year following the calendar not a designated beneficiary even though
the shortest life expectancy. The fact that year of the employee’s death. the trust is named as a beneficiary.
an employee’s interest under the plan Consequently, except as provided in However, if the requirements of para-
passes to a certain individual under §1.401(a)(9)–6, any person who was a graph (b) of this A-5 are met, the benefi-
applicable state law does not make that beneficiary as of the date of the employ- ciaries of the trust will be treated as hav-
individual a designated beneficiary unless ee’s death, but is not a beneficiary as of ing been designated as beneficiaries of the
the individual is designated as a benefi- that later date (e.g., because the person employee under the plan for purposes of
ciary under the plan. disclaims entitlement to the benefit in determining the distribution period under
Q-2. Must an employee (or the favor of another beneficiary or because section 401(a)(9).
employee’s spouse) make an affirmative the person receives the entire benefit to (b) The requirements of this paragraph
election specifying a beneficiary for a per- which the person is entitled before that (b) are met if, during any period during
son to be a designated beneficiary under date), is not taken into account in deter- which required minimum distributions are
section 40l(a)(9)(E)? mining the employee’s designated benefi- being determined by treating the benefi-
A-2. No. A designated beneficiary is ciary for purposes of determining the dis- ciaries of the trust as designated benefi-
an individual who is designated as a ben- tribution period for required minimum ciaries of the employee, the following
eficiary under the plan whether or not the distributions after the employee’s death. requirements are met:
designation under the plan was made by (b) Surviving spouse. As provided in (1) The trust is a valid trust under state
the employee. The choice of beneficiary A-5 of §1.401(a)(9)–3, in the case in law, or would be but for the fact that there
is subject to the requirements of sections which the employee’s spouse is the desig- is no corpus.
401(a)(11), 414(p), and 417. nated beneficiary as of the date described (2) The trust is irrevocable or will, by
Q-3. May a person other than an indi- in paragraph (a) of this A-5, and the sur- its terms, become irrevocable upon the
vidual be considered to be a designated viving spouse dies after the employee and death of the employee.
beneficiary for purposes of section before the date on which distributions (3) The beneficiaries of the trust who
401(a)(9)? have begun to the spouse under section are beneficiaries with respect to the trust’s
A-3. (a) No. Only individuals may be 401(a)(9)(B)(iii) and (iv), the rule in sec- interest in the employee’s benefit are
designated beneficiaries for purposes of tion 40l(a)(9)(B)(iv)(II) will apply. Thus, identifiable from the trust instrument
section 401(a)(9). A person that is not an the relevant designated beneficiary for within the meaning of A-1 of this section.
individual, such as the employee’s estate, determining the distribution period is the (4) The documentation described in
may not be a designated beneficiary, and, designated beneficiary of the surviving A-6 of this section has been provided to
if a person other than an individual is des- spouse. Such designated beneficiary will the plan administrator.
ignated as a beneficiary of an employee’s be determined as of the last day of the cal- (c) In the case of payments to a trust
benefit, the employee will be treated as endar year following the calendar year of having more than one beneficiary, see A-7
having no designated beneficiary for pur- surviving spouse’s death. If, as of such of §1.401(a)(9)–5 for the rules for deter-
poses of section 401(a)(9). However, see last day, there is no designated beneficia- mining the designated beneficiary whose
A-5 of this section for special rules which ry under the plan with respect to that sur- life expectancy will be used to determine
apply to trusts. viving spouse, distribution must be made the distribution period. If the beneficiary
(b) If an employee is treated as having in accordance with the 5-year rule in sec- of the trust named as beneficiary is anoth-
no designated beneficiary, for distribu- tion 401(a)(9)(B)(ii) and A-2 of er trust, the beneficiaries of the other trust
tions under a defined contribution plan, §1.401(a)(9)–3. will be treated as having been designated
the distribution period under section (c) Multiple beneficiaries. Notwith- as beneficiaries of the employee under the
401(a)(9)(A)(ii) after the death of the standing anything in this A-4 to the con- plan for purposes of determining the dis-
employee is limited to the period trary, the rules in A-7 of §1.401(a)(9)–5 tribution period under section 401(a)(9)
March 12, 2001 876 2001–11 I.R.B.
(A)(ii), provided that the requirements of fy that, to the best of the trustee’s knowl- mined under A-4 of this section).
paragraph (b) of this A-5 are satisfied with edge, this list is correct and complete and However, the required minimum distribu-
respect to such other trust in addition to that the requirements of paragraph (b)(1), tion amount will never exceed the entire
the trust named as beneficiary. (2), and (3) of A-5 of this section are sat- vested account balance on the date of the
Q-6. If a trust is named as a beneficiary isfied; and agree to provide a copy of the distribution. Further, the minimum distri-
of an employee, what documentation must trust instrument to the plan administrator bution required to be distributed on or
be provided to the plan administrator? upon demand; or before an employee’s required beginning
A-6. (a) Required minimum distribu- (2) Provide the plan administrator with date is always determined under section
tions before death. In order to satisfy the a copy of the actual trust document for the 401(a)(9)(A)(ii) and this A-1 and not sec-
documentation requirement of this A-6 for trust that is named as a beneficiary of the tion 401(a)(9)(A)(i).
required minimum distributions under employee under the plan as of the (b) Distribution calendar year. A cal-
section 401(a)(9) to commence before the employee’s date of death. endar year for which a minimum distrib-
death of an employee, the employee must (c) Relief for discrepancy between trust ution is required is a distribution calendar
comply with either paragraph (a)(1) or (2) instrument and employee certifications or year. If an employee’s required beginning
of this A-6: earlier trust instruments. (1) If required date is April 1 of the calendar year fol-
(1) The employee provides to the plan minimum distributions are determined lowing the calendar year in which the
administrator a copy of the trust instru- based on the information provided to the employee attains age 70 1/2, the employ-
ment and agrees that if the trust instru- plan administrator in certifications or trust ee’s first distribution calendar year is the
ment is amended at any time in the future, instruments described in paragraph (a)(1), year the employee attains age 70 1/2. If
the employee will, within a reasonable (a)(2) or (b) of this A-6, a plan will not fail an employee’s required beginning date is
time, provide to the plan administrator a to satisfy section 401(a)(9) merely April 1 of the calendar year following the
copy of each such amendment. because the actual terms of the trust calendar year in which the employee
(2) The employee— instrument are inconsistent with the infor- retires, the calendar year in which the
(i) Provides to the plan administrator a mation in those certifications or trust employee retires is the employee’s first
list of all of the beneficiaries of the trust instruments previously provided to the distribution calendar year. In the case of
(including contingent and remaindermen plan administrator, but only if the plan distributions to be made in accordance
beneficiaries with a description of the administrator reasonably relied on the with the life expectancy rule in
conditions on their entitlement); information provided and the required §1.401(a)(9)–3 and in section
(ii) Certifies that, to the best of the minimum distributions for calendar years 401(a)(9)(B)(iii) and (iv), the first distrib-
employee’s knowledge, this list is correct after the calendar year in which the dis- ution calendar year is the calendar year
and complete and that the requirements of crepancy is discovered are determined containing the date described in A-3(a) or
paragraphs (b)(1), (2), and (3) of A-5 of based on the actual terms of the trust A-3(b) of §1.401(a)(9)–3, whichever is
this section are satisfied; instrument. applicable.
(iii) Agrees that, if the trust instrument (2) For purposes of determining the (c) Time for distributions. The distrib-
is amended at any time in the future, the amount of the excise tax under section ution required to be made on or before the
employee will, within a reasonable time, 4974, the required minimum distribution employee’s required beginning date shall
provide to the plan administrator correct- is determined for any year based on the be treated as the distribution required for
ed certifications to the extent that the actual terms of the trust in effect during the employee’s first distribution calendar
amendment changes any information pre- the year. year (as defined in paragraph (b) of this
viously certified; and §1.401(a)(9)–5 Required minimum A-1). The required minimum distribution
(iv) Agrees to provide a copy of the distributions from defined contribution for other distribution calendar years,
trust instrument to the plan administrator plans. including the required minimum distribu-
upon demand. tion for the distribution calendar year in
(b) Required minimum distributions Q-1. If an employee’s benefit is in the which the employee’s required beginning
after death. In order to satisfy the docu- form of an individual account under a date occurs, must be made on or before
mentation requirement of this A-6 for defined contribution plan, what is the the end of that distribution calendar year.
required minimum distributions after the amount required to be distributed for each (d) Minimum distribution incidental
death of the employee, by the last day of calendar year? benefit requirement. If distributions are
the calendar year immediately following A-1. (a) General rule. If an employ- made in accordance with this section, the
the calendar year in which the employee ee’s accrued benefit is in the form of an minimum distribution incidental benefit
died, the trustee of the trust must either - - individual account under a defined contri- requirement of section 401(a)(9)(G) will
(1) Provide the plan administrator with bution plan, the minimum amount be satisfied.
a final list of all beneficiaries of the trust required to be distributed for each distrib- (e) Annuity contracts. Instead of satis-
(including contingent and remaindermen ution calendar year, as defined in para- fying this A-1, the required minimum dis-
beneficiaries with a description of the graph (b) of this A-1, is equal to the quo- tribution requirement may be satisfied by
conditions on their entitlement) as of the tient obtained by dividing the account the purchase of an annuity contract from
end of the calendar year following the cal- (determined under A-3 of this section) by an insurance company in accordance with
endar year of the employee’s death; certi- the applicable distribution period (deter- A-4 of §1.401(a)(9)–6 with the employ-

2001–11 I.R.B. 877 March 12, 2001


ee’s entire individual account. If such an (c)(1) The account balance is de- (iii) If, instead of $1,000 being distributed to X,
annuity is purchased after distributions creased by distributions made in the valu- $20,000 is distributed on April 1, 2003, the account
balance of $26,400 would still be reduced by $1,000
are required to commence (the required ation calendar year after the valuation in order to determine the benefit to be used in cal-
beginning date, in the case of distributions date. culating the required minimum distribution for cal-
commencing before death, or the date (2)(i) The following rule applies if any endar year 2003. The amount of the distribution
determined under A-3 of §1.401(a)(9)–3, portion of the required minimum distrib- made on April 1, 2003, in order to meet the required
in the case of distributions commencing ution for the first distribution calendar minimum distribution for 2002 would still be
$1,000. The remaining $19,000 ($20,000 - $1,000)
after death), payments under the annuity year is made in the second distribution of the distribution is not the required minimum dis-
contract purchased will satisfy section calendar year (i.e., generally, the distribu- tribution for 2002. Instead, the remaining $19,000
401(a)(9) for distribution calendar years tion calendar year in which the required of the distribution is sufficient to satisfy the
after the calendar year of the purchase if beginning date occurs). In such case, for required minimum distribution requirement with
payments under the annuity contract are purposes of determining the account bal- respect to X for calendar year 2003. The amount
which is required to be distributed for calendar year
made in accordance with §1.401(a)(9)–6. ance to be used for determining the 2003 is $1,040.10 ($25,400 divided by 24.4, the
In such a case, payments under the annu- required minimum distribution for the applicable distribution period for an individual age
ity contract will be treated as distributions second distribution calendar year, distrib- 72). Consequently, no additional amount is
from the individual account for purposes utions described in paragraph (c)(1) shall required to be distributed to X in 2003 because
of determining if the individual account include an additional amount. This addi- $19,000 exceeds $1,040.10. However, pursuant to
A-2 of this section, the remaining $17,959.90
satisfies section 401(a)(9) for the calendar tional amount is equal to the amount of ($19,000-$1,040.10) may not be used to satisfy the
year of the purchase. An employee may any distribution made in the second dis- required minimum distribution requirements for
also purchase an annuity contract for a tribution calendar year on or before the calendar year 2004 or any subsequent calendar
portion of the employee’s account under required beginning date that is not in years.
the rules of A-2(c) of §1.401(a)(9)–8. excess (when added to the amounts dis- (d) If an amount is distributed by one
Q-2. If an employee’s benefit is in the tributed in the first calendar year) of the plan and rolled over to another plan
form of an individual account and, in any amount required to meet the required (receiving plan), A-2 of §1.401(a)(9)-7
calendar year, the amount distributed minimum distribution for the first distrib- provides additional rules for determining
exceeds the minimum required, will cred- ution calendar year. the benefit and required minimum distrib-
it be given in subsequent calendar years (ii) This paragraph (c)(2) is illustrated ution under the receiving plan. If an
for such excess distribution? by the following example: amount is transferred from one plan
A-2. If, for any distribution calendar Example. (i) Employee X, born October 1, 1931, (transferor plan) to another plan (transfer-
year, the amount distributed exceeds the is an unmarried participant in a qualified defined ee plan), A-3 and A-4 of §1.401(a)(9)-7
contribution plan (Plan Z). After retirement, X
minimum required, no credit will be given provide additional rules for determining
attains age 70 1/2 in calendar year 2002. X’s
in subsequent calendar years for such required beginning date is April 1, 2003. As of the the amount of the required minimum dis-
excess distribution. last valuation date under Plan Z in calendar year tribution and the benefit under both the
Q-3. What is the amount of the account 2001, which was on December 31, 2001, the value of transferor and transferee plans.
of an employee used for determining the X’s account balance was $25,300. No contributions Q-4. For required minimum distribu-
are made or amounts forfeited after such date which
employee’s required minimum distribu- tions during an employee’s lifetime, what
are allocated in calendar year 2001. No rollover
tion in the case of an individual account? amounts are received after such date by Plan Z on is the applicable distribution period?
A-3. (a) In the case of an individual X’s behalf which were distributed by a qualified plan A-4. (a) General rule— (1)
account, the benefit used in determining or IRA in calendar years 2001, 2002, or 2003. The Applicable distribution period. Except as
the required minimum distribution for a applicable distribution period from the table in A- provided in paragraph (b) of this A-4, the
4(a)(2) for an individual age 71 is 25.3 years. The
distribution calendar year is the account applicable distribution period for required
required minimum distribution for calendar year
balance as of the last valuation date in the 2002 is $1,000 ($25,300 divided by 25.3). That minimum distributions for distribution
calendar year immediately preceding that amount is distributed to X on April 1, 2003. calendar years up to and including the dis-
distribution calendar year (valuation cal- (ii) The value of X’s account balance as of tribution calendar year that includes the
endar year) adjusted in accordance with December 31, 2002 (the last valuation date under employee’s date of death is determined
Plan Z in calendar year 2002) is $26,400. No contri-
paragraphs (b) and (c) of this A-3. using the table in paragraph (a)(2) for the
butions are made or amounts forfeited after such
(b) The account balance is increased by date which are allocated in calendar year 2002. In employee’s age as of the employee’s
the amount of any contributions or forfei- order to determine the benefit to be used in calculat- birthday in the relevant distribution calen-
tures allocated to the account balance as of ing the required minimum distribution for calendar dar year.
dates in the valuation calendar year after the year 2003, the account balance of $26,400 will be (2) Table for determining distribution
reduced by $1,000, the amount of the required mini-
valuation date. Contributions include con- period—(i) General rule. The following
mum distribution for calendar year 2002 made on
tributions made after the close of the valua- April 1, 2003. Consequently, the benefit for purpos- table is used for determining the distribu-
tion calendar year which are allocated as of es of determining the required minimum distribution tion period for lifetime distributions to an
dates in the valuation calendar year. for calendar year 2003 is $25,400. employee.

March 12, 2001 878 2001–11 I.R.B.


Age of the employee Distribution period
70 26.2
71 25.3
72 24.4
73 23.5
74 22.7
75 21.8
76 20.9
77 20.1
78 19.2
79 18.4
80 17.6
81 16.8
82 16.0
83 15.3
84 14.5
85 13.8
86 13.1
87 12.4
88 11.8
89 11.1
90 10.5
91 9.9
92 9.4
93 8.8
94 8.3
95 7.8
96 7.3
97 6.9
98 6.5
99 6.1
100 5.7
101 5.3
102 5.0
103 4.7
104 4.4
105 4.1
106 3.8
107 3.6
108 3.3
109 3.1
110 2.8
111 2.6
112 2.4
113 2.2
114 2.0
115 and older 1.8

(ii) Authority for revised table. The ee is the employee’s surviving spouse, for spouse’s birthdays in the distribution cal-
table in A-4(a)(2)(i) of this section may be required minimum distributions during endar year. The spouse is sole designated
replaced by any revised table prescribed the employee’s lifetime, the applicable beneficiary for purposes of determining
by the Commissioner in revenue rulings, distribution period is the longer of the dis- the applicable distribution period for a
notices, or other guidance published in the tribution period determined in accordance distribution calendar year during the
Internal Revenue Bulletin. See §601.601 with paragraph (a) of this A-4 or the joint employee’s lifetime if the spouse is the
(d)(2)(ii)(b) of this chapter. life expectancy of the employee and sole beneficiary of the employee’s entire
(b) Spouse is sole beneficiary. If the spouse using the employee’s and spouse’s interest at all times during the distribution
sole designated beneficiary of an employ- attained ages as of the employee’s and the calendar year.

2001–11 I.R.B. 879 March 12, 2001


Q-5. For required minimum distribu- the employee’s sole beneficiary, the A-7. (a) General rule. (1) Except as
tions after an employee’s death, what is applicable period is measured by the sur- otherwise provided in paragraph (c) of
the applicable distribution period? viving spouse’s life expectancy using the this A-7, if more than one individual is
A-5. (a) Death on or after the em- surviving spouse’s birthday for each dis- designated as a beneficiary with respect to
ployee’s required beginning date. If an tribution calendar year for which a an employee as of any applicable date for
employee dies on or after distribution has required minimum distribution is required determining the designated beneficiary,
begun as determined under A-6 of after the calendar year of the employee’s the designated beneficiary with the short-
§1.401(a)(9)-2 (generally after the em- death. For calendar years after the calen- est life expectancy will be the designated
ployee’s required beginning date), in dar year of the spouse’s death, the beneficiary for purposes of determining
order to satisfy section 401(a)(9)(B)(i), spouse’s remaining life expectancy is the the distribution period. However, except
the applicable distribution period for dis- life expectancy of the spouse using the as otherwise provided in A-5 of
tribution calendar years after the distribu- age of the spouse as of the spouse’s birth- §1.401(a)(9)-4 and paragraph (c)(1) of
tion calendar year containing the em- day in the calendar year of the spouse’s this A-7, if a person other than an individ-
ployee’s date of death is either— death. In subsequent calendar years, the ual is designated as a beneficiary, the
(1) If the employee has a designated applicable distribution period is reduced employee will be treated as not having
beneficiary as of the date determined by one for each calendar year that has any designated beneficiaries for purposes
under A-4 of §1.401(a)(9)-4, the remain- elapsed since the calendar year immedi- of section 401(a)(9) even if there are also
ing life expectancy of the employee’s des- ately following the calendar year of the individuals designated as beneficiaries.
ignated beneficiary determined in accor- spouse’s death. (2) See A-2 of §1.401(a)(9)-8 for spe-
dance with paragraph(c)(1) or (2) of A-5; (3) No designated beneficiary. The cial rules which apply if an employee’s
or applicable distribution period measured benefit under a plan is divided into sepa-
(2) If the employee does not have a des- by the employee’s remaining life rate accounts (or segregated shares in the
ignated beneficiary as of the date deter- expectancy is the life expectancy of the case of a defined benefit plan) and the
mined under A-4(a) of §1.401(a)(9)-4, the employee using the age of the employee beneficiaries with respect to a separate
remaining life expectancy of the employ- as of the employee’s birthday in the cal- account differ from the beneficiaries of
ee determined in accordance with para- endar year of the employee’s death. In another separate account.
graph (c)(3) of this A-5. subsequent calendar years the applicable (b) Contingent beneficiary. Except as
(b) Death before an employee’s distribution period is reduced by one for provided in paragraph (c)(1) of this A-7, if
required beginning date. If an employee each calendar year that has elapsed since a beneficiary’s entitlement to an employ-
dies before distribution has begun as the calendar year of death. ee’s benefit is contingent on an event
determined under A-5 of §1.401(a)(9)-2 Q-6. What life expectancies must be other than the employee’s death or the
(generally before the employee’s required used for purposes of determining required death of another beneficiary, such contin-
beginning date), in order to satisfy section minimum distributions under section gent beneficiary is considered to be a des-
401(a)(9)(B)(iii) or (iv) and the life 401(a)(9)? ignated beneficiary for purposes of deter-
expectancy rule described in A-1 of A-6. (a) General rule. Unless other- mining which designated beneficiary has
§1.401(a)(9)-3, the applicable distribution wise prescribed in accordance with para- the shortest life expectancy under para-
period for distribution calendar years after graph (b) of this A-6, life expectancies for graph (a) of this A-7.
the distribution calendar year containing purposes of determining required mini- (c) Death contingency. (1) If a bene-
the employee’s date of death is the mum distributions under section 401(a)(9) ficiary (subsequent beneficiary) is entitled
remaining life expectancy of the employ- must be computed using the expected to any portion of an employee’s benefit
ee’s designated beneficiary, determined in return multiples in Tables V and VI of only if another beneficiary dies before the
accordance with paragraph (c)(1) or (2) of §1.72-9. entire benefit to which that other benefi-
this A-5. (b) Revised expected return table. The ciary is entitled has been distributed by
(c) Life expectancy—(1) Nonspouse expected return multiples described in the plan, the subsequent beneficiary will
designated beneficiary. The applicable paragraph (a) of this A-6 may be replaced not be considered a beneficiary for pur-
distribution period measured by the bene- by revised expected return multiples pre- poses of determining who is the designat-
ficiary’s remaining life expectancy is scribed for use for purposes of determin- ed beneficiary with the shortest life
determined using the beneficiary’s age as ing required minimum distributions under expectancy under paragraph (a) of this
of the beneficiary’s birthday in the calen- section 401(a)(9) by the Commissioner in A-7 or whether a beneficiary who is not
dar year immediately following the calen- revenue rulings, notices, and other guid- an individual is a beneficiary. This rule
dar year of the employee’s death. In sub- ance published in the Internal Revenue does not apply if the other beneficiary
sequent calendar years the applicable Bulletin. See §601.601(d)(2)(ii)(b) of this dies prior to the applicable date for deter-
distribution period is reduced by one for chapter. mining the designated beneficiary.
each calendar year that has elapsed since Q-7. If an employee has more than one (2) If the designated beneficiary whose
the calendar year immediately following designated beneficiary, which designated life expectancy is being used to calculate
the calendar year of the employee’s death. beneficiary’s life expectancy will be used the distribution period dies on or after the
(2) Spouse designated beneficiary. If to determine the applicable distribution applicable date, such beneficiary’s
the surviving spouse of the employee is period? remaining life expectancy will be used to

March 12, 2001 880 2001–11 I.R.B.


determine the distribution period whether Trust P during B’s lifetime for the benefit of A’s chil- Q-8. If a portion of an employee’s
or not a beneficiary with a shorter life dren, as remaindermen beneficiaries of Trust P, even individual account is not vested as of the
though access to those amounts are delayed until
expectancy receives the benefits. after B’s death, A’s children are beneficiaries of A’s
employee’s required beginning date, how
(3) This paragraph (c) is illustrated by account in Plan X in addition to B and B is not the is the determination of the required mini-
the following examples: sole beneficiary of A’s account. Thus the designated mum distribution affected?
Example 1. Employer L maintains a defined con- beneficiary used to determine the distribution period A-8. If the employee’s benefit is in the
tribution plan, Plan W. Unmarried Employee C dies from A’s account in Plan X is the beneficiary with form of an individual account, the benefit
in calendar year 2001 at age 30. As of December 31, the shortest life expectancy. B’s life expectancy is
2002, D, the sister of C, is the beneficiary of C’s the shortest of all the potential beneficiaries of the
used to determine the required minimum
account balance under Plan W. Prior to death C has testamentary trust’s interest in A’s account in Plan X distribution for any distribution calendar
designated that, if D dies before C’s entire account (including remainder beneficiaries). Thus, the distri- year will be determined in accordance
balance has been distributed to D, E, mother of C bution period for purposes of section 401(a)(9) with A-1 of this section without regard to
and D, will be the beneficiary of the account bal- (B)(iii) is B’s life expectancy. Because B is not the whether or not all of the employee’s ben-
ance. Because E is only entitled, as a beneficiary, to sole beneficiary of the testamentary trust’s interest
any portion of C’s account if D dies before the entire in A’s account in Plan X, the special rule in
efit is vested. If any portion of the
account has been distributed, E is disregarded in 401(a)(9)(B)(iv) is not available and the annual re- employee’s benefit is not vested, distribu-
determining C’s designated beneficiary. quired minimum distributions from the account to tions will be treated as being paid from
Accordingly, even after D’s death, D’s life expectan- Trust M must begin no later than the end of the cal- the vested portion of the benefit first. If,
cy continues to be used to determined the distribu- endar year immediately following the calendar year as of the end of a distribution calendar
tion period. of A’s death.
Example 2. (i) Employer M maintains a defined Example 3. (i) The facts are the same as
year (or as of the employee’s required
contribution plan, Plan X. Employee A, an employ- Example 2 except that the testamentary trust instru- beginning date, in the case of the employ-
ee of M, died in 2001 at the age of 55, survived by ment provides that all amounts distributed from A‘s ee’s first distribution calendar year), the
spouse, B, who was 50 years old. Prior to A’s death, account in Plan X to the trustee while B is alive will total amount of the employee’s vested
M had established an account balance for A in Plan be paid directly to B upon receipt by the trustee of benefit is less than the required minimum
X. A’s account balance is invested only in produc- Trust P.
tive assets. A named the trustee of a testamentary (ii) In this case, B is the sole beneficiary of A’s
distribution for the calendar year, only the
trust (Trust P) established under A’s will as the ben- account in Plan X for purposes of determining the vested portion, if any, of the employee’s
eficiary of all amounts payable from the A’s account designated beneficiary under section 401(a)(9) benefit is required to be distributed by the
in Plan X after A’s death. A copy of the Trust P and (B)(iii) and (iv). No amounts distributed from A’s end of the calendar year (or, if applicable,
a list of the trust beneficiaries were provided to the account in Plan X to Trust P are accumulated in by the employee’s required beginning
plan administrator of Plan X by the end of the calen- Trust P during B’s lifetime for the benefit of any
dar year following the calendar year of A’s death. As other beneficiary. Because B is the sole beneficiary
date). However, the required minimum
of the date of A’s death, the Trust P was irrevocable of the testamentary trust’s interest in A’s account in distribution for the subsequent distribu-
and was a valid trust under the laws of the state of Plan X, the annual required minimum distributions tion calendar year must be increased by
A’s domicile. A’s account balance in Plan X was from A’s account to Trust P must begin no later than the sum of amounts not distributed in
includible in A’s gross estate under § 2039. the end of the calendar year in which A would have prior calendar years because the employ-
(ii) Under the terms of Trust P, all trust income is attained age 70 1/2 rather than the calendar year
payable annually to B, and no one has the power to immediately following the calendar year of A’s
ee’s vested benefit was less than the
appoint Trust P principal to any person other than B. death. required minimum distribution (subject to
A’s children, who are all younger than B, are the sole (d) Designations by beneficiaries. (1) the limitation that the required minimum
remainder beneficiaries of the Trust P. No other per- distribution for that subsequent distribu-
If the plan provides (or allows the em-
son has a beneficial interest in Trust P. Under the
ployee to specify) that, after the end of the tion calendar year will not exceed the
terms of the Trust P, B has the power, exercisable
annually, to compel the trustee to withdraw from A’s calendar year following the calendar year vested portion of the employee’s benefit).
account balance in Plan X an amount equal to the in which the employee died, any person or In such case, an adjustment for the addi-
income earned on the assets held in A’s account in persons have the discretion to change the tional amount distributed which corre-
Plan X during the calendar year and to distribute that sponds to the adjustment described in
beneficiaries of the employee, then, for
amount through Trust P to B. Plan X contains no
purposes of determining the distribution A-3(c)(2) of this section will be made to
prohibition on withdrawal from A’s account of
amounts in excess of the annual required minimum period after the employee’s death, the the account used to determine the required
distributions under section 401(a)(9). In accordance employee will be treated as not having minimum distribution for that calendar
with the terms of Plan X, the trustee of Trust P elects, designated a beneficiary. However, such year.
in order to satisfy section 401(a)(9), to receive annu-
discretion will not be found to exist mere-
al required minimum distributions using the life §1.401(a)(9)-6 Required minimum
expectancy rule in section 401(a)(9)(B)(iii) for dis- ly because a beneficiary may designate a
distributions from defined benefit plans.
tributions over a distribution period equal to B’s life subsequent beneficiary for distributions of
expectancy. If B exercises the withdrawal power, the any portion of the employee’s benefit Q-1. How must annuity distributions
trustee must withdraw from A’s account under Plan after the beneficiary dies. under a defined benefit plan be paid in
X the greater of the amount of income earned in the
(2) This paragraph (d) is illustrated by order to satisfy section 401(a)(9)?
account during the calendar year or the required
minimum distribution. However, under the terms of the following example: A-1. (a) In order to satisfy section
Trust P, and applicable state law, only the portion of Example. The facts are the same as in Example 1 401(a)(9), annuity distributions under a
the Plan X distribution received by the trustee equal in paragraph (c)(3) of this A-7, except that, as per-
mitted under the plan, D designates E as the benefi-
defined benefit plan must be paid in peri-
to the income earned by A’s account in Plan X is
ciary of any amount remaining after the death of D odic payments made at intervals not
required to be distributed to B (along with any other
trust income.) rather than C making this designation. E is still dis- longer than one year (payment intervals)
(iii) Because some amounts distributed from A’s regarded in determining C’s designated beneficiary for a life (or lives), or over a period cer-
account in Plan X to Trust P may be accumulated in for purposes of section 401(a)(9). tain not longer than a life expectancy (or

2001–11 I.R.B. 881 March 12, 2001


joint life and last survivor expectancy) (d) (1) Except as provided in (d)(2) of A-2. (a) Life annuity for employee. If
described in section 401(a)(9)(A)(ii) or this A-1, annuity payments must com- the employee’s benefit is payable in the
section 401(a)(9)(B)(iii), whichever is mence on or before the employee’s form of a life annuity for the life of the
applicable. The life expectancy (or joint required beginning date (within the mean- employee satisfying section 401(a)(9), the
life and last survivor expectancy) for pur- ing of A-2 of §1.401(a)(9)-2). The first MDIB requirement of section 401(a)
poses of determining the length of the payment which must be made on or (9)(G) will be satisfied.
period certain will be determined in before the employee’s required beginning (b) Joint and survivor annuity, spouse
accordance with A-3 of this section. Once date must be the payment which is beneficiary. If the employee’s sole bene-
payments have commenced over a period required for one payment interval. The ficiary, as of the annuity starting date for
certain, the period certain may not be second payment need not be made until annuity payments, is the employee’s
lengthened even if the period certain is the end of the next payment interval even spouse and the distributions satisfy sec-
shorter than the maximum permitted. Life if that payment interval ends in the next tion 401(a)(9) without regard to the
annuity payments must satisfy the mini- calendar year. Similarly, in the case of MDIB requirement, the distributions to
mum distribution incidental benefit distributions commencing after death in the employee will be deemed to satisfy
requirements of A-2 of this section. All accordance with section 401(a)(9)(B)(iii) the MDIB requirement of section
annuity payments (life and period certain) and (iv), the first payment that must be 401(a)(9)(G). For example, if an employ-
also must either be nonincreasing or made on or before the date determined ee’s benefit is being distributed in the
increase only as follows: under A-3(a) or (b) (whichever is applica- form of a joint and survivor annuity for
(1) With any percentage increase in a ble) of §1.401(a)(9)-3 must be the pay- the lives of the employee and the employ-
specified and generally recognized cost- ment which is required for one payment ee’s spouse and the spouse is the sole ben-
of-living index; interval. Payment intervals are the peri- eficiary of the employee, the amount of
(2) To the extent of the reduction in the ods for which payments are received, e.g., the periodic payment payable to the
amount of the employee’s payments to bimonthly, monthly, semi-annually, or spouse may always be 100 percent of the
provide for a survivor benefit upon death, annually. All benefit accruals as of the last annuity payment payable to the employee
but only if the beneficiary whose life was day of the first distribution calendar year regardless of the difference in the ages
being used to determine the period must be included in the calculation of the between the employee and the employee’s
described in section 401(a)(9)(A)(ii) over amount of the life annuity payments for spouse. However, the amount of the pay-
which payments were being made dies or payment intervals ending on or after the ments under the annuity must be nonin-
is no longer the employee’s beneficiary employee’s required beginning date. creasing unless specifically permitted
pursuant to a qualified domestic relations (2) In the case of an annuity contract under A-1 of this section.
order within the meaning of section purchased after the required beginning (c) Joint and survivor annuity, non-
414(p); date, the first payment interval must begin spouse beneficiary — (1) Explanation of
(3) To provide cash refunds of employ- on or before the purchase date and the rule. If distributions commence under a
ee contributions upon the employee’s payment required for one payment inter- distribution option that is in the form of a
death; or val must be made no later than the end of joint and survivor annuity for the joint
(4) Because of an increase in benefits such payment interval. lives of the employee and a beneficiary
under the plan. (3) This paragraph (d) is illustrated by other than the employee’s spouse, the
(b) The annuity may be a life annuity the following example: MDIB requirement will not be satisfied
(or joint and survivor annuity) with a peri- Example. A defined benefit plan (Plan X) pro- as of the date distributions commence
vides monthly annuity payments of $500 for the life
od certain if the life (or lives, if applica- unless the distribution option provides
of unmarried participants with a 10-year period cer-
ble) and period certain each meet the tain. An unmarried participant (A) in Plan X attains that annuity payments to be made to the
requirements of paragraph (a) of this A-1. age 70 1/2 in 2001. In order to meet the require- employee on and after the employee’s
For purposes of this section, if distribution ments of this paragraph, the first payment which required beginning date will satisfy the
is permitted to be made over the lives of must be made on behalf of A on or before April 1, conditions of this paragraph. The period-
2002, will be $500 and the payments must continue
the employee and the designated benefi- ic annuity payment payable to the sur-
to be made in monthly payments of $500 thereafter
ciary, references to life annuity include a for the life and 10-year certain period. vivor must not at any time on and after
joint and survivor annuity. (e) If distributions from a defined ben- the employee’s required beginning date
(c) Distributions under a variable an- efit plan are not in the form of an annuity, exceed the applicable percentage of the
nuity will not be found to be increasing the employee’s benefit will be treated as annuity payment payable to the employee
merely because the amount of the pay- an individual account for purposes of using the table below. Thus, this require-
ments varies with the investment perfor- determining the required minimum distri- ment must be satisfied with respect to
mance of the underlying assets. How- bution. See §1.401(a)(9)-5. any benefit increase after such date,
ever, the Commissioner may prescribe Q-2. How must distributions in the including increases to reflect increases in
additional requirements applicable to form of a life (or joint and survivor) annu- the cost of living. The applicable per-
such variable life annuities in revenue rul- ity be made in order to satisfy the mini- centage is based on the excess of the age
ings, notices, and other guidance pub- mum distribution incidental benefit of the employee over the age of the ben-
lished in the Internal Revenue Bulletin. (MDIB) requirement of section eficiary as of their attained ages as of
See §601.601(d)(2)(ii)(b) of this chapter. 401(a)(9)(G)? their birthdays in a calendar year. If the

March 12, 2001 882 2001–11 I.R.B.


employee has more than one beneficiary, centage using the age of the youngest the annuity payments must satisfy A-1 of
the applicable percentage will be the per- beneficiary. Additionally, the amount of this section.

(2) Table.

Excess of age of employee over Applicable percentage


age of beneficiary
10 years or less 100%
11 96%
12 93%
13 90%
14 87%
15 84%
16 82%
17 79%
18 77%
19 75%
20 73%
21 72%
22 70%
23 68%
24 67%
25 66%
26 64%
27 63%
28 62%
29 61%
30 60%
31 59%
32 59%
33 58%
34 57%
35 56%
36 56%
37 55%
38 55%
39 54%
40 54%
41 53%
42 53%
43 53%
44 and greater 52%

(3) Example. This paragraph (c) is monthly payment to Y is 100 percent of the monthly upon Z’s death will exceed 60 percent of Z’s monthly
illustrated by the following example: amount payable to Z. There is no provision under the payment (the maximum percentage for a difference of
Example. Distributions commence on January 1, option for a change in the projected payments to Y as ages of 30 years).
2001, to an employee (Z), born March 1, 1935, after of April 1, 2006, Z’s required beginning date. (d) Period certain and annuity fea-
retirement at age 65. Z’s daughter (Y), born February Consequently, as of January 1, 2001, the date annuity
tures. If a distribution form includes a life
5, 1965, is Z’s beneficiary. The distributions are in the distributions commence, the plan does not satisfy the
MDIB requirement in operation because, as of such
annuity and a period certain, the amount
form of a joint and survivor annuity for the lives of Z
and Y with payments of $500 a month to Z and upon date, the distribution option provides that, as of Z’s of the annuity payments payable to the
Z’s death of $500 a month to Y, i.e., the projected required beginning date, the monthly payment to Y employee must satisfy paragraph (c) of

2001–11 I.R.B. 883 March 12, 2001


this A-2, and the period certain may not exceed the life expectancy of the desig- Q-6. If a portion of an employee’s ben-
exceed the period determined under A-3 nated beneficiary using the beneficiary’s efit is not vested as of the employee’s
of this section. age in the year that contains the annuity required beginning date, how is the deter-
Q-3. How long is a period certain starting date. mination of the required minimum distri-
under an annuity contract permitted to Q-4. May distributions be made from bution affected?
extend? an annuity contract which is purchased A-6. In the case of annuity distributions
A-3. (a) Distributions commencing from an insurance company? from a defined benefit plan, if any portion
during the employee’s life - - (1) Spouse A-4. Yes. Distributions may be made of the employee’s benefit is not vested as
beneficiary. If an employee’s spouse is the from an annuity contract which is pur- of December 31 of a distribution calendar
employee’s sole beneficiary as of the chased with the employee’s benefit by the year (or as of the employee’s required
annuity starting date, the period certain plan from an insurance company and beginning date in the case of the employ-
for annuity distributions commencing which makes payments that satisfy the ee’s first distribution calendar year), the
during the life of an employee with an provisions of this section. In the case of portion which is not vested as of such date
annuity starting date on or after the an annuity contract purchased from an will be treated as not having accrued for
employee’s required beginning date is not insurance company, there is also an purposes of determining the required min-
permitted to exceed the joint life and last exception to the nonincreasing require- imum distribution for that distribution cal-
survivor expectancy of the employee and ment in A-1(a) of this section for an endar year. When an additional portion of
the spouse using the age of the employee increase to provide a cash refund upon the the employee’s benefit becomes vested,
and spouse as of their birthdays in the cal- employee’s death equal to the excess of such portion will be treated as an addition-
endar year that contains the annuity start- the amount of the premiums paid for the al accrual. See A-5 of this section for the
ing date. contract over the prior distributions under rules for distributing benefits which accrue
(2) Nonspouse beneficiary. If an em- the contract. If the payments actually under a defined benefit plan after the
ployee’s surviving spouse is not the em- made under the annuity contract do not employee’s required beginning date.
ployee’s sole beneficiary as of the annu- meet the requirements of section Q-7. If an employee retires after the
ity starting date, the period certain for 401(a)(9), the plan fails to satisfy section calendar year in which the employee
any annuity distributions during the life 401(a)(9). attains age 70 1/2, for what period must
of the employee with an annuity starting Q-5. In the case of annuity distribu- the employee’s accrued benefit under a
date on or after the employee’s required tions under a defined benefit plan, how defined benefit plan be actuarially
beginning date is not permitted to exceed must additional benefits which accrue increased?
the shorter of the applicable distribution after the employee’s required beginning A-7. (a) Actuarial increase starting
period for the employee (determined in date be distributed in order to satisfy sec- date. If an employee (other than a 5-per-
accordance with the table in A-4(a)(2) of tion 401(a)(9)? cent owner) retires after the calendar year
§1.401(a)(9)–5) for the calendar year A-5. (a) In the case of annuity distribu- in which in the employee attains age 70
that contains the annuity starting date or tions under a defined benefit plan, if any 1/2, in order to satisfy section 401(a)(9)
the joint life and last survivor ex- additional benefits accrue after the (C)(iii), the employee’s accrued benefit
pectancy of the employee and the em- employee’s required beginning date, dis- under a defined benefit plan must be actu-
ployee’s designated beneficiary, deter- tribution of such amount as a separate arially increased to take into account any
mined using the designated beneficiary identifiable component must commence period after age 70 1/2 in which the
as of the annuity starting date and using in accordance with A-1 of this section employee was not receiving any benefits
their ages as of their birthdays in the cal- beginning with the first payment interval under the plan. The actuarial increase
endar year that contains the annuity ending in the calendar year immediately required to satisfy section 401(a)(9)(C)(iii)
starting date. See A-10 for the rule for following the calendar year in which such must be provided for the period starting on
annuity payments with an annuity start- amount accrues. the April 1 following the calendar year in
ing date before the required beginning (b) A plan will not fail to satisfy sec- which the employee attains age 70 1/2.
date. tion 401(a)(9) merely because there is an (b) Actuarial increase ending date. The
(b) Life expectancy rule. (1) If annuity administrative delay in the commence- period for which the actuarial increase
distributions commence after the death of ment of the distribution of the separate must be provided ends on the date on
the employee under the life expectancy identifiable component, provided that the which benefits commence after retirement
rule (under section 401(a)(9)(iii) or (iv)), actual payment of such amount com- in an amount sufficient to satisfy section
the period certain for any distributions mences as soon as practicable but not 401(a)(9).
commencing after death cannot exceed later than by the end of the first calendar (c) Nonapplication to plan providing
the applicable distribution period deter- year following the calendar year in same required beginning date for all
mined under A-5(b) of §1.401(a)(9)–5 for which the additional benefit accrues, and employees. If as permitted under A-2(e)
the distribution calendar year that con- that the total amount paid during such of §1.401(a)(9)–2, a plan provides that the
tains the annuity starting date. first calendar year is not less than the required beginning date for purposes of
(2) If the annuity starting date is in a total amount that was required to be paid section 401(a)(9) for all employees is
calendar year before the first distribution during that year under A-5(a) of this sec- April 1 of the calendar year following the
calendar year, the period certain may not tion. calendar year in which the employee

March 12, 2001 884 2001–11 I.R.B.


attained age 70 1/2 (regardless of whether generally no actuarial adjustment is (b) Period certain. If as of the employ-
the employee is a 5-percent owner) and required to reflect the period during which ee’s birthday in the year that contains the
the plan makes distributions in an amount a benefit is suspended as permitted under annuity starting date, the age of the
sufficient to satisfy section 401(a)(9) section 203(a)(3)(B) of the Employee employee is under 70, the following rule
using that required beginning date, no Retirement Income Security Act of 1974 applies in applying the rule in paragraph
actuarial increase is required under sec- (ERISA). The actuarial increase required (a)(2) of A-3 of this section. The applica-
tion 401(a)(9)(C)(iii). under section 401(a)(9) for the period ble distribution period for the employee
(d) Nonapplication to defined contribu- described in A-7 of this section is general- (determined in accordance with the table
tion plans. The actuarial increase required ly the same as, and not in addition to, the in A-4(a)(2) of §1.401(a)(9)–5) is 26.2
under this A-7 does not apply to defined actuarial increase required for the same plus the difference between 70 and the age
contribution plans. period under section 411 to reflect any of the employee as of the employee’s
(e) Nonapplication to governmental delay in the payment of retirement bene- birthday in the year that contains the
and church plans. The actuarial increase fits after normal retirement age. annuity starting date.
required under this A-7 does not apply to However, unlike the actuarial increase Q-11. What rule applies if distributions
a governmental plan (within the meaning required under section 411, the actuarial commence irrevocably (except for accel-
of section 414(d)) or a church plan. For increase required under section eration) to the surviving spouse of an
purposes of this paragraph, the term 401(a)(9)(C) must be provided even dur- employee over a period permitted under
church plan means a plan maintained by a ing the period during which an employ- section 401(a)(9)(B)(iii)(II) before the
church for church employees, and the ee’s benefit has been suspended in accor- date on which distributions are required to
term church means any church (as defined dance with ERISA section 203(a)(3)(B). commence and the distribution form is an
in section 3121(w)(3)(A)) or qualified Q-10. What rule applies if distributions annuity under which distributions are
church-controlled organization (as commence to an employee on a date before made as of the date distributions com-
defined in section 3121(w)(3)(B)). the employee’s required beginning date mence in accordance with the provisions
Q-8. What amount of actuarial increase over a period permitted under section of A-1 (and if applicable A-4) of this sec-
is required under section 401(a)(9) 401(a)(9)(A)(ii) and the distribution form tion?
(C)(iii)? is an annuity under which distributions are A-11. If distributions commence irrevo-
A-8. In order to satisfy section made in accordance with the provisions of cably (except for acceleration) to the sur-
401(a)(9)(C)(iii), the retirement benefits A-1 (and if applicable A-4) of this section? viving spouse of an employee over a period
payable with respect to an employee as of A-10. (a) General rule. If distributions permitted under section 401(a)(9)(B)
the end of the period for actuarial increas- irrevocably (except for acceleration) com- (iii)(II) before the date on which distribu-
es (described in A-7 of this section) must mence to an employee on a date before tions are required to commence and the dis-
be no less than: the actuarial equivalent the employee’s required beginning date tribution form is an annuity under which
of the employee’s retirement benefits that over a period permitted under section distributions are made as of the date distrib-
would have been payable as of the date 401(a)(9)(A)(ii) and the distribution form utions commence in accordance with the
the actuarial increase must commence is an annuity under which distributions provisions of A-1 (and if applicable A-4) of
under A-7(a) of this section if benefits had are made in accordance with the provi- this section, distributions will be consid-
commenced on that date; plus the actuari- sions of A-1 (and, if applicable, A-4) of ered to have begun on the actual com-
al equivalent of any additional benefits this section, the annuity starting date will mencement date for purposes of section
accrued after that date; reduced by the be treated as the required beginning date 401(a)(9)(B)(iv)(II). Consequently, in such
actuarial equivalent of any distributions for purposes of applying the rules of this case, A-5 of §1.401(a)(9)–3 and section
made with respect to the employee’s section and §1.401(a)(9)–3. Thus, for 401(a)(9)(B)(ii) and (iii) will not apply
retirement benefits after that date. example, the designated beneficiary dis- upon the death of the surviving spouse as
Actuarial equivalence is determined using tributions will be determined as of the though the surviving spouse were the em-
the plan’s assumptions for determining annuity starting date. Similarly, if the ployee. Instead, the annuity distributions
actuarial equivalence for purposes of sat- employee dies after the annuity starting must continue to be made, in accordance
isfying section 411. date but before the required beginning with the provisions of A-1 (and if applica-
Q-9. How does the actuarial increase date determined under A-2 of ble A-4) of this section over the remaining
required under section 401(a)(9)(C)(iii) §1.401(a)(9)–2, after the employee’s period over which distributions com-
relate to the actuarial increase required death, the remaining portion of the menced (single life and, if applicable, pe-
under section 411? employee’s interest must continue to be riod certain).
A-9. In order for any of an employee’s distributed in accordance with this section
§1.401(a)(9)–7 Rollovers and Transfers.
accrued benefit to be nonforfeitable as over the remaining period over which dis-
required under section 411, a defined ben- tributions commenced (single or joint Q-1. If an amount is distributed by one
efit plan must make an actuarial adjust- lives and, if applicable, period certain). plan (distributing plan) and is rolled over
ment to an accrued benefit the payment of The rules in §1.401(a)(9)–3 and section to another plan, is the benefit or the
which is deferred past normal retirement 401(a)(9)(B)(ii) or (iii) and (iv) do not required minimum distribution under the
age. The only exception to this rule is that apply. distributing plan affected by the rollover?

2001–11 I.R.B. 885 March 12, 2001


A-1. No. If an amount is distributed by A-3. (a) In the case of a transfer of an fit of the employee under the transferee
one plan and is rolled over to another amount of an employee’s benefit from one plan is increased by the amount trans-
plan, the amount distributed is still treated plan to another, the transfer is not treated ferred. The transfer has no impact on the
as a distribution by the distributing plan as a distribution by the transferor plan for required minimum distribution to be made
for purposes of section 401(a)(9), purposes of section 401(a)(9). Instead, by the transferee plan in the calendar year
notwithstanding the rollover. the benefit of the employee under the in which the transfer is received.
Q-2. If an amount is distributed by one transferor plan is decreased by the amount However, if a required minimum distribu-
plan (distributing plan) and is rolled over transferred. However, if any portion of an tion is required from the transferee plan
to another plan (receiving plan), how are employee’s benefit is transferred in a dis- for the following calendar year, the trans-
the benefit and the required minimum dis- tribution calendar year with respect to that ferred amount must be considered to be
tribution under the receiving plan affect- employee, in order to satisfy section part of the employee’s benefit under the
ed? 401(a)(9), the transferor plan must deter- transferee plan. Consequently, for pur-
A-2. If an amount is distributed by one mine the amount of the required minimum poses of determining any required mini-
plan (distributing plan) and is rolled over to distribution with respect to that employee mum distribution for the calendar year
another plan (receiving plan), the benefit of for the calendar year of the transfer using immediately following the calendar year
the employee under the receiving plan is the employee’s benefit under the transfer- in which the transfer occurs, in the case of
increased by the amount rolled over. or plan before the transfer. Additionally, a transfer after the last valuation date of
However, the distribution has no impact on if any portion of an employee’s benefit is the transferee plan in the transfer calendar
the required minimum distribution to be transferred in the employee’s second dis- year, the benefit of the employee under
made by the receiving plan for the calendar tribution calendar year but on or before the receiving plan valued as of such valu-
year in which the rollover is received. But, the employee’s required beginning date, ation date, adjusted in accordance with
if a required minimum distribution is in order to satisfy section 401(a)(9), the A-3 of §1.401(a)(9)–5, will be increased
required to be made by the receiving plan transferor plan must determine the by the amount transferred valued as of the
for the following calendar year, the amount of the required minimum distribu- date of the transfer.
rollover amount must be considered to be tion requirement for the employee’s first Q-5. How are a spinoff, merger or con-
part of the employee’s benefit under the distribution calendar year based on the solidation (as defined in §1.414(l)–1)
receiving plan. Consequently, for purpos- employee’s benefit under the transferor treated for purposes of determining an
es of determining any required minimum plan before the transfer. The transferor employee’s benefit and required mini-
distribution for the calendar year immedi- plan may satisfy the required minimum mum distribution under section
ately following the calendar year in which distribution requirement for the calendar 401(a)(9)?
the amount rolled over is received by the year of the transfer (and the prior year if A-5. For purposes of determining an
receiving plan, in the case in which the applicable) by segregating the amount employee’s benefit and required mini-
amount rolled over is received after the last which must be distributed from the mum distribution under section 401(a)(9),
valuation date in the calendar year under employee’s benefit and not transferring a spinoff, a merger, or a consolidation (as
the receiving plan, the benefit of the that amount. Such amount may be defined in §1.414(l)–1) will be treated as
employee as of such valuation date, adjust- retained by the transferor plan and distrib- a transfer of the benefits of the employees
ed in accordance with A-3 of uted on or before the date required. involved. Consequently, the benefit and
§1.401(a)(9)–5, will be increased by the (b) For purposes of determining any required minimum distribution of each
rollover amount valued as of the date of required minimum distribution for the cal- employee involved under the transferor
receipt. For purposes of calculating the endar year immediately following the cal- and transferee plans will be determined in
benefit under the receiving plan pursuant to endar year in which the transfer occurs, in accordance with A-3 and A-4 of this sec-
the preceding sentence, if the amount the case of a transfer after the last valua- tion.
rolled over is received by the receiving tion date for the calendar year of the trans- §1.401(a)(9)–8 Special rules.
plan in a different calendar year from the fer under the transferor plan, the benefit of
calendar year in which it is distributed by the employee as of such valuation date, Q-1. What distribution rules apply if an
the distributing plan, the amount rolled adjusted in accordance with A-3 of employee is a participant in more than one
over is deemed to have been received by §1.401(a)(9)–5, will be decreased by the plan?
the receiving plan in the calendar year in amount transferred, valued as of the date A-1. If an employee is a participant in
which it was distributed by the distributing of the transfer. more than one plan, the plans in which the
plan. Q-4. If an amount of an employee’s employee participates are not permitted to
Q-3. In the case of a transfer of an benefit is transferred from one plan (trans- be aggregated for purposes of testing
amount of an employee’s benefit from one feror plan) to another plan (transferee whether the distribution requirements of
plan (transferor plan) to another plan plan), how are the benefit and the required section 401(a)(9) are met. The distribu-
(transferee plan), are there any special minimum distribution under the transferee tion of the benefit of the employee under
rules for satisfying the required minimum plan affected? each plan must separately meet the
distribution requirement or determining A-4. In the case of a transfer from one requirements of section 401(a)(9). For
the employee’s benefit under the transfer- plan (transferor plan) to another (transfer- this purpose, a plan described in section
or plan? ee plan), the general rule is that the bene- 414(k) is treated as two separate plans, a

March 12, 2001 886 2001–11 I.R.B.


defined contribution plan to the extent (iv), the only beneficiary of a separate sists of separate identifiable components
benefits are based on an individual account (or segregated share) under the which may be separately distributed.
account and a defined benefit plan with plan is the employee’s surviving spouse, Q-4. Must a distribution that is
respect to the remaining benefits. and beneficiaries other than the surviving required by section 401(a)(9) to be made
Q-2. If an employee’s benefit under a spouse are designated with respect to the by the required beginning date to an
plan is divided into separate accounts (or other separate accounts of the employee, employee or that is required by section
segregated shares in the case of a defined distribution of the spouse’s separate 401(a)(9)(B)(iii) and (iv) to be made by
benefit plan), do the distribution rules in account (or segregated share) under the the required time to a designated benefi-
section 401(a)(9) and these regulations plan need not commence until the date ciary who is a surviving spouse be made
apply separately to each separate account determined under the first sentence in notwithstanding the failure of the employ-
(or segregated share)? A-3(b) of §1.401(a)(9)–3, even if distrib- ee, or spouse where applicable, to consent
A-2. (a) Except as otherwise provided ution of the other separate accounts (or to a distribution while a benefit is imme-
in paragraphs (b) and (c) of this A-2, if an segregated shares) under the plan must diately distributable?
employee’s account under a defined con- commence at an earlier date. In the case A-4. Yes. Section 411(a)(11) and sec-
tribution plan is divided into separate of a distribution after the death of an tion 417(e) (see §§1.411(a)(11)–1(c)(2)
accounts (or if an employee’s benefit employee to which section and 1.417(e)–1(c)) require employee and
under a defined benefit plan is divided 401(a)(9)(B)(i) does not apply, distribu- spousal consent to certain distributions of
into segregated shares in the case of a tion from a separate account (or segregat- plan benefits while such benefits are
defined benefit plan) under the plan, the ed share) of an employee may be made immediately distributable. If an employ-
separate accounts (or segregated shares) over a beneficiary’s life expectancy in ee’s normal retirement age is later than the
will be aggregated for purposes of satisfy- accordance with section 401(a)(9)(B)(iii) required beginning date for the com-
ing the rules in section 401(a)(9). Thus, and (iv) even though distributions from mencement of distributions under section
except as otherwise provided in para- other separate accounts (or segregated 401(a)(9) and, therefore, benefits are still
graphs (b) and (c) of this A-2, all separate shares) under the plan with different ben- immediately distributable, the plan must,
accounts, including a separate account for eficiaries are being made in accordance nevertheless, distribute plan benefits to the
nondeductible employee contributions with the five-year rule in section participant (or where applicable, to the
(under section 72(d)(2)) or for qualified 401(a)(9)(B)(ii). spouse) in a manner that satisfies the
voluntary employee contributions (as (c) A portion of an employee’s account requirements of section 401(a)(9). Section
defined in section 219(e)), will be aggre- balance under a defined contribution plan 401(a)(9) must be satisfied even though
gated for purposes of section 401(a)(9). is permitted to be used to purchase an the participant (or spouse, where applica-
(b) If, for lifetime distributions, as of an annuity contract with a remaining amount ble) fails to consent to the distribution. In
employee’s required beginning date (or maintained in the separate account. In that such a case, the plan may distribute in the
the beginning of any distribution calendar case, the separate account under the plan form of a qualified joint and survivor
year beginning after the employee’s must be distributed in accordance with annuity (QJSA) or in the form of a quali-
required beginning date), or in the case of §1.401(a)(9)–5 in order to satisfy section fied preretirement survivor annuity
distributions under section 401(a)(9)(B) 401(a)(9) and the annuity payments under (QPSA) and the consent requirements of
(ii) or (iii) and (iv), as of the end of the the annuity contract must satisfy sections 411(a)(11) and 417(e) are deemed
year following the year containing the §1.401(a)(9)–6 in order to satisfy section to be satisfied if the plan has made reason-
employee’s (or spouse’s, where applica- 401(a)(9). able efforts to obtain consent from the par-
ble) date of death, the beneficiaries with Q-3. What is a separate account or seg- ticipant (or spouse if applicable) and if the
respect to a separate account (or segregat- regated share for purposes of section distribution otherwise meets the require-
ed share in the case of a defined benefit 401(a)(9)? ments of section 417. If, because of sec-
plan) under the plan differ from the bene- A-3. (a) For purposes of section tion 401(a)(11)(B), the plan is not required
ficiaries with respect to the other separate 401(a)(9), a separate account in an individ- to distribute in the form of a QJSA to a
accounts (or segregated shares) of the ual account is a portion of an employee’s participant or a QPSA to a surviving
employee under the plan, such separate benefit determined by an acceptable sepa- spouse, the plan may distribute the
account (or segregated share) under the rate accounting including allocating invest- required minimum distribution amount
plan need not be aggregated with other ment gains and losses, and contributions required at the time required to satisfy sec-
separate accounts (or segregated shares) and forfeitures, on a pro rata basis in a rea- tion 401(a)(9) and the consent require-
under the plan in order to determine sonable and consistent matter between ments of sections 411(a)(11) and 417(e)
whether the distributions from such sepa- such portion and any other benefits. are deemed to be satisfied if the plan has
rate account (or segregated share) under Further, the amounts of each such portion made reasonable efforts to obtain consent
the plan satisfy section 401(a)(9). of the benefit will be separately determined from the participant (or spouse if applica-
Instead, the rules in section 401(a)(9) may for purposes of determining the amount of ble) and if the distribution otherwise meets
separately apply to such separate account the required minimum distribution in the requirements of section 417.
(or segregated share) under the plan. For accordance with §1.401(a)(9)–5. Q-5. Who is an employee’s spouse or
example, if, in the case of a distribution (b) A benefit in a defined benefit plan is surviving spouse for purposes of section
described in section 401(a)(9)(B)(iii) and separated into segregated shares if it con- 401(a)(9)?

2001–11 I.R.B. 887 March 12, 2001


A-5. Except as otherwise provided in §1.401(a)(9)–5 for each distribution cal- alternate payee pursuant to the QDRO. If
A-6(a) (in the case of distributions of a endar year using an applicable distribu- the alternate payee dies after distribution
portion of an employee’s benefit payable tion period determined under A-4 of of the separate account allocated to the
to a former spouse of an employee pur- §1.401(a)(9)–5 using the age of the alternate payee pursuant to a QDRO has
suant to a qualified domestic relations employee in the distribution calendar year begun (determined under A-5 of
order), for purposes of section 401(a)(9), for purposes of using the table in §1.401(a)(9)–2) but before the employee
an individual is a spouse or surviving A-4(a)(2) of §1.401(a)(9)–5 if applicable dies, distribution of the remaining portion
spouse of an employee if such individual or ages of the employee and spousal alter- of that portion of the benefit allocated to
is treated as the employee’s spouse under nate payee if their joint life expectancy is the alternate payee must be made in
applicable state law. In the case of distri- longer than the distribution period using accordance with the rules in
butions after the death of an employee, for that table. The determination of whether §1.401(a)(9)–5 or §1.401(a)(9)–6 for dis-
purposes of determining whether, under distribution from such account after the tributions during the life of the employee.
the life expectancy rule in section death of the employee to the alternate Only after the death of the employee is the
401(a)(9)(B)(iii) and (iv), the provisions payee will be made in accordance with amount of the required minimum distribu-
of section 401(a)(9)(B)(iv) apply, the section 401(a)(9)(B)(i) or section tion determined in accordance with the
spouse of the employee is determined as 401(a)(9)(B)(ii) or (iii) and (iv) will rules that apply after the death of the
of the date of death of the employee. depend on whether distributions have employee.
Q-6. In order to satisfy section begun as determined under A-5 or (c) If a QDRO does not provide that an
401(a)(9), are there any special rules §1.401(a)(9)–2 (which provides, in gener- employee’s benefit is to be divided but
which apply to the distribution of all or a al, that distributions are not treated as hav- provides that a portion of an employee’s
portion of an employee’s benefit payable ing begun until the employee’s required benefit (otherwise payable to the employ-
to an alternate payee pursuant to a quali- beginning date even though payments ee) is to be paid to an alternate payee,
fied domestic relations order as defined in may actually have begun before that date). such portion will not be treated as a sepa-
section 414(p) (QDRO)? For example, if the alternate payee dies rate account (or segregated share) of the
A-6. (a) A former spouse to whom all before the employee and distribution of employee. Instead, such portion will be
or a portion of the employee’s benefit is the separate account allocated to the alter- aggregated with any amount distributed to
payable pursuant to a QDRO will be treat- nate payee pursuant to the QDRO is to be the employee and will be treated as hav-
ed as a spouse (including a surviving made to the alternate payee’s beneficiary, ing been distributed to the employee for
spouse) of the employee for purposes of such beneficiary may be treated as a des- purposes of determining whether the
section 401(a)(9), including the minimum ignated beneficiary for purposes of deter- required minimum distribution require-
distribution incidental benefit require- mining the required minimum distribution ment has been satisfied with respect to
ment, regardless of whether the QDRO required from such account after the death that employee.
specifically provides that the former of the employee if the beneficiary of the Q-7. Will a plan fail to satisfy section
spouse is treated as the spouse for purpos- alternate payee is an individual and if 401(a)(9) where it is not legally permitted
es of sections 401(a)(11) and 417. such beneficiary is a beneficiary under the to distribute to an alternate payee all or a
(b)(1) If a QDRO provides that an plan or specified to or in the plan. portion of an employee’s benefit payable
employee’s benefit is to be divided and a Specification in or pursuant to the QDRO to an alternate payee pursuant to a QDRO
portion is to be allocated to an alternate will also be treated as specification to the within the period specified in section
payee, such portion will be treated as a plan. 414(p)(7)?
separate account (or segregated share) (2) Distribution of the separate account A-7. A plan will not fail to satisfy sec-
which separately must satisfy the require- allocated to an alternate payee pursuant to tion 401(a)(9) merely because it fails to
ments of section 401(a)(9) and may not be a QDRO satisfy the requirements of sec- distribute a required amount during the
aggregated with other separate accounts tion 401(a)(9)(A)(ii) if such account is to period in which the issue of whether a
(or segregated shares) of the employee for be distributed, beginning not later than the domestic relations order is a QDRO is
purposes of satisfying section 401(a)(9). employee’s required beginning date, over being determined pursuant to section
Except as otherwise provided in para- the life of the alternate payee (or over a 414(p)(7), provided that the period does
graph(b)(2) of this A-6, distribution of period not extending beyond the life not extend beyond the 18-month period
such separate account allocated to an expectancy of the alternative payee). described in section 414(p)(7)(E). To the
alternate payee pursuant to a QDRO must Also, if the plan permits the employee to extent that a distribution otherwise
be made in accordance with section elect whether distribution upon the death required under section 401(a)(9) is not
401(a)(9). For example, in general, distri- of the employee will be made in accor- made during this period, this amount and
bution of such account will satisfy section dance with the five-year rule in section any additional amount accrued during this
401(a)(9)(A) if required minimum distrib- 401(a)(9)(B)(ii) or the life expectancy period will be treated as though it is not
utions from such account during the rule in section 401(a)(9)(B)(iii) and (iv) vested during the period and any distribu-
employee’s lifetime begin not later than pursuant to A-4(c) of §1.401(a)(9)–3, tions with respect to such amounts must
the employee’s required beginning date such election is to be made only by the be made under the relevant rules for non-
and the required minimum distribution is alternate payee for purposes of distribut- vested benefits described in either A-8 of
determined in accordance with ing the separate account allocated to the §1.401(a)(9)–5 or A-6 of §1.401(a)(9)–6.

March 12, 2001 888 2001–11 I.R.B.


Q-8. Will a plan fail to satisfy section endar year in which distributions com- accordance with section 242(b)(2) of the
401(a)(9) where an individual’s distribu- mence. Tax Equity and Fiscal Responsibility Act
tion from the plan is less than the amount Q-10. Is the distribution of an annuity (TEFRA)?
otherwise required to satisfy section contract a distribution for purposes of sec- A-13. No. Even though the distribu-
401(a)(9) under §1.401(a)(9)–5 or tion 401(a)(9)? tion requirements added by TEFRA were
§1.401(a)(9)–6 because distributions were A-10. No. The distribution of an annu- retroactively repealed by the Tax Reform
being paid under an annuity contract ity contract is not a distribution for pur- Act of 1984 (TRA of 1984), the transi-
issued by a life insurance company in poses of section 401(a)(9). tional election rule in section 242(b) of
state insurer delinquency proceedings and Q-11. Will a payment by a plan after TEFRA was preserved. Satisfaction of
have been reduced or suspended by rea- the death of an employee fail to be treated the spousal consent requirements of sec-
sons of such state proceedings? as a distribution for purposes of section tion 4l7(a) and (e) (added by the
A-8. A plan will not fail to satisfy sec- 401(a)(9) solely because it is made to an Retirement Equity Act of 1984) will not
tion 401(a)(9) merely because an individ- estate or a trust? be considered a revocation of the pre-
ual’s distribution from the plan is less than A-11. A payment by a plan after the 1984 designation. However, sections
the amount otherwise required to satisfy death of an employee will not fail to be 401(a)(11) and 417 must be satisfied with
section 401(a)(9) under §1.401(a)(9)–5 or treated as a distribution for purposes of respect to any distribution subject to those
§1.401(a)(9)–6 because distributions were section 401(a)(9) solely because it is sections. The election provided in section
being paid under an annuity contract made to an estate or a trust. As a result, 242(b) of TEFRA is hereafter referred to
issued by a life insurance company in the estate or trust which receives a pay- as a section 242(b)(2) election.
state insurer delinquency proceedings and ment from a plan after the death of an Q-14. In the case in which an amount
have been reduced or suspended by rea- employee need not distribute the amount is transferred from one plan (transferor
sons of such state proceedings. To the of such payment to the beneficiaries of the plan) to another plan (transferee plan),
extent that a distribution otherwise estate or trust in accordance with section may the transferee plan distribute the
required under section 401(a)(9) is not 401(a)(9)(B). However, pursuant to A-3 amount transferred in accordance with a
made during the state insurer delinquency of §1.401(a)(9)–4, distribution to the section 242(b)(2) election made under
proceedings, this amount and any addi- estate must satisfy the five-year rule in either the transferor plan or under the
tional amount accrued during this period section 401(a)(9)(B)(iii) if the distribution transferee plan?
will be treated as though it is not vested to the employee had not begun (as defined A-14. (a) In the case in which an
during the period and any distributions in A-6 of §1.401(a)(9)–2) as of the amount is transferred from one plan to
with respect to such amounts must be employee’s date of death, and pursuant to another plan, the amount transferred may
made under the relevant rules for nonvest- A-3 of §1.401(a)(9)–4, an estate may not be distributed in accordance with a sec-
ed benefits described in either A-8 of be a designated beneficiary. See A-5 and tion 242(b)(2) election made under the
§1.401(a)(9)–5 or A-6 of §1.401(a)(9)–6. A-6 of §1.401(a)(9)–4 for provisions transferor plan if the employee did not
Q-9. Will a plan fail to qualify as a under which beneficiaries of a trust with elect to have the amount transferred and if
pension plan within the meaning of sec- respect to the trust’s interest in an employ- the amount transferred is separately
tion 401(a) solely because the plan per- ee’s benefit are treated as having been accounted for by the transferee plan.
mits distributions to commence to an designated as beneficiaries of the employ- However, only the benefit attributable to
employee on or after April 1 of the calen- ee under the plan. the amount transferred, plus earnings
dar year following the calendar year in Q-12. Will a plan fail to satisfy section thereon, may be distributed in accordance
which the employee attains age 70 1/2 411 if the plan is amended to eliminate with the section 242(b)(2) election made
even though the employee has not retired benefit options that do not satisfy section under the transferor plan. If the employee
or attained the normal retirement age 401(a)(9)? elected to have the amount transferred, the
under the plan as of the date on which A-12. Nothing in section 401(a)(9) transfer will be treated as a distribution
such distributions commence? permits a plan to eliminate for all partici- and rollover of the amount transferred for
A-9. No. A plan will not fail to quali- pants a benefit option that could not oth- purposes of this section.
fy as a pension plan within the meaning of erwise be eliminated pursuant to section (b) In the case in which an amount is
section 401(a) solely because the plan 411(d)(6). However, a plan must provide transferred from one plan to another plan,
permits distributions to commence to an that, notwithstanding any other plan pro- the amount transferred may not be distrib-
employee on or after April 1 of the calen- visions, it will not distribute benefits uted in accordance with a section
dar year following the calendar year in under any option that does not satisfy sec- 242(b)(2) election made under the trans-
which the employee attains age 70 1/2 tion 401(a)(9). See A-3 of feree plan. If a section 242(b)(2) election
even though the employee has not retired §1.401(a)(9)–1. Thus, the plan, notwith- was made under the transferee plan, the
or attained the normal retirement age standing section 411(d)(6), must prevent amount transferred must be separately
under the plan as of the date on which participants from electing benefit options accounted for. If the amount transferred is
such distributions commence. This rule that do not satisfy section 401(a)(9). not separately accounted for under the
applies without regard to whether or not Q-13. Is a plan disqualified merely transferee plan, the section 242(b)(2)
the employee is a 5-percent owner with because it pays benefits under a designa- election under the transferee plan is
respect to the plan year ending in the cal- tion made before January 1, 1984, in revoked and section 401(a)(9) will apply

2001–11 I.R.B. 889 March 12, 2001


to subsequent distributions by the trans- the trust must distribute by the end of the Q-2. To what benefits under section
feree plan. calendar year following the calendar year 403(b) contracts, do the distribution rules
(c) A merger, spinoff, or consolidation, in which the revocation occurs the total provided in section 401(a)(9) apply?
as defined in §1.414(l)–1(b), will be treat- amount not yet distributed which was A-2. (a) The distribution rules provid-
ed as a transfer for purposes of the section required to have been distributed to satis- ed in section 401(a)(9) apply to all benefits
242(b)(2) election. fy the requirements of section 401(a)(9) under section 403(b) contracts accruing
Q-15. If an amount is distributed by and continue distributions in accordance after December 31, 1986 (post-’86
one plan (distributing plan) and rolled with such requirements. account balance). The distribution rules
over into another plan (receiving plan), Par. 4. Section 1.403(b)–2 is added to provided in section 401(a)(9) do not apply
may the receiving plan distribute the read as follows: to the balance of the account balance
amount rolled over in accordance with a under the section 403(b) contract valued as
section 242(b)(2) election made under §1.403(b)–2 Required minimum of December 31, 1986, exclusive of subse-
either the distributing plan or the receiv- distributions from annuity contracts quent earnings (pre-’87 account balance).
ing plan? purchased, or custodial accounts or Consequently, the post-’86 account bal-
A-15. No. If an amount is distributed retirement income accounts established, ance includes earnings after December 31,
by one plan and rolled over into another by a section 501(c)(3) organization or a 1986, on contributions made before
plan, the receiving plan must distribute public school. January 1, 1987, in addition to the contri-
the amount rolled over in accordance with Q-1. Are section 403(b) contracts sub- butions made after December 31, 1986,
section 401(a)(9) whether or not the ject to the distribution rules provided in and earnings thereon. The issuer or custo-
employee made a section 242(b)(2) elec- section 401(a)(9)? dian of the section 403(b) contract must
tion under the distributing plan. Further, A-1. (a) Yes. Section 403(b) contracts keep records that enable it to identify the
if the amount rolled over was not distrib- are subject to the distribution rules pro- pre-’87 account balance and subsequent
uted in accordance with the election, the vided in section 401(a)(9). For purposes changes as set forth in paragraph (b) of
election under the distributing plan is of this section the term section 403(b) this A-2 and provide such information
revoked and section 401(a)(9) will apply contract means an annuity contract upon request to the relevant employee or
to all subsequent distributions by the dis- described in section 403(b)(1), custodial beneficiaries with respect to the contract.
tributing plan. Finally, if the employee account described in section 403(b)(7), or If the issuer does not keep such records,
made a section 242(b)(2) election under a retirement income account described in the entire account balance will be treated
the receiving plan and such election is still section 403(b)(9). as subject to section 401(a)(9).
in effect, the amount rolled over must be (b) For purposes of applying the distri- (b) In applying the distribution rules in
separately accounted for under the receiv- bution rules in section 401(a)(9), section section 401(a)(9), only the post-’86
ing plan and distributed in accordance 403(b) contracts will be treated as indi- account balance is used to calculate the
with section 401(a)(9). If amounts rolled vidual retirement annuities described in required minimum distribution required
over are not separately accounted for, any section 408(b) and individual retirement for a calendar year. The amount of any
section 242(b)(2) election under the accounts described in section 408(a) distribution required to satisfy the
receiving plan is revoked and section (IRAs). Consequently, except as other- required minimum distribution require-
401(a)(9) will apply to subsequent distrib- wise provided in paragraph (c), the distri- ment for a calendar year will be treated as
utions by the receiving plan. bution rules in section 401(a)(9) will be being paid from the post-’86 account bal-
Q-16. May a section 242(b)(2) election applied to section 403(b) contracts in ance. Any amount distributed in a calen-
be revoked after the date by which distri- accordance with the provisions in dar year in excess of the required mini-
butions are required to commence in order §1.408–8. mum distribution requirement for a
to satisfy section 401(a)(9) and this sec- (c)(1) The required beginning date for calendar year will be treated as paid from
tion of the regulations? purposes of section 403(b)(9) is April 1, of the pre-’87 account balance. The pre-’87
A-16. Yes. A section 242(b)(2) elec- the calendar year following the later of the account balance for the next calendar year
tion may be revoked after the date by calendar year in which the employee attains will be permanently reduced by the
which distributions are required to com- 70 1/2 or the calendar year in which the deemed distributions from the account.
mence in order to satisfy section 401(a)(9) employee retires from employment with the (c) The pre-’87 account balance and the
and this section of the regulations. employer maintaining the plan. The con- post-’86 account balance have no rele-
However, if the section 242(b)(2) election cept of 5-percent owner has no application vance for purposes of determining the
is revoked after the date by which distrib- in the case of employees of employers amount includible in income under sec-
utions are required to commence in order described in section 403(b)(1)(A). tion 72.
to satisfy section 401(a)(9) and this sec- (2) The rule in A-5 of §1.408–8 does Q-3. Must the value of the account bal-
tion of the regulations and the total not apply to section 403(b) contracts. ance under a section 403(b) contract as of
amount of the distributions which would Thus, the surviving spouse of an employ- December 31, 1986, be distributed in
have been required to be made prior to the ee is not permitted to treat a section accordance with the minimum distribu-
date of the revocation in order to satisfy 403(b) contract of which the spouse is the tion incidental benefit requirement?
section 401(a)(9), but for the section sole beneficiary as the spouse’s own sec- A-3. Distributions of the entire ac-
242(b)(2) election, have not been made, tion 403(b) contract. count balance of a section 403(b) con-

March 12, 2001 890 2001–11 I.R.B.


tract, including the value of the account provided in section 401(a)(9) and if a required minimum distribution is
balance under the contract or account as §§1.401(a)(9)–1 through 1.401(a)(9)–8 required for a calendar year, the amounts
of December 31, 1986, must satisfy the for qualified plans. For example, whether distributed during a calendar year from an
minimum distribution incidental benefit the five year rule or the life expectancy IRA are treated as required minimum dis-
requirement. However, distributions at- rule applies to distribution after death tributions under section 401(a)(9) to the
tributable to the value of the account bal- occurring before the IRA owner’s extent that the total required minimum
ance under contract or account as of De- required beginning date will be deter- distribution for the year under section
cember 31, 1986, is treated as satisfying mined in accordance with §1.401(a)(9)–3, 401(a)(9) for that IRA has not been satis-
the minimum distribution incidental ben- the rules of §1.401(a)(9)–4 apply for pur- fied. This requirement may be satisfied
efit requirement if such distributions sat- poses of determining an IRA owner’s des- by a distribution from the IRA or, as per-
isfy the rules in effect as of July 27, 1987, ignated beneficiary, the amount of the mitted under A-9 of this section, from
interpreting §1.401–1(b) (1)(i). required minimum distribution required another IRA.
Q-4. Is the required minimum distribu- for each calendar year from an individual Q-5. May an individual’s surviving
tion from one section 403(b) contract of account will be determined in accordance spouse elect to treat such spouse’s entire
an employee permitted to be distributed with §1.401(a)(9)–5, and whether annuity interest as a beneficiary in an individual’s
from another section 403(b) contract in payments from an individual retirement IRA upon the death of the individual (or
order to satisfy section 401(a)(9)? annuity satisfy section 401(a)(9) will be the remaining part of such interest if dis-
A-4. Yes. The required minimum dis- determined under §1.401(a)(9)–6. For tribution to the spouse has commenced) as
tribution must be separately determined this purpose the term IRA means an indi- the spouse’s own account?
for each section 403(b) contract of an vidual retirement account or annuity A-5. (a) The surviving spouse of an
employee. However, such amounts may described in section 408(a) or (b). individual may elect in the manner
then be totaled and the total distribution (b) For purposes of applying the described in paragraph (b) of this A-5 to
taken from any one or more of the indi- required minimum distribution rules in treat the spouse’s entire interest as a ben-
vidual section 403(b) contracts. §§1.401(a)(9)–1 through 1.401(a)(9)–8 eficiary in an individual’s IRA (or the
However, under this rule, only amounts for qualified plans, the IRA trustee, custo- remaining part of such interest if distribu-
in section 403(b) contracts that an indi- dian, or issuer is treated as the plan tion thereof has commenced to the
vidual holds as an employee may be administrator, and the IRA owner is sub- spouse) as the spouse’s own IRA. This
aggregated. Amounts in section 403(b) stituted for the employee. election is permitted to be made at any
contracts that an individual holds as a Q-2. Are employer contributions under time after the distribution of the required
beneficiary of the same decedent may be a simplified employee pension (defined in minimum amount for the account for the
aggregated, but such amounts may not be section 408(k)) or a SIMPLE IRA calendar year containing the individual’s
aggregated with amounts held in section (defined in section 408(p)) treated as con- date of death. In order to make this elec-
403(b) contracts that the individual holds tributions to an IRA? tion, the spouse must be the sole benefi-
as the employee or as the beneficiary of A-2. Yes. IRAs that receive employer ciary of the IRA and have an unlimited
another decedent. Distributions from contributions under a simplified employee right to withdrawal amounts from the
section 403(b) contracts or accounts will pension (defined in section 408(k)) or a IRA. This requirement is not satisfied if a
not satisfy the distribution requirements SIMPLE plan (defined in section 408(p)) trust is named as beneficiary of the IRA
from IRAs, nor will distributions from are treated as IRAs for purposes of section even if the spouse is the sole beneficiary
IRAs satisfy the distribution require- 401(a) and are, therefore, subject to the of the trust. If the surviving spouse makes
ments from section 403(b) contracts or distribution rules in this section. such an election, the surviving spouse’s
accounts. Q-3. In the case of distributions from interest in the IRA would then be subject
Par. 5. Section 1.408–8 is added to read an IRA, what does the term required to the distribution requirements of section
as follows: beginning date mean? 401(a)(9)(A) applicable to the spouse as
A-3. In the case of distributions from the IRA owner rather than those of section
§1.408–8 Distribution requirements for
an IRA, the term required beginning date 401(a)(9)(B) applicable to the surviving
individual retirement plans.
means April 1 of the calendar year fol- spouse as the decedent IRA owner’s ben-
The following questions and answers lowing the calendar year in which the eficiary. Thus, the required minimum dis-
relate to the distribution rules for IRAs individual attains age 70 1/2. tribution for the year of the election and
provided in sections 408(a)(6) and Q-4. When is the amount of a distribu- each subsequent year would be deter-
408(b)(3). tion from a IRA not eligible for rollover mined under section 401(a)(9)(A) with
Q-1. Are individual retirement plans because the amount is a required mini- the spouse as IRA owner and not section
(IRAs) subject to the distribution rules mum distribution? 401(a)(9)(B).
provided in section 401(a)(9) and A-4. The amount of a distribution that (b) The election described in paragraph
§§1.401(a)(9)–1 through 1.401(a)(9)–8 is a required minimum distribution from (a) of this A-5 is made by the surviving
for qualified plans? an IRA and thus not eligible for rollover is spouse redesignating the account as the
A-1. (a) Yes. Except as otherwise pro- determined in the same manner as provid- account in the name of the surviving
vided in this section, IRAs are subject to ed in Q&A-7 of §1.402(c)–2 for distribu- spouse as IRA owner rather than as bene-
the required minimum distribution rules tions from qualified plans. For example, ficiary. Alternatively, a surviving spouse

2001–11 I.R.B. 891 March 12, 2001


eligible to make the election is deemed to qualified plan, such surviving spouse minimum distribution is being deter-
have made the election if, at any time, may elect to treat the IRA as the spouse’s mined.
either of the following occurs: own IRA in accordance with the provi- Q-9. Is the required minimum distribu-
(1) Any required amounts in the sions in A-5 of this section. In the event tion from one IRA of an owner permitted
account (including any amounts that have of any other rollover to an IRA of an to be distributed from another IRA in
been rolled over or transferred, in accor- amount distributed by a qualified plan or order to satisfy section 401(a)(9)?
dance with the requirements of section another IRA, the rules in §1.401(a)(9)–3 A-9. Yes. The required minimum dis-
408(d)(3)(A)(i), into an individual retire- will apply for purposes of determining tribution must be calculated separately for
ment account or individual retirement the account balance for the receiving IRA each IRA. However, such amounts may
annuity for the benefit of such surviving and the required minimum distribution then be totaled and the total distribution
spouse) have not been distributed within from the receiving IRA. However, taken from any one or more of the indi-
the appropriate time period applicable to because the value of the account balance vidual IRAs. However, under this rule,
the surviving spouse as beneficiary under is determined as of December 31 of the only amounts in IRAs that an individual
section 401(a)(9)(B); or year preceding the year for which the holds as the IRA owner may be aggregat-
(2) Any additional amounts are con- required minimum distribution is being ed. Amounts in IRAs that an individual
tributed to the account (or to the account determined and not as of a valuation date holds as a beneficiary of the same dece-
or annuity to which the surviving spouse in the preceding year, the account balance dent may be aggregated, but such amounts
has rolled such amounts over, as of the receiving IRA need not be adjusted may not be aggregated with amounts held
described in (1) above) which are subject, for the amount received as provided in in IRAs that the individual holds as the
or deemed to be subject, to the distribu- A-2 of §1.401(a)(9)–7 in order to deter- IRA owner or as the beneficiary of anoth-
tion requirements of section 401(a)(9)(A). mine the required minimum distribution er decedent. Distributions from section
(c) The result of an election described for the calendar year following the calen- 403(b) contracts or accounts will not sat-
in paragraph (b) of this A-5 is that the sur- dar year in which the amount rolled over isfy the distribution requirements from
viving spouse shall then be considered the is received, unless the amount received is IRAs, nor will distributions from IRAs
IRA owner for whose benefit the trust is deemed to have been received in the satisfy the distribution requirements from
maintained for all purposes under the immediately preceding year, pursuant to section 403(b) contracts or accounts.
Code (e.g., section 72(t)). A-2 of §1.401(a)(9)–7. In that case, for Distributions from Roth IRAs (defined in
Q-6. How is the benefit determined for purposes of determining the required section 408A) will not satisfy the distrib-
purposes of calculating the required mini- minimum distribution for the calendar ution requirements applicable to IRAs or
mum distribution from an IRA? year in which such amount is actually section 403(b) accounts or contracts and
A-6. For purposes of determining the received, the account balance of the distributions from IRAs or section 403(b)
required minimum distribution required to receiving IRA as of December 31 of the contracts or accounts will not satisfy the
be made from an IRA in any calendar preceding year must be adjusted by the distribution requirements from Roth
year, the account balance of the IRA as of amount received in accordance with A-2 IRAs.
December 31 of the calendar year imme- of §1.401(a)(9)–7. Q-10. Is the trustee, custodian, or
diately preceding the calendar year for Q-8. What rules apply in the case of a issuer of an IRA required to report the
which distributions are being made will transfer from one IRA to another? amount that is required to be distributed
be substituted in A-3 of §1.401(a)(9)–5 A-8. In the case of a transfer from one from that IRA?
for the account of the employee. The IRA to another IRA, the rules in A-3 or A-10. Yes. The trustee, custodian, or
account balance as of December 31 of A-4 of §1.401(a)(9)–7 will apply for pur- issuer of an IRA is required to report to
such calendar year is the value of the IRA poses of determining the account balance the Internal Revenue Service and to the
upon close of business on such December of, and the required minimum distribu- IRA owner the amount required to be dis-
31. However, for purposes of determining tion from, the IRAs involved. Thus, the tributed from the IRA for each calendar
the required minimum distribution for the transferor IRA must distribute in the year year at the time and in the manner pre-
second distribution calendar year for an of the transfer any amount required scribed in the instructions to the applica-
individual, the account balance as of determined without regard to the trans- ble Federal tax forms, as well as any addi-
December 31 of such calendar year must fer. For purposes of determining the tional information as required by such
be reduced by any distribution (as account balance of the transferee IRA forms or such instructions.
described in A-3(c)(2) of §1.401(a)(9)–5) and the transferor IRA, the account bal-
made to satisfy the required minimum dis- ance need not be adjusted for the amount PART 54 — PENSION EXCISE TAXES
tribution requirements for the individual’s transferred as provided in A-4 of Par. 6. The authority citation for part
first distribution calendar year after such §1.401(a)(9)–7 in order to calculate the 54 is amended by adding the following
date. required minimum distribution for the citation to read as follows:
Q-7. What rules apply in the case of a calendar year following the calendar year Authority: 26 U.S.C. 7805 ***
rollover to an IRA of an amount distrib- of the transfer, because the account bal- §54.4974–2 is also issued under 26
uted by a qualified plan or another IRA? ance is determined as of December 31 of U.S.C. 4974.
A-7. If the surviving spouse of an the calendar year immediately preceding Par. 7. Section after §54.4974–2 is
employee rolls over a distribution from a the calendar year for which the required added to read as follows:

March 12, 2001 892 2001–11 I.R.B.


§54.4974–2 Excise tax on accumulations (f) Any other plan, contract, account, or tains the date five years after the employ-
in qualified retirement plans. annuity that, at any time, has been treated ee’s death, the required minimum distrib-
as a plan, account, or annuity described in ution amount requi