INCOME TAX

Rev. Rul. 2000–41, page 248.Federal rates; adjusted federal rates; adjustedfederal long-term rate, and the long-term ex-empt rate. For purposes of sections 1274, 1288, 382,and other sections of the Code, tables set forth the rates forSeptember 2000.

T.D. 8896, page 249.REG–103735–00; REG–110311–98;REG–103736–00, page 258.Proposed and temporary regulations modify the disclosure,registration, and list maintenance requirements relating to taxshelters under sections 6011, 6111, and 6112 of the Code.

T.D. 8897, page 234.Final regulations under section 263A of the Code provideguidance relating to the application of the uniform capital-ization rules to property produced in the trade or businessof farming. Notices 87–76, 88–24, and 88–86 (section V)obsolete.

Notice 2000–44, page 255.Tax avoidance using artificially high basis.Taxpayers and their representatives are alerted that the pur-ported losses arising from certain types of transactions arenot properly allowable for federal income tax purposes. Also,the Service may impose penalties on participants in thesetransactions or, as applicable, on persons who participate inpromoting or reporting these transactions.

Notice 2000–45, page 256.Capitalization; business expenses; farmers. This no-tice provides guidance to taxpayers engaged in the trade

or business of farming in determining whether a plant hasa preproductive period in excess of 2 years for purposesof section 263A(d) of the Code.

Rev. Proc. 2000–33, page 257.Acquisition of corporate debt. This procedure providesguidance on whether an acquisition of corporate debt by abeneficiary of the decedent creditor’s estate or by a bene-ficiary of a revocable trust that became irrevocable uponthe creditor’s death is a direct acquisition within the mean-ing of section 1.108–2(b) of the regulations.

EMPLOYEE PLANS

Announcement 2000–77, page 260.This announcement provides guidance on the types of planamendments that may be needed to obtain a favorable deter-mination letter for volume submitter plan applications.

ADMINISTRATIVE

T.D. 8896, page 249.REG–103735–00; REG–110311–98;REG–103736–00, page 258.Proposed and temporary regulations modify the disclosure,registration, and list maintenance requirements relating to taxshelters under sections 6011, 6111, and 6112 of the Code.

Announcement 2000–76, page 260.The Service expects to post planned changes to the 2001Forms W-2 and W-3 on the IRS web site by mid-October2000. Earlier drafts are being modified in response topublic comments.

Internal Revenue

bbuulllleettiinnBulletin No. 2000–36

September 5, 2000

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page ii.Announcement of Disbarments and Suspensions begins on page 262.Index for August begins on page iv.

September 5, 2000 2000–36 I.R.B.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basis,and are published in the first Bulletin of the succeeding semi-annual period, respectively.

The IRS Mission

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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

September 5, 2000 234 2000–36 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 61.—Gross Income

26 CFR 1.61–12: Income from discharge ofindebtedness.

This revenue procedure provides guidance onwhether an acquisition of corporate debt by a benefi-ciary of the decedent creditor’s estate or by a benefi-ciary of a revocable trust that became irrevocableupon the creditor’s death is a direct acquisitionwithin the meaning of § 1.108–2(b) of the Regula-tions. See §§ 1.61–12(a), 1.108–2(a) and 1.108–2(b)regarding income from the discharge of indebted-ness by a person related to the debtor, and certainexceptions that may be provided by Revenue Proce-dure or other published guidance.

See Rev. Proc. 2000–33, page 257.

Section 108.—Income FromDischarge of Indebtedness

26 CFR 1.108–2: Acquisition of indebtedness by aperson related to the debtor.

This revenue procedure provides guidance onwhether an acquisition of corporate debt by a benefi-ciary of the decedent creditor’s estate or by a benefi-ciary of a revocable trust that became irrevocableupon the creditor’s death is a direct acquisitionwithin the meaning of § 1.108–2(b) of the regula-tions. See §§ 1.61–12(a), 1.108–2(a) and 1.108–2(b)regarding income from the discharge of indebted-ness by a person related to the debtor, and certainexceptions that may be provided by Revenue Proce-dure or other published guidance.

See Rev. Proc. 2000–33, page 257.

Section 263A.—Capitalizationand Inclusion in Inventory Costsof Certain Expenses

26 CFR 1.263A–4: Rules for property produced in afarming business.

T.D. 8897

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Rules for Property Produced ina Farming Business

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to the applica-tion of section 263A of the Internal Rev-enue Code to property produced in thetrade or business of farming. These regu-lations also provide guidance regardingthe election available to certain taxpayersto not have section 263A apply to anyplant produced by the electing taxpayersin each taxpayer’s farming trade or busi-ness. These regulations affect taxpayersengaged in the trade or business of farm-ing.

DATES: Effective Date: These regula-tions are effective August 21, 2000.

Applicability Date: For dates of applic-ability, see §1.263A–4(f) of these regula-tions.

FOR FURTHER INFORMATION CON-TACT: Grant D. Anderson, (202) 622-4970 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

On March 30, 1987, the IRS published inthe Federal Register a notice of proposedrulemaking (LR–168–86, 1987–1 C.B. 808[52 F.R. 10118]) by cross reference to tem-porary regulations published the same day(T.D. 8131, 1987–1 C.B. 98 [52 F.R.10052]). Amendments to the notice of pro-posed rulemaking and temporary regula-tions were published in the Federal Regis-ter on August 7, 1987, by a notice ofproposed rulemaking (LR–37–87, 1987–2C.B. 1054 [52 F.R. 29391]) that cross refer-enced to temporary regulations publishedthe same day (T.D. 8148, 1987–2 C.B. 70[52 F.R. 29375]). Notice 88–24 (1988–1C.B. 491) provided that forthcoming regu-lations would modify the proposed regula-tions and the regulations under §1.471–6.Notice 88–86 (1988–2 C.B. 401) providedthat forthcoming regulations would clarifythe definition of members of family for pur-poses of the election out of section 263A.In addition, Notice 88–86 provided thatforthcoming regulations would provide thatcertain taxpayers could elect to use the sim-plified production method for property

used in the trade or business of farming.On August 5, 1994, the temporary regula-tions relating to property produced in afarming business were reissued and pub-lished in the Federal Register (T.D. 8559,1994–2 C.B. 32 [59 F.R. 39958]). On Au-gust 22, 1997, proposed and revised tempo-rary regulations were issued and publishedin the Federal Register (T.D. 8729,1997–2 C.B. 35 [62 F.R. 44542]). A publichearing was held on November 19, 1997.

Written comments responding to thenotice of proposed rulemaking were re-ceived. After consideration of all the pub-lic comments, the regulations are adoptedas revised by this Treasury decision andthe corresponding temporary regulationsare withdrawn.

Explanation of Provisions andSummary of Comments

Section 263A provides uniform capital-ization rules that govern the treatment ofcosts incurred in the production of propertyor the acquisition of property for resale.Section 263A generally requires taxpayersto capitalize the direct costs and an alloca-ble portion of indirect costs of producingproperty in a farming business (includingboth plants and animals). However, tax-payers that are neither required to use anaccrual method by section 447 nor prohib-ited by section 448(a)(3) from using thecash receipts and disbursements method(qualified taxpayers) are eligible for twoexceptions provided in section 263A(d).First, under section 263A(d)(1), section263A does not apply to a qualified tax-payer’s cost of producing plants with a pre-productive period of two years or less oranimals in a farming business. Second,pursuant to section 263A(d)(3), a qualifiedtaxpayer may elect to have section 263Anot apply to the cost of producing plants ina farming business.

Property Produced in a FarmingBusiness

Consistent with sections 263A(d)(1)(A)and 263A(d)(3)(A), the proposed regula-tions provided that the special rules of sec-tion 263A(d) apply only to property pro-duced by a taxpayer in a farming business.The term farming business means the cul-tivation of land or the raising or harvesting

of any agricultural or horticultural com-modity. Examples include operating anursery or sod farm; the raising or harvest-ing of trees bearing fruit, nuts, or othercrops; the raising of ornamental trees(other than evergreen trees that are morethan 6 years old at the time they are sev-ered from their roots); and the raising,shearing, feeding, caring for, training, andmanagement of animals.

The proposed regulations explained thattaxpayers engaged in contract harvesting,reselling of plants or animals that are notproduced by the taxpayer, and processingthat is not incident to growing, raising, orharvesting of agricultural or horticulturalcommodities, are not producing propertyin a farming business. Several commenta-tors requested that the final regulationspermit some of these taxpayers to use thespecial rules of section 263A(d). How-ever, sections 263A(d)(1)(A) and263A(d)(3)(A) limit the special rules ofsection 263A(d) to property produced bythe taxpayer in a farming business. Asdiscussed below, the IRS and TreasuryDepartment continue to believe that tax-payers that merely contract harvest, resellplants or animals that they do not raise orgrow, or engage in processing agriculturalor horticultural commodities that is not in-cident to growing, raising, or harvesting ofthese commodities, are not producingproperty in a farming business and there-fore do not meet this requirement. Ac-cordingly, the final regulations do notadopt these suggestions.

The proposed regulations providedthat, for purposes of the definition offarming business, harvesting, does not in-clude contract harvesting of an agricul-tural or horticultural commodity that isnot grown or raised by the taxpayer.Some commentators were concerned thatthis language may be used to disqualifyotherwise legitimate farmers who makearrangements with their neighbors to har-vest each others crops. First, the IRS andTreasury Department believe that whetherand to what extent a taxpayer is engagedin a farming business is to be determinedbased on all the facts and circumstances.No inference is intended that merely be-cause a taxpayer engages in nonfarm ac-tivities, such as contract harvesting, in ad-dition to farm activities, that suchtaxpayer is not engaged in a farming busi-ness. Further, the exception under section

263A(d) is relevant only to taxpayerswhose costs are otherwise subject to capi-talization under section 263A. Thus, forexample, while taxpayers that grow plantsare generally subject to section 263A withrespect to that production activity, taxpay-ers that contract harvest horticulturalcommodities are not, because they are en-gaged in a service activity. A taxpayerthat harvests crops grown by the taxpayerand contract harvests crops grown by an-other is subject to section 263A (and theexception contained in section 263A(d)),but only for the costs of harvesting itsown crops. Accordingly, the final regula-tions do not adopt the commentators’ sug-gestion to include contract harvesting inthe special rules of section 263A(d).

Similarly, the proposed regulationsprovided that the special rules of section263A(d) do not apply to a taxpayer thatmerely buys and resells plants or animalsgrown or raised by another taxpayer. Thepreamble to the proposed regulations in-dicated that in evaluating whether the tax-payer is engaged in the production, ormerely the resale, of plants or animals, itis anticipated that consideration will begiven to factors including: the length oftime between the taxpayer’s acquisitionof a plant or animal and the time the plantor animal is made available for sale to thetaxpayer’s customers, and, in the case ofplants, whether plants acquired by thetaxpayer are planted in the ground or keptin temporary containers.

Many commentators expressed concernthat the proposed regulations’ concept of“merely buying and reselling plantsgrown by another” could be interpreted tomean that only taxpayers growing a plantfrom seed would be regarded as engagedin a farming business. For example, thecommentators were concerned that a tax-payer that buys a partially grown plant,grows the plant to a larger size, and thensells the plant would not be engaged in afarming business. The final regulationsclarify that a taxpayer is engaged in theproduction of property in a farming busi-ness, rather than the mere resale of plantsor animals, if the plant or animal is heldfor further cultivation and developmentprior to sale. In addition, the final regula-tions include an example illustrating thata taxpayer that buys plants, grows them,and sells them, is producing property in afarming business; whereas a taxpayer that

buys plants and, without further cultiva-tion and development, resells them is notproducing property in a farming business.The example also illustrates that a tax-payer engaged in both farming activitiesand resale activities is not required to cap-italize costs under section 263A with re-spect to the resale activities if the tax-payer has average annual gross receipts ofless than $10 million. See also, Ann.97–120 (1997–50 I.R.B. 61) (confirmingthat nursery growers using the farmingexception may deduct the costs of youngplants purchased for further developmentand cultivation prior to sale as well as thecosts of growing the plants).

Some commentators suggested that thefinal regulations disregard whether a plantis kept in its container out of concern thattaxpayers who grow plants in containerswould not be considered to be producingproperty in a farming business. The IRSand Treasury Department continue to be-lieve that this is a factor to be consideredin addition to all the other facts and cir-cumstances. Accordingly, the final regu-lations retain this factor. However, thefinal regulations have been clarified to ex-plain that a plant that is grown by a tax-payer in a container is regarded as a plantproduced in a farming business.

One commentator requested that thevalue added to a plant or animal by a tax-payer also be a factor in determiningwhether a taxpayer is engaged in the pro-duction, or the mere resale, of plants oranimals. The final regulations providethat a taxpayer’s addition of value toplants or animals through agricultural orhorticultural processes is a factor to beconsidered in evaluating whether a tax-payer is producing property in a farmingbusiness.

Some commentators requested that thelist of factors contained in the preamblebe included in the regulations. In re-sponse to these comments, the final regu-lations contain a list of factors, modifiedas discussed above, to assist in the deter-mination of whether a plant or animal isheld for further cultivation and develop-ment prior to sale or merely held for re-sale.

One commentator expressed concernthat under the proposed regulations afarming business only includes process-ing activities that are normally incident tothe growing, raising, or harvesting of

2000–36 I.R.B. 235 September 5, 2000

agricultural or horticultural commodities.This commentator also suggested thatfarmers are engaging in processing activi-ties as the result of new technology andchanges in the market for agricultural orhorticultural products. The IRS and Trea-sury Department believe that processingactivities that are not normally incident tothe growing, raising, or harvesting ofagricultural or horticultural products,such as the canning of an agriculturalproduct or the combination of an agricul-tural product with other ingredients toproduce a different edible item, are notfarming activities. Accordingly, the finalregulations, like the proposed regulations,include in the definition of farming busi-ness only those processing activities thatare normally incident to the growing, rais-ing, or harvesting of agricultural or horti-cultural products, such as the washing, in-specting, and packaging of thoseproducts.

Exceptions to Section 263A for CertainProperty

Taxpayers generally must capitalize di-rect costs and an allocable portion of indi-rect costs of producing all plants (withoutregard to the length of the preproductiveperiod) and animals. Qualified taxpayers,however, are eligible for an exception tothis general rule. Under this exception,qualified taxpayers are not required tocapitalize under section 263A the costs ofproducing plants that have a preproduc-tive period of 2 years or less or with re-spect to animals. Thus, under this excep-tion, qualified taxpayers are required tocapitalize only those costs of producingplants that have a preproductive period inexcess of 2 years.

A few commentators suggested that,for purposes of determining the applica-tion of section 263A, the preproductiveperiod of a plant should be determinedwith reference to the length of time a par-ticular taxpayer grows a plant rather thanwith reference to how long it takes theplant to reach a productive stage. Thecommentators suggested this methodwould, in essence, supplant the nation-wide weighted average preproductive pe-riod used for plants grown in commercialquantities in the United States and the rea-sonable estimate of the preproductive pe-riod used for all other plants. For exam-ple, a qualified taxpayer grows bushes

that have a preproductive period of 3years and 3 months. If the taxpayer pur-chases and plants the bushes when theyare 2 years old, the commentators suggestthat the preproductive period of thebushes should be regarded as 2 years orless (and the taxpayer would, therefore,not be required to capitalize the costs as-sociated with growing the bushes) be-cause this taxpayer grows the bushes foronly 15 months before the bushes becomeproductive in marketable quantities. If,however, another qualified taxpayer pur-chased the same type of bushes when thebushes were 14 months old and grewthem for 2 years and 1 month, the prepro-ductive period of the bushes would be re-garded as in excess of 2 years, and thistaxpayer would be required to capitalizethe costs of growing the bushes.

The final regulations do not adopt thisrecommendation. First, the statute re-quires that the preproductive period of aplant grown in commercial quantities inthe United States be based on the nation-wide weighted average preproductive pe-riod of the plant. See Pelaez and Sons,Inc., et al. v. Commissioner, 114 T.C. No.28 (No. 18049–97 May 30, 2000). Fur-ther, the IRS and Treasury Departmentcontinue to believe that, for purposes ofdetermining whether section 263A ap-plies, the preproductive period of a plantnot grown in commercial quantities in theUnited States also should be determinedon a plant-by-plant basis rather than on ataxpayer-by-taxpayer basis.

In the case of a plant that is not pro-duced in commercial quantities in theUnited States, the proposed regulationsprovided that, at or before the time theseed or plant is acquired or planted, thetaxpayer is required to reasonably esti-mate whether the plant has a preproduc-tive period in excess of 2 years. Onecommentator suggested that the regula-tions provide that if the United States De-partment of Agriculture (USDA) or a statedepartment of agriculture certifies that aplant is not grown in commercial quanti-ties in the United States, the plant will bedeemed to have a preproductive period of2 years or less. The effect of this sugges-tion would be to provide an exemptionfrom section 263A for all qualified tax-payers growing plants that are not grownin commercial quantities in the UnitedStates. The IRS and Treasury Department

believe that such a rule would be incon-sistent with the statutory language of sec-tion 263A. Accordingly, the final regula-tions do not adopt this suggestion.

The proposed regulations providedthat, for purposes of determining whethera plant has a preproductive period in ex-cess of 2 years, in the case of a plantgrown in commercial quantities in theUnited States, the nationwide weightedaverage preproductive period of suchplant is used. One commentator re-quested that a list of plants with nation-wide weighted average preproductive pe-riods in excess of 2 years be publishedand kept current as needed. Notice2000–45, page 256, issued contemporane-ously with the publication of these finalregulations, provides a list of plantsgrown in commercial quantities in theUnited States that have a nationwideweighted average preproductive period inexcess of 2 years. Notice 2000–45 will bemodified and superseded as needed.

Tax shelters, within the meaning of sec-tion 448(a)(3), are not qualified taxpayersand are therefore not eligible for the spe-cial rules of section 263A(d). A tax shel-ter, for purposes of section 448(a)(3),means a farming business that is a farmingsyndicate as defined under section 464(c)or any partnership, entity, plan or arrange-ment that is a tax shelter within the mean-ing of section 6662(d)(2)(C)(iii) (that is,its principal purpose is to avoid or evadeFederal income tax). See §1.448–1T(b)(1)(iii). There is a presumptionunder section 448 that marketed arrange-ments, in which persons carry on farmingactivities using the services of a commonmanagerial or administrative service, willfall within the meaning of a tax shelter if asubstantial portion of farming expensesare prepaid with borrowed funds. See§1.448–1T(b)(4). The proposed regula-tions repeated the text of §1.448–1T(b)(1)(iii) and (4) to explain whichfarming businesses are tax shelters.

A commentator suggested that the mar-keted arrangement presumption set forthin §1.448–1T(b)(4) and the proposed reg-ulations is too broad in scope and shouldbe modified. The commentator is con-cerned that this provision of the regula-tions will cause taxpayers participating infarming cooperatives to be treated as taxshelters and, therefore, require them touse an accrual method of accounting and

September 5, 2000 236 2000–36 I.R.B.

to capitalize the direct costs and an alloca-ble portion of indirect costs of producingall plants and animals. The commentatorexplained that such a result is unwar-ranted with respect to individual farmersand farming businesses that join togetherto form farming cooperatives for non-taxreasons, such as to obtain supplies atlower prices and have a steady market fortheir farm products.

The IRS and Treasury Department be-lieve that the marketed arrangement pre-sumption is necessary to preclude taxpay-ers from investing in farming operationsin order to generate losses, often withoutmaking economic outlays, that may beused to shelter income from othersources. However, the IRS and TreasuryDepartment do not believe that the mar-keted arrangement presumption, as de-scribed in the temporary Income Tax Reg-ulations under section 448 and theproposed section 263A regulations, wouldcause a taxpayer producing property in afarming business to be regarded as a taxshelter merely because the taxpayerjoined a farming cooperative. Therefore,the marketed arrangement presumption isnot modified in the final regulations.

Preparatory and Preproductive PeriodCosts

The IRS and Treasury Department be-lieve that, in general, section 263A doesnot change the rules under section 263 re-garding the need to capitalize preparatorycosts (that is, costs incurred prior to rais-ing agricultural or horticultural commodi-ties or that otherwise enable a farmer tobegin the farming process). Thus, theproposed regulations clarified that, asunder prior law, taxpayers generally mustcapitalize preparatory expenditures (forexample, the cost of seeds, seedlings, andanimals; clearing, leveling and gradingland; drilling and equipping wells; irriga-tion systems; budding trees, etc.). How-ever, because section 263A requires thecapitalization of certain additional costs,the amount of preparatory expenditurescapitalized to property that is subject tosection 263A may be greater than underprior law. By requiring the capitalizationof all the direct costs and the allocableportion of indirect costs incurred duringthe preparatory period, section 263A en-sures that the income from farming willbe appropriately matched with all of the

costs of producing property in a farmingbusiness.

Section 263A expanded the circum-stances under which costs that were oncetermed developmental expenditures orcultural practices expenditures (that is,costs incurred by a taxpayer so that thegrowing process can continue in the de-sired manner) must be capitalized. Theproposed regulations clarified that thesecosts are included in the category of pre-productive period costs that are requiredto be capitalized under section 263A.Thus, the proposed regulations providedthat all appropriate costs incurred duringthe preproductive period of property sub-ject to section 263A must be capitalized,including the costs of certain soil andwater conservation expenditures and fer-tilizing incurred during the preproductiveperiod.

One commentator requested that ex-penditures for soil and water conserva-tion, described in section 175, and fertil-izer, described in section 180, be exceptedfrom capitalization under section 263A.However, the legislative history of formersection 447(b) indicates that Congress be-lieved that soil and water conservation ex-penditures incurred during the preproduc-tive period were required to be capitalizedinto the basis of the plants produced. SeeH.R. Rep. No. 658, 94th Cong., 1st Sess.95 (1975), 1976–3 (Vol. 2) C.B. 787. Seealso, Staff of the Joint Committee on Tax-ation, General Explanation of the Tax Re-form Act of 1976, H.R. Rep. No. 10612,94th Cong., 2nd Sess. 55 (1976), 1976–3(Vol. 2) C.B. 67. In addition, the legisla-tive history to section 464 indicates thatCongress believed that the costs of fertil-izer incurred during the preproductive pe-riod was capitalized under former section278. See Senate Report No. 938, 94th

Cong., 2nd Sess. 62 (1976), 1976–3 (Vol.3) C.B. 100. See also, Staff of the JointCommittee on Taxation, General Expla-nation of the Tax Reform Act of 1976,H.R. Rep. No. 10612, 94th Cong., 2nd

Sess. 49 (1976), 1976–3 (Vol. 2) C.B. 61.Because section 263A was intended tocontinue the principles of sections 447and 278, the IRS and Treasury Depart-ment believe that expenditures for soiland water conservation and fertilizer in-curred during the preproductive periodare costs of producing those plants. Fur-ther, the IRS and Treasury Department

believe that providing a single rule re-garding when expenditures for soil andwater conservation and fertilizer incurredduring the preproductive period must becapitalized is consistent with the intent ofCongress to provide uniform capitaliza-tion rules. Accordingly, the final regula-tions retain the proposed regulations’ pro-vision that these costs incurred during thepreproductive period are included in thecategory of costs that are required to becapitalized under section 263A. How-ever, the IRS and Treasury Department donot believe that Congress intended to re-quire capitalization of expenditures forsoil and water conservation deductibleunder section 175 and fertilizer deductibleunder section 180 that are not incurredduring the preproductive period. Accord-ingly, the final regulations clarify thatthese expenditures are not subject to capi-talization under section 263A except tothe extent they are required to be capital-ized as a preproductive period cost.

Capitalization Period

Preproductive period costs (for exam-ple, irrigating, fertilizing, real estate taxes)are capitalized during the actual prepro-ductive period of a plant or animal. A tax-payer that grows a plant that will havemore than 1 crop or yield is engaged in theproduction of two types of property, theplant and the crop or yield of the plant (forexample, the orange tree and the orange).The proposed regulations clarified thecapitalization period for plants that willhave more than 1 crop or yield, for cropsor yields of plants that will have more than1 crop or yield, and for other plants.

The proposed regulations provided thatthe preproductive period of a plant gener-ally begins when a taxpayer first incurscosts with respect to the plant, for exam-ple, when the plant is acquired or the seedis planted. In the case of crops or yieldsof a plant that has more than 1 crop oryield, the preproductive period of the cropor yield begins when the plant has be-come productive in marketable quantitiesand the crop or yield first appears,whether in the form of a sprout, bloom,blossom, bud, etc.

One commentator suggested that thepreproductive period for crops or yieldsthat require several years of growth (forexample, biennial crops) begins upon firstappearance of the crop in the year the

2000–36 I.R.B. 237 September 5, 2000

crop actually develops. For example, abiennial plant produces fruit buds in thefirst year, but the buds do not developuntil the second year. In the second year,the plant produces blossoms, which sub-sequently grow into an edible food prod-uct that is harvested and sold in that year.However, if weather conditions are harsh,the buds produced in the first year maynot blossom and develop in the secondyear. The commentator suggests that thepreproductive period begin not when thebuds first appear in the first year but whenthe blossoms appear in the second year asthat is the first sign of actual develop-ment. The IRS and Treasury Departmentare concerned that the suggested rulewould be difficult to apply because a tax-payer may not know in any case whetherthe appearance of a crop will actually de-velop. Accordingly, the final regulationsdo not adopt this suggestion.

In the case of a plant that will havemore than 1 crop or yield, the preproduc-tive period of the plant ends when theplant becomes productive in marketablequantities. In the case of the crop or yieldof a plant that has more than 1 crop oryield that has become productive in mar-ketable quantities, the preproductive pe-riod of the crop or yield ends when thecrop or yield is disposed of. Finally, inthe case of other plants, the preproductiveperiod ends when the plant is disposed of.

One commentator requested that theproper tax treatment of field costs (suchas the costs of irrigating, fertilizing, etc.)that are incurred after a crop or yield isharvested but before the crop or yield isdisposed of, which do not benefit and areunrelated to the crop or yield that hasbeen harvested, be clarified. The com-mentator is concerned that the proposedregulations subject such field costs to cap-italization under the general principles ofsection 263A. The IRS and Treasury De-partment agree with the commentator’sconcerns. Accordingly, the final regula-tions provide that field costs incurredafter a crop or yield is harvested but be-fore the crop or yield is disposed of do nothave to be capitalized to the harvestedcrop or yield because such costs relate tothe plant or a future crop or yield ratherthan to the harvested crop or yield.

One commentator requested that thedefinition of when a plant that will havemore than 1 crop or yield becomes pro-

ductive in marketable quantities be clari-fied. Under the proposed regulationssuch a plant becomes productive in mar-ketable quantities when it is (or would beconsidered) placed in service for purposesof section 168 (without regard to the ap-plicable convention). The commentatornoted that some taxpayers regard a plantas being placed in service for purposes ofdepreciation at the time the preproductiveperiod ends for purposes of section 263A.The commentator requested that the finalregulations adopt a rule that providesmore guidance with respect to the end ofthe preproductive period.

The IRS and Treasury Departmentagree with the commentator’s concerns.Accordingly, the final regulations providethat a plant becomes productive in mar-ketable quantities once a crop or yield isproduced in sufficient quantities to beharvested and marketed in the ordinarycourse of the taxpayer’s business. Factorsthat are relevant in determining whetherthe crop or yield is produced in sufficientquantities to be harvested and marketed inthe ordinary course include: whether acrop or yield is harvested that is morethan de minimis, although it may be lessthan expected at the maximum bearingstage, based on a comparison of the quan-tities per acre harvested in the year inquestion to the quantities per acre ex-pected to be harvested when the plantreaches full maturity; and whether thesales proceeds exceed the costs of harvestand make a reasonable contribution to anallocable share of farm expenses.

Election not to Capitalize Costs

Qualified taxpayers may elect not tocapitalize under section 263A the costs ofproducing certain plants even though suchplants have a preproductive period in ex-cess of 2 years and would otherwise besubject to the capitalization requirementsof section 263A. Taxpayers making thiselection may continue to deduct (subjectto other limitations of the Internal Rev-enue Code) the costs that were deductibleunder the rules in effect before the enact-ment of section 263A.

A taxpayer may make this election auto-matically on its original federal income taxreturn for the first taxable year in which thetaxpayer would otherwise be required tocapitalize costs under section 263A. Thefinal regulations provide that if a taxpayer

does not make this election in this first tax-able year, the taxpayer may make this elec-tion by filing Form 3115, “Application forChange in Accounting Method,” using theappropriate procedures that govern the fil-ing of the Form 3115.

A taxpayer and any person related tothe taxpayer (including a member of thetaxpayer’s family) electing to not capital-ize costs under section 263A for certainplants are required to use the alternativedepreciation system of section 168(g)(2)for any property used predominantly in afarming business that is placed in servicein a taxable year for which the election isin effect. In Notice 88–86, the IRS notedthat commentators had suggested thatguidance be provided clarifying the defin-ition of members of a family. This guid-ance was provided in the proposed regula-tions. One commentator suggested thatthis proposed guidance be modified sothat elections made by some family mem-bers do not bind other family members.The statutory language provides that anelection affects family members and de-fines family members for this purpose.Thus, the IRS and Treasury Departmentbelieve that Congress’s intent was to bindall family members when one membermakes an election not to capitalize costsunder section 263A. Accordingly, thefinal regulations do not adopt the sugges-tion.

Casualty Loss Exception

Section 263A(d)(2) provides an excep-tion from capitalization under section263A for costs incurred with respect toplants that are replacing certain plants thatwere lost by reason of certain casualties.The proposed regulations clarified thatthis exception does not apply to prepara-tory expenditures or the costs of capitalassets. In addition, the regulations clari-fied that the casualty loss exception ap-plies whether the plants are replanted onthe same parcel of land as the plants de-stroyed by casualty or a parcel of land ofthe same acreage in the United States.The regulations additionally clarified thatthe exception applies to all plants re-planted on such acreage, even if the plantsare replanted in greater density than theplants destroyed by the casualty.

One commentator requested that thecasualty loss exception be expanded toallow a current deduction for the expendi-

September 5, 2000 238 2000–36 I.R.B.

tures incurred for replacing capital assets.The final regulations do not adopt thisrecommendation. Prior to the enactmentof section 263A, preparatory expendituresas well as acquisition costs incurred dur-ing the preparatory period were generallycapitalized under section 263. Also, priorto the enactment of section 263A, certainpreproductive period costs were capital-ized under former sections 447(b) and278. Former section 278(c) provided anexception to the capitalization of prepro-ductive period costs where such costswere incurred to replant a grove, orchard,or vineyard which had been lost or de-stroyed by reason of a casualty. However,this exception only applied to preproduc-tive period costs capitalized under formersection 278 and did not apply to prepara-tory expenditures and acquisition costscapitalized under section 263. The spe-cial exception in section 263A(d)(2) wasintended to be a continuation, as modifiedto include all plants bearing an ediblecrop for human consumption, of the ex-ception found in former section 278(c).Nothing in the statute or legislative his-tory of section 263A indicates an inten-tion to expand the exception to includeother costs, such as the costs of replacingcapital assets, in addition to the prepro-ductive period costs.

Unit Livestock Price Method

The unit livestock price method pro-vides for the valuation of different classesof animals in inventory at a standard unitprice for each animal within a class. Ataxpayer who elects to use the unit live-stock price method must apply it to alllivestock raised, whether for sale or fordraft, breeding, or dairy purposes. In No-tice 88–24, the IRS indicated that forth-coming regulations would modify the rulecontained in §1.471–6 and require thattaxpayers adjust the unit prices upward,from time to time as specified by thoseregulations, to reflect increases in coststaxpayers experience in raising livestock.Contemporaneous with the section 263Aproposed regulations published August22, 1997, §1.471–6 was modified to re-quire a taxpayer to annually reevaluatethe unit livestock prices and adjust theprices upward to reflect increases in thecosts of raising livestock. Under this reg-ulation, the consent of the Commissioneris not required to make such upward ad-

justments; however, consent is required tomake any other change in animal classifi-cation or unit prices.

One commentator expressed concernthat if taxpayers are required to annuallyreevaluate their unit prices, they shouldbe able to both increase and decrease theunit price to reflect all changes in the costof raising livestock. In addition, thiscommentator suggested that the unit live-stock price method should be modified toallow a taxpayer to remove from inven-tory animals that have been raised for usein the taxpayer’s trade or business (suchas a breeding cow) and depreciate the in-ventory value of the animal.

Although these comments are outsidethe scope of this regulation, the IRS andTreasury Department understand thecommentator’s concerns. In addition, theIRS and Treasury Department recognize abroader concern that the requirement toannually reevaluate unit prices may haveeliminated much of the simplicity of theunit livestock price method, especially forfarmers neither required to use an accrualmethod by section 447 nor prohibitedfrom using the cash method by section448(a)(3). Accordingly, the IRS andTreasury Department intend to study theunit livestock price method to determinewhether the method may be made simplerto apply and will take into account thecommentator’s suggestions as part of thisstudy.

Record Keeping Requirements

Pursuant to 26 U.S.C. 7805(f)(1),copies of the 1997 notice of proposedrulemaking and temporary rule were pro-vided to the Chief Counsel for Advocacyof the Small Business Administration forcomment. The Chief Counsel for Advo-cacy submitted comments requesting thatthe IRS conduct a regulatory flexibilityanalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) (RFA) on howthe notice of proposed rulemaking wouldaffect recordkeeping burdens imposed onsmall business taxpayers engaged in afarming business.

Under the RFA, the IRS is required toprepare a regulatory flexibility analysis ifthe proposed rule imposes a collection ofinformation requirement (including arecordkeeping requirement) on small enti-ties and that requirement is likely to havea significant economic impact on a sub-

stantial number of small entities (5 U.S.C603(a)). The RFA defines a recordkeep-ing requirement as “a requirement im-posed by an agency on persons to main-tain specified records” (5 U.S.C. 601(7)and (8)). Since neither the proposed norfinal regulation contain a collection of in-formation requirement (including a re-quirement that persons maintain specifiedrecords), an analysis is not required by theRFA.

Effective Date And Method Changes

The final regulations provide that, inthe case of property that is not inventoryin the hands of the taxpayer, the regula-tions are applicable to costs incurred afterAugust 21, 2000, in taxable years endingafter August 21, 2000. In the case of in-ventory property, the final regulations areapplicable to taxable years beginningafter August 21, 2000.

For property that is not inventory, ataxpayer is granted the consent of theCommissioner to change its method of ac-counting to comply with the provisions ofthese final regulations for costs incurredafter August 21, 2000, provided thechange is made for the first taxable yearending after August 21, 2000. For inven-tory property, a taxpayer is granted theconsent of the Commissioner to changeits method of accounting to comply withthe provisions of these final regulationsfor the first taxable year beginning afterAugust 21, 2000. To make such a change,a taxpayer must follow the automatic con-sent procedures in Rev. Proc. 99–49(1999–52 I.R.B. 725) (see §601.601(d)(2)of this chapter), as modified by these reg-ulations.

Effect on Other Documents

The following publications are obsoleteas of August 22, 2000: Notice 87–76(1987–2 C.B. 384); Notice 88–24(1988–1 C.B. 491); and section V of No-tice 88–86 (1988–2 C.B. 401).

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.

2000–36 I.R.B. 239 September 5, 2000

chapter 5) does not apply to these regula-tions, and because the regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking that preceded these regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on their impacton small business.

Drafting Information

The principal authors of these final reg-ulations are Jan Skelton and Richard C.Farley, Jr. previously of the Office of theAssociate Chief Counsel (Income Tax andAccounting). However, other personnelfrom the IRS and Treasury Departmentparticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR Part 1 isamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.162–12 is amended

by revising the ninth sentence of para-graph (a) to read as follows:

§1.162–12 Expenses for farmers.

(a) * * * For rules regarding the capital-ization of expenses of producing propertyin the trade or business of farming, seesection 263A of the Internal RevenueCode and §1.263A–4. * * ** * * * *

Par. 3. Section 1.263A–0 is amendedby revising the introductory text andadding entries for §1.263A–4 to read asfollows:

§1.263A–0 Outline of regulations undersection 263A.

This section lists the paragraphs in§§1.263A–1 through 1.263A–4 and§§1.263A–7 through 1.263A–15 as fol-lows:* * * * *

§1.263A–4 Rules for property producedin a farming business.

(a) Introduction.(1) In general.(2) Exception.(i) In general.(ii) Tax shelter.(A) In general.(B) Presumption.(iii) Examples.(3) Costs required to be capitalized or

inventoried under another provi-sion.

(4) Farming business.(i) In general.(A) Plant.(B) Animal.(ii) Incidental activities.(A) In general.(B) Activities that are not incidental.(iii) Examples.(b) Application of section 263A to

property produced in a farmingbusiness.

(1) In general.(i) Plants.(ii) Animals.(2) Preproductive period.(i) Plant.(A) In general.(B) Applicability of section 263A.(C) Actual preproductive period.(1) Beginning of the preproductive pe-

riod.(2) End of the preproductive period.(i) In general.(ii) Marketable quantities.(D) Examples.(ii) Animal.(A) Beginning of the preproductive pe-

riod.(B) End of the preproductive period.(C) Allocation of costs between animal

and first yield.(c) Inventory methods.(1) In general.(2) Available for property used in a

trade or business.(3) Exclusion of property to which

section 263A does not apply.(d) Election not to have section 263A

apply.(1) Introduction.(2) Availability of the election.(3) Time and manner of making the

election.i. Automatic election.ii. Nonautomatic election.(4) Special rules.(i) Section 1245 treatment.

(ii) Required use of alternative depre-ciation system.

(iii) Related person.(A) In general.(B) Members of family.(5) Examples.(e) Exception for certain costs result-

ing from casualty losses.(1) In general.(2) Ownership.(3) Examples.(4) Special rule for citrus and almond

groves.(i) In general.(ii) Example.(f) Effective date and change in

method of accounting.(1) Effective date.(2) Change in method of accounting.* * * * *

§1.263A–0T [Removed]

Par. 4. Section 1.263A–0T is removed. Par. 5. Section 1.263A–1 is amended

as follows: 1. The last sentence of paragraph

(b)(3) is revised. 2. The last sentence of paragraph

(b)(4) is revised.The revisions read as follows:

§1.263A–1 Uniform capitalization ofcosts.

* * * * *(b) * * *(3) * * * See §1.263A–4 for specific

rules relating to taxpayers engaged in thetrade or business of farming.

(4) * * * See §1.263A–4, however, forrules relating to taxpayers producing cer-tain trees to which section 263A applies.* * * * *

Par. 6. Section 1.263A–4 is revised toread as follows:

§1.263A–4 Rules for property producedin a farming business.

(a) Introduction—(1) In general. Thissection provides guidance with respect tothe application of section 263A to propertyproduced in a farming business as definedin paragraph (a)(4) of this section. Exceptas otherwise provided by the rules of thissection, the general rules of §§1.263A–1through 1.263A–3 and §§1.263A–7through 1.263A–15 apply to property pro-duced in a farming business. A taxpayerthat engages in the raising or growing of

September 5, 2000 240 2000–36 I.R.B.

any agricultural or horticultural commod-ity, including both plants and animals, isengaged in the production of property. Sec-tion 263A generally requires the capitaliza-tion of the direct costs and an allocable por-tion of the indirect costs that directlybenefit or are incurred by reason of the pro-duction of this property. The direct and in-direct costs of producing plants or animalsgenerally include preparatory costs alloca-ble to the plant or animal and preproductiveperiod costs of the plant or animal. Exceptas provided in paragraphs (a)(2) and (e) ofthis section, taxpayers must capitalize thecosts of producing all plants and animalsunless the election described in paragraph(d) of this section is made.

(2) Exception—(i) In general. Section263A does not apply to the costs of produc-ing plants with a preproductive period of 2years or less or the costs of producing ani-mals in a farming business, if the taxpayeris not—

(A) A corporation or partnership re-quired to use an accrual method of account-ing (accrual method) under section 447 incomputing its taxable income from farm-ing; or

(B) A tax shelter prohibited from usingthe cash receipts and disbursements methodunder section 448(a)(3).

(ii) Tax shelter—(A) In general. Afarming business is considered a tax shelter,and thus a taxpayer prohibited from usingthe cash method under section 448(a)(3), ifthe farming business is—

(1) A farming syndicate as defined insection 464(c); or

(2) A tax shelter, within the meaning ofsection 6662(d)(2)(C)(iii).

(B) Presumption. Marketed arrange-ments in which persons carry on farmingactivities using the services of a commonmanagerial or administrative service willbe presumed to have the principal purposeof tax avoidance, within the meaning ofsection 6662(d)(2)(C)(iii), if such personsprepay a substantial portion of their farm-ing expenses with borrowed funds.

(iii) Examples. The following examplesillustrate the provisions of thisparagraph(a)(2):

Example 1. Farmer A grows trees that have a pre-productive period in excess of 2 years, and that pro-duce an annual crop. Farmer A is not required by sec-tion 447 to use an accrual method or prohibited bysection 448(a)(3) from using the cash method. Ac-cordingly, Farmer A qualifies for the exception de-scribed in this paragraph (a)(2). Since the trees have apreproductive period in excess of 2 years, Farmer A

must capitalize the direct costs and an allocable por-tion of the indirect costs that directly benefit or are in-curred by reason of the production of the trees. Sincethe annual crop has a preproductive period of 2 yearsor less, Farmer A is not required to capitalize the costsof producing the crops.

Example 2. Assume the same facts as Example 1,except that Farmer A is required by section 447 to usean accrual method or prohibited by 448(a)(3) fromusing the cash method. Farmer A does not qualify forthe exception described in this paragraph (a)(2).Farmer A is required to capitalize the direct costs andan allocable portion of the indirect costs that directlybenefit or are incurred by reason of the production ofthe trees and crops.

(3) Costs required to be capitalized orinventoried under another provision. Theexceptions from capitalization provided inparagraphs (a)(2), (d) and (e) of this sectiondo not apply to any cost that is required tobe capitalized or inventoried under anotherInternal Revenue Code or regulatory provi-sion, such as section 263 or 471.

(4) Farming business—(i) In general.A farming business means a trade or busi-ness involving the cultivation of land or theraising or harvesting of any agricultural orhorticultural commodity. Examples in-clude the trade or business of operating anursery or sod farm; the raising or harvest-ing of trees bearing fruit, nuts, or othercrops; the raising of ornamental trees (otherthan evergreen trees that are more than 6years old at the time they are severed fromtheir roots); and the raising, shearing, feed-ing, caring for, training, and managementof animals. For purposes of this section,the term harvesting does not include con-tract harvesting of an agricultural or horti-cultural commodity grown or raised by an-other. Similarly, merely buying andreselling plants or animals grown or raisedentirely by another is not raising an agricul-tural or horticultural commodity. A tax-payer is engaged in raising a plant or ani-mal, rather than the mere resale of a plantor animal, if the plant or animal is held forfurther cultivation and development priorto sale. In determining whether a plant oranimal is held for further cultivation anddevelopment prior to sale, considerationwill be given to all of the facts and circum-stances, including: the value added by thetaxpayer to the plant or animal throughagricultural or horticultural processes; thelength of time between the taxpayer’s ac-quisition of the plant or animal and the timethat the taxpayer makes the plant or animalavailable for sale; and in the case of a plant,whether the plant is kept in the container inwhich purchased, replanted in the ground,

or replanted in a series of larger containersas it is grown to a larger size.

(A) Plant. A plant produced in a farm-ing business includes, but is not limited to,a fruit, nut, or other crop bearing tree, an or-namental tree, a vine, a bush, sod, and thecrop or yield of a plant that will have morethan one crop or yield raised by the tax-payer. Sea plants are produced in a farmingbusiness if they are tended and cultivated asopposed to merely harvested.

(B) Animal. An animal produced in afarming business includes, but is not lim-ited to, any stock, poultry or other bird, andfish or other sea life raised by the taxpayer.Thus, for example, the term animal may in-clude a cow, chicken, emu, or salmonraised by the taxpayer. Fish and other sealife are produced in a farming business ifthey are raised on a fish farm. A fish farmis an area where fish or other sea life aregrown or raised as opposed to merelycaught or harvested.

(ii) Incidental activities—(A) In gen-eral. A farming business includes process-ing activities that are normally incident tothe growing, raising, or harvesting of agri-cultural or horticultural products. For ex-ample, a taxpayer in the trade or business ofgrowing fruits and vegetables may harvest,wash, inspect, and package the fruits andvegetables for sale. Such activities are nor-mally incident to the raising of these cropsby farmers. The taxpayer will be consid-ered to be in the trade or business of farm-ing with respect to the growing of fruits andvegetables and the processing activities in-cident to their harvest.

(B) Activities that are not incidental.Farming business does not include the pro-cessing of commodities or products beyondthose activities that are normally incident tothe growing, raising, or harvesting of suchproducts.

(iii) Examples. The following exam-ples illustrate the provisions of this para-graph (a)(4):

Example 1. Individual A operates a retail nurs-ery. Individual A has three categories of plants. Thefirst category is comprised of plants that IndividualA grows from seeds or cuttings. The second cate-gory is comprised of plants that Individual A pur-chases in containers and grows for a period of fromseveral months to several years. Individual A re-plants some of these plants in the ground. The oth-ers are replanted in a series of larger containers asthey grow. The third category is comprised of plantsthat are purchased by Individual A in containers. In-dividual A does not grow these plants to a larger sizebefore making them available for resale. Instead,Individual A makes these plants available for resale,

2000–36 I.R.B. 241 September 5, 2000

in the container in which purchased, shortly after re-ceiving them. Thus, no value is added to theseplants by Individual A through horticulturalprocesses. Individual A also sells soil, mulch, chem-icals, and yard tools. Individual A is producingproperty in the farming business with respect to thefirst two categories of plants because these plantsare held for further cultivation and developmentprior to sale. The plants in the third category are notheld for further cultivation and development prior tosale and, therefore, are not regarded as property pro-duced in a farming business for purposes of section263A. Accordingly, Individual A must account forthe third category of plants, along with the soil,mulch, chemicals, and yard tools, as property ac-quired for resale. If Individual A’s average annualgross receipts are less than $10 million, Individual Awill not be required to capitalize costs with respectto its resale activities under section 263A.

Example 2. Individual B is in the business ofgrowing and harvesting wheat and other grains. Indi-vidual B also processes grain that Individual B hasharvested in order to produce breads, cereals, andother similar food products, which Individual B thensells to customers in the course of its business. Al-though Individual B is in the farming business with re-spect to the growing and harvesting of grain, Individ-ual B is not in the farming business with respect to theprocessing of such grain to produce the food products.

Example 3. Individual C is in the business of rais-ing poultry and other livestock. Individual C also op-erates a meat processing operation in which the poul-try and other livestock are slaughtered, processed, andpackaged or canned. The packaged or canned meat issold to Individual C’s customers. Although Individ-ual C is in the farming business with respect to theraising of poultry and other livestock, Individual C isnot in the farming business with respect to the slaugh-tering, processing, packaging, and canning of suchanimals to produce the food products.

(b) Application of section 263A toproperty produced in a farmingbusiness—(1) In general. Unless other-wise provided in this section, section263A requires the capitalization of the di-rect costs and an allocable portion of theindirect costs that directly benefit or areincurred by reason of the production ofany property in a farming business (in-cluding animals and plants without regardto the length of their preproductive pe-riod). Section 1.263A–1(e) describes thetypes of direct and indirect costs that gen-erally must be capitalized by taxpayersunder section 263A and paragraphs(b)(1)(i) and (ii) of this section providespecific examples of the types of coststypically incurred in the trade or businessof farming. For purposes of this section,soil and water conservation expendituresthat a taxpayer has elected to deductunder section 175 and fertilizer that a tax-payer has elected to deduct under section180 are not subject to capitalization undersection 263A, except to the extent these

costs are required to be capitalized as apreproductive period cost of a plant or an-imal.

(i) Plants. The costs of producing aplant typically required to be capitalizedunder section 263A include the costs in-curred so that the plant’s growing processmay begin (preparatory costs), such as theacquisition costs of the seed, seedling, orplant, and the costs of planting, cultivat-ing, maintaining, or developing the plantduring the preproductive period (prepro-ductive period costs). Preproductive pe-riod costs include, but are not limited to,management, irrigation, pruning, soil andwater conservation (including costs thatthe taxpayer has elected to deduct undersection 175), fertilizing (including coststhat the taxpayer has elected to deductunder section 180), frost protection,spraying, harvesting, storage and han-dling, upkeep, electricity, tax depreciationand repairs on buildings and equipmentused in raising the plants, farm overhead,taxes (except state and Federal incometaxes), and interest required to be capital-ized under section 263A(f).

(ii) Animals. The costs of producingan animal typically required to be capital-ized under section 263A include the costsincurred so that the animal’s raisingprocess may begin (preparatory costs),such as the acquisition costs of the ani-mal, and the costs of raising or caring forsuch animal during the preproductive pe-riod (preproductive period costs). Prepro-ductive period costs include, but are notlimited to, management, feed (such asgrain, silage, concentrates, supplements,haylage, hay, pasture and other forages),maintaining pasture or pen areas (includ-ing costs that the taxpayer has elected todeduct under sections 175 or 180), breed-ing, artificial insemination, veterinary ser-vices and medicine, livestock hauling,bedding, fuel, electricity, hired labor, taxdepreciation and repairs on buildings andequipment used in raising the animals (forexample, barns, trucks, and trailers), farmoverhead, taxes (except state and Federalincome taxes), and interest required to becapitalized under section 263A(f).

(2) Preproductive period—(i) Plant—(A) In general. The preproductive periodof property produced in a farming busi-ness means—

(1) In the case of a plant that will havemore than one crop or yield (for example,

an orange tree), the period before the firstmarketable crop or yield from such plant;

(2) In the case of the crop or yield of aplant that will have more than one crop oryield (for example, the orange), the periodbefore such crop or yield is disposed of; or

(3) In the case of any other plant, theperiod before such plant is disposed of.

(B) Applicability of section 263A. Forpurposes of determining whether a planthas a preproductive period in excess of 2years, the preproductive period of plantsgrown in commercial quantities in theUnited States is based on the nationwideweighted average preproductive periodfor such plant. The Commissioner willpublish a noninclusive list of plants with anationwide weighted average preproduc-tive period in excess of 2 years. In thecase of other plants grown in commercialquantities in the United States, the nation-wide weighted average preproductive pe-riod must be determined based on avail-able statistical data. For all other plants,the taxpayer is required, at or before thetime the seed or plant is acquired orplanted, to reasonably estimate the pre-productive period of the plant. If the tax-payer estimates a preproductive period inexcess of 2 years, the taxpayer must capi-talize the costs of producing the plant. Ifthe estimate is reasonable, based on thefacts in existence at the time it is made,the determination of whether section263A applies is not modified at a latertime even if the actual length of the pre-productive period differs from the esti-mate. The actual length of the preproduc-tive period will, however, be consideredin evaluating the reasonableness of thetaxpayer’s future estimates. The nation-wide weighted average preproductive pe-riod or the estimated preproductive periodis only used for purposes of determiningwhether the preproductive period of aplant is greater than 2 years.

(C) Actual preproductive period. Theplant’s actual preproductive period is usedfor purposes of determining the periodduring which a taxpayer must capitalizepreproductive period costs with respect toa particular plant.

(1) Beginning of the preproductive pe-riod. The actual preproductive period of aplant begins when the taxpayer first in-curs costs that directly benefit or are in-curred by reason of the plant. Generally,this occurs when the taxpayer plants the

September 5, 2000 242 2000–36 I.R.B.

seed or plant. In the case of a taxpayerthat acquires plants that have already beenpermanently planted, or plants that aretended by the taxpayer or another prior topermanent planting, the actual preproduc-tive period of the plant begins upon acqui-sition of the plant by the taxpayer. In thecase of the crop or yield of a plant thatwill have more than one crop or yield, theactual preproductive period begins whenthe plant has become productive in mar-ketable quantities and the crop or yieldfirst appears, for example, in the form of asprout, bloom, blossom, or bud.

(2) End of the preproductive period—(i) In general. In the case of a plant thatwill have more than one crop or yield, theactual preproductive period ends when theplant first becomes productive in mar-ketable quantities. In the case of any otherplant (including the crop or yield of a plantthat will have more than one crop or yield),the actual preproductive period ends whenthe plant, crop, or yield is sold or otherwisedisposed of. Field costs, such as irrigating,fertilizing, spraying and pruning, that areincurred after the harvest of a crop or yieldbut before the crop or yield is sold or other-wise disposed of are not required to be in-cluded in the preproductive period costs ofthe harvested crop or yield because they donot benefit and are unrelated to the har-vested crop or yield.

(ii) Marketable quantities. A plant thatwill have more than one crop or yield be-comes productive in marketable quanti-ties once a crop or yield is produced insufficient quantities to be harvested andmarketed in the ordinary course of thetaxpayer’s business. Factors that are rele-vant to determining whether a crop oryield is produced in sufficient quantitiesto be harvested and marketed in the ordi-nary course include: whether the crop oryield is harvested that is more than deminimis, although it may be less than ex-pected at the maximum bearing stage,based on a comparison of the quantitiesper acre harvested in the year in questionto the quantities per acre expected to beharvested when the plant reaches full ma-turity; and whether the sales proceeds ex-ceed the costs of harvest and make a rea-sonable contribution to an allocable shareof farm expenses.

(D) Examples. The following exam-ples illustrate the provisions of this para-graph (b)(2):

Example 1. (i) Farmer A, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion, grows plants that will have more than one cropor yield. The plants are grown in commercial quan-tities in the United States. Farmer A acquires 1 year-old plants by purchasing them from an unrelatedparty, Corporation B, and plants them immediately.The nationwide weighted average preproductive pe-riod of the plant is 4 years. The particular plantsgrown by Farmer A do not begin to produce in mar-ketable quantities until 3 years and 6 months afterthey are planted by Farmer A.

(ii) Since the plants are deemed to have a prepro-ductive period in excess of 2 years, Farmer A is re-quired to capitalize the costs of producing the plants.See paragraphs (a)(2) and (b)(2)(i)(B) of this sec-tion. In accordance with paragraph (b)(2)(i)(C)(1)of this section, Farmer A must begin to capitalize thepreproductive period costs when the plants areplanted. In accordance with paragraph(b)(2)(i)(C)(2) of this section, Farmer A must con-tinue to capitalize preproductive period costs to theplants until the plants begin to produce in mar-ketable quantities. Thus, Farmer A must capitalizethe preproductive period costs for a period of 3 yearsand 6 months (that is, until the plants are 4 years and6 months old), notwithstanding the fact that theplants, in general, have a nationwide weighted aver-age preproductive period of 4 years.

Example 2. (i) Farmer B, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion, grows plants that will have more than one cropor yield. The plants are grown in commercial quan-tities in the United States. The nationwide weightedaverage preproductive period of the plant is 2 yearsand 5 months. Farmer B acquires 1 month-oldplants by purchasing them from an unrelated party,Corporation B. Farmer B enters into a contract withCorporation B under which Corporation B will re-tain and tend the plants for 7 months following thesale. At the end of 7 months, Farmer B takes posses-sion of the plants and plants them in the permanentorchard. The plants become productive in mar-ketable quantities 1 year and 11 months after theyare planted by Farmer B.

(ii) Since the plants are deemed to have a prepro-ductive period in excess of 2 years, Farmer B is re-quired to capitalize the costs of producing the plants.See paragraphs (a)(2) and (b)(2)(i)(B) of this sec-tion. In accordance with paragraph (b)(2)(i)(C)(1)of this section, Farmer B must begin to capitalize thepreproductive period costs when the purchase oc-curs. In accordance with paragraph (b)(2)(i)(C)(2)of this section, Farmer B must continue to capitalizethe preproductive period costs to the plants until theplants begin to produce in marketable quantities.Thus, Farmer B must capitalize the preproductiveperiod costs of the plants for a period of 2 years and6 months (the 7 months the plants are tended byCorporation B and the 1 year and 11 months afterthe plants are planted by Farmer B), that is, until theplants are 2 years and 7 months old, notwithstandingthe fact that the plants, in general, have a nationwideweighted average preproductive period of 2 yearsand 5 months.

Example 3. (i) Assume the same facts as in Ex-ample 2, except that Farmer B acquires the plants bypurchasing them from Corporation B when theplants are 8 months old and that the plants areplanted by Farmer B upon acquisition.

(ii) Since the plants are deemed to have a prepro-ductive period in excess of 2 years, Farmer B is re-quired to capitalize the costs of producing the plants.See paragraphs (a)(2) and (b)(2)(i)(B) of this sec-tion. In accordance with paragraph (b)(2)(i)(C)(1)of this section, Farmer B must begin to capitalize thepreproductive period costs when the plants areplanted. In accordance with paragraph(b)(2)(i)(C)(2) of this section, Farmer B must con-tinue to capitalize the preproductive period costs tothe plants until the plants begin to produce in mar-ketable quantities. Thus, Farmer B must capitalizethe preproductive period costs of the plants for a pe-riod of 1 year and 11 months.

Example 4. (i) Farmer C, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion, grows plants that will have more than one cropor yield. The plants are grown in commercial quan-tities in the United States. Farmer C acquires 1month-old plants from an unrelated party and plantsthem immediately. The nationwide weighted aver-age preproductive period of the plant is 2 years and3 months. The particular plants grown by Farmer Cbegin to produce in marketable quantities 1 year and10 months after they are planted by Farmer C.

(ii) Since the plants are deemed to have a nation-wide weighted average preproductive period in ex-cess of 2 years, Farmer C is required to capitalize thecosts of producing the plants, notwithstanding thefact that the particular plants grown by Farmer C be-come productive in less than 2 years. See paragraph(b)(2)(i)(B) of this section. In accordance with para-graph (b)(2)(i)(C)(1) of this section, Farmer C mustbegin to capitalize the preproductive period costswhen it plants the plants. In accordance with para-graph (b)(2)(i)(C)(2) of this section, Farmer C prop-erly ceases capitalization of preproductive periodcosts when the plants become productive in mar-ketable quantities (that is, 1 year and 10 months afterthey are planted, which is when they are 1 year and11 months old).

Example 5. (i) Farmer D, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion, grows plants that will have more than one cropor yield. The plants are not grown in commercialquantities in the United States. Farmer D acquiresand plants the plants when they are 1 year old andestimates that they will become productive in mar-ketable quantities 3 years after planting. Thus, at thetime the plants are acquired and planted Farmer Dreasonably estimates that the plants will have a pre-productive period of 4 years. The actual plantsgrown by Farmer D do not begin to produce in mar-ketable quantities until 3 years and 6 months afterthey are planted by Farmer D.

(ii) Since the plants have an estimated prepro-ductive period in excess of 2 years, Farmer D is re-quired to capitalize the costs of producing the plants.See paragraph (b)(2)(i)(B) of this section. In accor-dance with paragraph (b)(2)(i)(C)(1) of this section,Farmer D must begin to capitalize the preproductiveperiod costs when it acquires and plants the plants.In accordance with paragraph (b)(2)(i)(C)(2) of thissection, Farmer D must continue to capitalize thepreproductive period costs until the plants begin toproduce in marketable quantities. Thus, Farmer Dmust capitalize the preproductive period costs of theplants for a period of 3 years and 6 months (that is,until the plants are 4 years and 6 months old),notwithstanding the fact that Farmer D estimated

2000–36 I.R.B. 243 September 5, 2000

that the plants would become productive after 4years.

Example 6. (i) Farmer E, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion grows plants from seed. The plants are notgrown in commercial quantities in the United States.The plants do not have more than 1 crop or yield. Atthe time the seeds are planted Farmer E reasonablyestimates that the plants will have a preproductiveperiod of 1 year and 10 months. The actual plantsgrown by Farmer E are not ready for harvesting anddisposal until 2 years and 2 months after the seedsare planted by Farmer E.

(ii) Because Farmer E’s estimate of the prepro-ductive period (which was 2 years or less) was rea-sonable at the time made based on the facts, FarmerE will not be required to capitalize the costs of pro-ducing the plants under section 263A, notwithstand-ing the fact that the actual preproductive period ofthe plants exceeded 2 years. See paragraph(b)(2)(i)(B) of this section. However, Farmer Emust take the actual preproductive period of theplants into consideration when making future esti-mates of the preproductive period of such plants.

Example 7. (i) Farmer F, a calendar year tax-payer that does not qualify for the exception in para-graph (a)(2) of this section, grows trees that willhave more than one crop. Farmer F acquires andplants the trees in April, Year 1. On October 1, Year6, the trees become productive in marketable quanti-ties.

(ii) The costs of producing the plant, includingthe preproductive period costs incurred by Farmer Fon or before October 1, Year 6, are capitalized to thetrees. Preproductive period costs incurred after Oc-tober 1, Year 6, are capitalized to a crop when in-curred during the preproductive period of the cropand deducted as a cost of maintaining the tree whenincurred between the disposal of one crop and theappearance of the next crop. See paragraphs(b)(2)(i)(A), (b)(2)(i)(C)(1) and (b)(2)(i)(C)(2) ofthis section.

Example 8. (i) Farmer G, a taxpayer that quali-fies for the exception in paragraph (a)(2) of this sec-tion, produces fig trees on 10 acres of land. The figtrees are grown in commercial quantities in theUnited States and have a nationwide weighted aver-age preproductive period in excess of 2 years.Farmer G acquires and plants the fig trees in theirpermanent grove during Year 1. When the fig treesare mature, Farmer G expects to harvest 10x tons offigs per acre. At the end of Year 4, Farmer G har-vests .5x tons of figs per acre that it sells for $100x.During Year 4, Farmer G incurs expenses related tothe fig operation of: $50x to harvest the figs andtransport them to market and other direct and indi-rect costs related to the fig operation in the amountof $1000x.

(ii) Since the fig trees have a preproductive pe-riod in excess of 2 years, Farmer G is required tocapitalize the costs of producing the fig trees. Seeparagraphs (a)(2) and (b)(2)(i)(B) of this section. Inaccordance with paragraph (b)(2)(i)(C)(2) of thissection, Farmer G must continue to capitalize pre-productive period costs to the trees until they be-come productive in marketable quantities. The fol-lowing factors weigh in favor of a determination thatthe fig trees did not become productive in Year 4:the quantity of harvested figs is de minimis based onthe fact that the yield is only 5 percent of the ex-

pected yield at maturity and the proceeds from thesale of the figs are sufficient, after covering the costsof harvesting and transporting the figs, to cover onlya negligible portion of the allocable farm expenses.Based on these facts and circumstances, the fig treesdid not become productive in marketable quantitiesin Year 4.

(ii) Animal. An animal’s actual pre-productive period is used to determine theperiod that the taxpayer must capitalizepreproductive period costs with respect toa particular animal.

(A) Beginning of the preproductive pe-riod. The preproductive period of an ani-mal begins at the time of acquisition,breeding, or embryo implantation.

(B) End of the preproductive period.In the case of an animal that will be usedin the trade or business of farming (for ex-ample, a dairy cow), the preproductiveperiod generally ends when the animal is(or would be considered) placed in ser-vice for purposes of section 168 (withoutregard to the applicable convention).However, in the case of an animal thatwill have more than one yield (for exam-ple, a breeding cow), the preproductiveperiod ends when the animal produces(for example, gives birth to) its first yield.In the case of any other animal, the pre-productive period ends when the animal issold or otherwise disposed of.

(C) Allocation of costs between animaland yields. In the case of an animal thatwill have more than one yield, the costsincurred after the beginning of the prepro-ductive period of the first yield but beforethe end of the preproductive period of theanimal must be allocated between the ani-mal and the yield using any reasonablemethod. Any depreciation allowance onthe animal may be allocated entirely tothe yield. Costs incurred after the begin-ning of the preproductive period of thesecond yield, but before the first yield isweaned from the animal must be allocatedbetween the first and second yield usingany reasonable method. However, a tax-payer may elect to allocate these costs en-tirely to the second yield. An allocationmethod used by a taxpayer is a method ofaccounting that must be used consistentlyand is subject to the rules of section 446and the regulations thereunder.

(c) Inventory methods—(1) In gen-eral. Except as otherwise provided, thecosts required to be allocated to any plantor animal under this section may be deter-mined using reasonable inventory valua-

tion methods such as the farm-pricemethod or the unit-livestock-pricemethod. See §1.471–6. Under the unit-livestock-price method, unit prices mustinclude all costs required to be capitalizedunder section 263A. A taxpayer using theunit-livestock-price method may elect touse the cost allocation methods in§1.263A–1(f) or 1.263A–2(b) to allocateits direct and indirect costs to the propertyproduced in the business of farming. Insuch a situation, section 471 costs are thecosts taken into account by the taxpayerunder the unit-livestock-price methodusing the taxpayer’s standard unit price asmodified by this paragraph (c)(1). Taxshelters, as defined in paragraph (a)(2)(ii)of this section, that use the unit-livestock-price method for inventories must includein inventory the annual standard unit pricefor all animals that are acquired duringthe taxable year, regardless of whether thepurchases are made during the last 6months of the taxable year. Taxpayers re-quired by section 447 to use an accrualmethod or prohibited by section 448(a)(3)from using the cash method that use theunit-livestock-price method must modifythe annual standard price in order to rea-sonably reflect the particular period in thetaxable year in which purchases of live-stock are made, if such modification isnecessary in order to avoid significantdistortions in income that would other-wise occur through operation of the unit-livestock-price method.

(2) Available for property used in atrade or business. The farm-price methodor the unit-livestock-price method may beused by any taxpayer to allocate costs toany plant or animal under this section, re-gardless of whether the plant or animal isheld or treated as inventory property bythe taxpayer. Thus, for example, a tax-payer may use the unit-livestock-pricemethod to account for the costs of raisinglivestock that will be used in the trade orbusiness of farming (for example, abreeding animal or a dairy cow) eventhough the property in question is not in-ventory property.

(3) Exclusion of property to which sec-tion 263A does not apply. Notwithstand-ing a taxpayer’s use of the farm-pricemethod with respect to farm property towhich the provisions of section 263Aapply, that taxpayer is not required, solelyby such use, to use the farm-price method

September 5, 2000 244 2000–36 I.R.B.

with respect to farm property to which theprovisions of section 263A do not apply.Thus, for example, assume Farmer Araises fruit trees that have a preproductiveperiod in excess of 2 years and to whichthe provisions of section 263A, therefore,apply. Assume also that Farmer A raisescattle and is not required to use an accrualmethod by section 447 or prohibited fromusing the cash method by section448(a)(3). Because Farmer A qualifiesfor the exception in paragraph (a)(2) ofthis section, Farmer A is not required tocapitalize the costs of raising the cattle.Although Farmer A may use the farm-price method with respect to the fruittrees, Farmer A is not required to use thefarm-price method with respect to the cat-tle. Instead, Farmer A’s accounting forthe cattle is determined under other provi-sions of the Code and regulations.

(d) Election not to have section 263Aapply—(1) Introduction. This paragraph(d) permits certain taxpayers to make anelection not to have the rules of this sec-tion apply to any plant produced in afarming business conducted by the elect-ing taxpayer. The election is a method ofaccounting under section 446, and oncean election is made, it is revocable onlywith the consent of the Commissioner.

(2) Availability of the election. Theelection described in this paragraph (d) isavailable to any taxpayer that producesplants in a farming business, except thatno election may be made by a corpora-tion, partnership, or tax shelter required touse the accrual method under section 447or prohibited from using the cash methodby section 448(a)(3). Moreover, the elec-tion does not apply to the costs of plant-ing, cultivation, maintenance, or develop-ment of a citrus or almond grove (or anypart thereof) incurred prior to the close ofthe fourth taxable year beginning with thetaxable year in which the trees wereplanted in the permanent grove (includingcosts incurred prior to the permanentplanting). If a citrus or almond grove isplanted in more than one taxable year, theportion of the grove planted in any onetaxable year is treated as a separate grovefor purposes of determining the year ofplanting.

(3) Time and manner of making theelection—(i) Automatic election. A tax-payer makes the election under this para-graph (d) by not applying the rules of sec-

tion 263A to determine the capitalizedcosts of plants produced in a farmingbusiness and by applying the special rulesin paragraph (d)(4) of this section on itsoriginal return for the first taxable year inwhich the taxpayer is otherwise requiredto capitalize section 263A costs. Thus, inorder to be treated as having made theelection under this paragraph (d), it isnecessary to report both income and ex-penses in accordance with the rules of thisparagraph (d) (for example, it is necessaryto use the alternative depreciation systemas provided in paragraph (d)(4)(ii) of thissection). For example, a farmer whodeducts costs that are otherwise requiredto be capitalized under section 263A butfails to use the alternative depreciationsystem under section 168(g)(2) for applic-able property placed in service has notmade an election under this paragraph (d)and is not in compliance with the provi-sions of section 263A. In the case of apartnership or S corporation, the electionmust be made by the partner, shareholder,or member.

(ii) Nonautomatic election. A taxpayerthat does not make the election under thisparagraph (d) as provided in paragraph(d)(3)(i) must obtain the consent of theCommissioner to make the election by fil-ing a Form 3115, Application for Changein Method of Accounting, in accordancewith §1.446–1(e)(3).

(4) Special rules. If the election underthis paragraph (d) is made, the taxpayer issubject to the special rules in this para-graph (d)(4).

(i) Section 1245 treatment. The plantproduced by the taxpayer is treated as sec-tion 1245 property and any gain resultingfrom any disposition of the plant is recap-tured (that is, treated as ordinary income)to the extent of the total amount of the de-ductions that, but for the election, wouldhave been required to be capitalized withrespect to the plant. In calculating theamount of gain that is recaptured underthis paragraph (d)(4)(i), a taxpayer mayuse the farm-price method or another sim-plified method permitted under these reg-ulations in determining the deductionsthat otherwise would have been capital-ized with respect to the plant.

(ii) Required use of alternative depre-ciation system. If the taxpayer or a re-lated person makes an election under thisparagraph (d), the alternative depreciation

system (as defined in section 168(g)(2))must be applied to all property used pre-dominantly in any farming business of thetaxpayer or related person and placed inservice in any taxable year during whichthe election is in effect. The requirementto use the alternative depreciation systemby reason of an election under this para-graph (d) will not prevent a taxpayer frommaking an election under section 179 todeduct certain depreciable business as-sets.

(iii) Related person—(A) In general.For purposes of this paragraph (d)(4), re-lated person means—

(1) The taxpayer and members of thetaxpayer’s family;

(2) Any corporation (including an Scorporation) if 50 percent or more of thestock (in value) is owned directly or indi-rectly (through the application of section318) by the taxpayer or members of thetaxpayer’s family;

(3) A corporation and any other corpo-ration that is a member of the same con-trolled group (within the meaning of sec-tion 1563(a)(1)); and

(4) Any partnership if 50 percent ormore (in value) of the interests in suchpartnership is owned directly or indirectlyby the taxpayer or members of the tax-payer’s family.

(B) Members of family. For purposesof this paragraph (d)(4)(iii), the terms“members of the taxpayer’s family,” and“members of family” (for purposes of ap-plying section 318(a)(1)), means thespouse of the taxpayer (other than aspouse who is legally separated from theindividual under a decree of divorce orseparate maintenance) and any of the tax-payer ’s children (including legallyadopted children) who have not reachedthe age of 18 as of the last day of the tax-able year in question.

(5) Examples. The following exam-ples illustrate the provisions of this para-graph (d):

Example 1. (i) Farmer A, an individual, is en-gaged in the trade or business of farming. Farmer Agrows apple trees that have a preproductive periodgreater than 2 years. In addition, Farmer A growsand harvests wheat and other grains. Farmer Aelects under this paragraph (d) not to have the rulesof section 263A apply to the costs of growing theapple trees.

(ii) In accordance with paragraph (d)(4) of thissection, Farmer A is required to use the alternativedepreciation system described in section 168(g)(2)with respect to all property used predominantly in

2000–36 I.R.B. 245 September 5, 2000

any farming business in which Farmer A engages (in-cluding the growing and harvesting of wheat) if suchproperty is placed in service during a year for whichthe election is in effect. Thus, for example, all assetsand equipment (including trees and any equipmentused to grow and harvest wheat) placed in serviceduring a year for which the election is in effect mustbe depreciated as provided in section 168(g)(2).

Example 2. Assume the same facts as in Example1, except that Farmer A and members of Farmer A’sfamily (as defined in paragraph (d)(4)(iii)(B) of thissection) also own 51 percent (in value) of the inter-ests in Partnership P, which is engaged in the tradeor business of growing and harvesting corn. Part-nership P is a related person to Farmer A under theprovisions of paragraph (d)(4)(iii) of this section.Thus, the requirements to use the alternative depre-ciation system under section 168(g)(2) also apply toany property used predominantly in a trade or busi-ness of farming which Partnership P places in ser-vice during a year for which an election made byFarmer A is in effect.

(e) Exception for certain costs resultingfrom casualty losses—(1) In general. Sec-tion 263A does not require the capitaliza-tion of costs that are attributable to the re-planting, cultivating, maintaining, anddeveloping of any plants bearing an ediblecrop for human consumption (including,but not limited to, plants that constitute agrove, orchard, or vineyard) that were lostor damaged while owned by the taxpayerby reason of freezing temperatures, disease,drought, pests, or other casualty (replantingcosts). Such replanting costs may be in-curred with respect to property other thanthe property on which the damage or lossoccurred to the extent the acreage of theproperty with respect to which the replant-ing costs are incurred is not in excess of theacreage of the property on which the dam-age or loss occurred. This paragraph (e)applies only to the replanting of plants ofthe same type as those lost or damaged.This paragraph (e) applies to plants re-planted on the property on which the dam-age or loss occurred or property of the sameor lesser acreage in the United States irre-spective of differences in density betweenthe lost or damaged and replanted plants.Plants bearing crops for human consump-tion are those crops normally eaten ordrunk by humans. Thus, for example, costsincurred with respect to replanting plantsbearing jojoba beans do not qualify for theexception provided in this paragraph (e) be-cause that crop is not normally eaten ordrunk by humans.

(2) Ownership. Replanting costs de-scribed in paragraph (e)(1) of this sectiongenerally must be incurred by the tax-payer that owned the property at the time

the plants were lost or damaged. Para-graph (e)(1) of this section will apply,however, to costs incurred by a personother than the taxpayer that owned theplants at the time of damage or loss if—

(i) The taxpayer that owned the plantsat the time the damage or loss occurredowns an equity interest of more than 50percent in such plants at all times duringthe taxable year in which the replantingcosts are paid or incurred; and

(ii) Such other person owns any por-tion of the remaining equity interest andmaterially participates in the replanting,cultivating, maintaining, or developing ofsuch plants during the taxable year inwhich the replanting costs are paid or in-curred. A person will be treated as materi-ally participating for purposes of this pro-vision if such person would otherwisemeet the requirements with respect to ma-terial participation within the meaning ofsection 2032A(e)(6).

(3) Examples. The following exam-ples illustrate the provisions of this para-graph (e):

Example 1. (i) Farmer A grows cherry trees thathave a preproductive period in excess of 2 years andproduce an annual crop. These cherries are nor-mally eaten by humans. Farmer A grows the treeson a 100 acre parcel of land (parcel 1) and thegroves of trees cover the entire acreage of parcel 1.Farmer A also owns a 150 acre parcel of land (parcel2) that Farmer A holds for future use. Both parcelsare in the United States. In 2000, the trees and theirrigation and drainage systems that service the treesare destroyed in a casualty (within the meaning ofparagraph (e)(1) of this section). Farmer A installsnew irrigation and drainage systems on parcel 1,purchases young trees (seedlings), and plants theseedlings on parcel 1.

(ii) The costs of the irrigation and drainage sys-tems and the seedlings must be capitalized. In accor-dance with paragraph (e)(1) of this section, the costsof planting, cultivating, developing, and maintainingthe seedlings during their preproductive period arenot required to be capitalized by section 263A.

Example 2. (i) Assume the same facts as in Ex-ample 1 except that Farmer A decides to replant theseedlings on parcel 2 rather than on parcel 1. Ac-cordingly, Farmer A installs the new irrigation anddrainage systems on 100 acres of parcel 2 and plantsseedlings on those 100 acres.

(ii) The costs of the irrigation and drainage sys-tems and the seedlings must be capitalized. Becausethe acreage of the related portion of parcel 2 does notexceed the acreage of the destroyed orchard on par-cel 1, the costs of planting, cultivating, developing,and maintaining the seedlings during their prepro-ductive period are not required to be capitalized bysection 263A. See paragraph (e)(1) of this section.

Example 3. (i) Assume the same facts as in Ex-ample 1 except that Farmer A replants the seedlingson parcel 2 rather than on parcel 1, and Farmer A ad-ditionally decides to expand its operations by grow-

ing 125 rather than 100 acres of trees. Accordingly,Farmer A installs new irrigation and drainage sys-tems on 125 acres of parcel 2 and plants seedlingson those 125 acres.

(ii) The costs of the irrigation and drainage sys-tems and the seedlings must be capitalized. Thecosts of planting, cultivating, developing, and main-taining 100 acres of the trees during their preproduc-tive period are not required to be capitalized by sec-tion 263A. The costs of planting, cultivating,maintaining, and developing the additional 25 acresare, however, subject to capitalization under section263A. See paragraph (e)(1) of this section.

(4) Special rule for citrus and almondgroves—(i) In general. The exception inthis paragraph (e) is available with respectto replanting costs of a citrus or almondgrove incurred prior to the close of thefourth taxable year after replanting,notwithstanding the taxpayer’s election tohave section 263A not apply (described inparagraph (d) of this section).

(ii) Example. The following exampleillustrates the provisions of this paragraph(e)(4):

Example. (i) Farmer A, an individual, is en-gaged in the trade or business of farming. Farmer Agrows citrus trees that have a preproductive periodof 5 years. Farmer A elects, under paragraph (d) ofthis section, not to have section 263A apply. Thiselection, however, is unavailable with respect to thecosts of producing a citrus grove incurred within thefirst 4 years beginning with the year the trees wereplanted. See paragraph (d)(2) of this section. Inyear 10, after the citrus grove has become produc-tive in marketable quantities, the citrus grove is de-stroyed by a casualty within the meaning of para-graph (e)(1) of this section. In year 10, Farmer Aacquires and plants young citrus trees in the samegrove to replace those destroyed by the casualty.

(ii) Farmer A must capitalize the costs of produc-ing the citrus grove incurred before the close of thefourth taxable year beginning with the year in whichthe trees were permanently planted. As a result ofthe election not to have section 263A apply, FarmerA may deduct the preproductive period costs in-curred in the fifth year. In year 10, Farmer A mustcapitalize the acquisition cost of the young trees.However, the costs of planting, cultivating, develop-ing, and maintaining the young trees that replacethose destroyed by the casualty are exempted fromcapitalization under this paragraph (e).

(f) Effective date and change in methodof accounting—(1) Effective date. In thecase of property that is not inventory in thehands of the taxpayer, this section is applic-able to costs incurred after August 21,2000, in taxable years ending after August21, 2000. In the case of inventory property,this section is applicable to taxable yearsbeginning after August 21, 2000.

(2) Change in method of accounting.Any change in a taxpayer’s method of ac-counting necessary to comply with this sec-tion is a change in method of accounting to

September 5, 2000 246 2000–36 I.R.B.

which the provisions of sections 446 and481 and the regulations thereunder apply.For property that is not inventory in thehands of the taxpayer, a taxpayer is grantedthe consent of the Commissioner to changeits method of accounting to comply with theprovisions of this section for costs incurredafter August 21, 2000, provided the changeis made for the first taxable year endingafter August 21, 2000. For inventory prop-erty, a taxpayer is granted the consent of theCommissioner to change its method of ac-counting to comply with the provisions ofthis section for the first taxable year begin-ning after August 21, 2000. A taxpayerchanging its method of accounting underthis paragraph (f)(2) must file a Form 3115,“Application for Change in AccountingMethod,” in accordance with the automaticconsent procedures in Rev. Proc. 99–49(1999–52 I.R.B. 725) (see §601.601(d)(2)of this chapter). However, the scope limita-tions in section 4.02 of Rev. Proc. 99–49 donot apply, provided the taxpayer’s methodof accounting for property produced in afarming business is not an issue under con-sideration within the meaning of section3.09 of Rev. Proc. 99–49. If the taxpayer isunder examination, before an appeals office,or before a federal court at the time that acopy of the Form 3115 is filed with the na-tional office, the taxpayer must provide aduplicate copy of the Form 3115 to the ex-amining agent, appeals officer, or counselfor the government, as appropriate, at thetime the copy of the Form 3115 is filed. TheForm 3115 must contain the name(s) andtelephone number(s) of the examiningagent, appeals officer, or counsel for thegovernment, as appropriate. Further, in thecase of property that is not inventory in thehands of the taxpayer, a change under thisparagraph (f)(2) is made on a cutoff basis asdescribed in section 2.06 of Rev. Proc.99–49 and without the audit protection pro-vided in section 7 of Rev. Proc. 99–49.However, a taxpayer may receive such auditprotection for non-inventory property bytaking into account any section 481(a) ad-justment that results from the change inmethod of accounting to comply with thissection. A taxpayer that opts to determine asection 481(a) adjustment (and, thus, obtainaudit protection) for non-inventory propertymust take into account only additional sec-tion 263A costs incurred after December 31,1986, in taxable years ending after Decem-ber 31, 1986. Any change in method of ac-

counting that is not made for the taxpayer’sfirst taxable year ending or beginning afterAugust 21, 2000, whichever is applicable,must be made in accord with the proceduresin Rev. Proc. 97–27 (1997–1 C.B. 680) (see§601.601(d)(2) of this chapter).

§1.263A–4T [Removed]

Par. 7. Section 1.263A–4T is removed.Par. 8. Section 1.471–6 is amended as

follows: 1. The third sentence of paragraph (d)

is revised. 2. The last sentence of paragraph (f) is

revised. The revisions read as follows:

§1.471–6 Inventories of livestock raisersand other farmers.

* * * * *(d) * * * However, see §1.263A–

4(c)(3) for an exception to this rule. * * * * * * * *

(f) * * * See §1.263A–4 for rules re-garding the computation of costs for pur-poses of the unit-livestock-price-method. * * * * *

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved August 10, 2000.

Jonathan Talisman,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on Au-gust 18, 2000, 8:45 a.m., and published in the issueof the Federal Register for August 21, 2000, 65 F.R.50638)

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of September 2000.See Rev. Rul. 2000–41, page 248.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted applicable federal long-term rate isset forth for the month of September 2000. See Rev.Rul. 2000–41, page 248.

Section 412.—Minimum FundingStandards

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 467.—Certain Paymentsfor the Use of Property orServices

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 482.—Allocation ofIncome and Deductions AmongTaxpayers

Federal short-term, mid-term, and long-termrates are set forth for the month of September 2000.See Rev. Rul. 2000–41, page 248.

Section 483.—Interest onCertain Deferred Payments

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 642.—Speical Rules forCredits and Deductions

Federal short-term, mid-term, and long-termrates are set forth for the month of September 2000.See Rev. Rul. 2000–41, page 248.

Section 807.—Rules for CertainReserves

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

2000–36 I.R.B. 247 September 5, 2000

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, on thispage.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate, and

the long-term exempt rate. For purposesof sections 1274, 1288, 382, and othersections of the Code, tables set forth therates for September 2000.

Rev. Rul. 2000–41

This revenue ruling provides variousprescribed rates for federal income taxpurposes for September 2000 (the currentmonth.) Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-term ad-justed applicable federal rates (adjustedAFR) for the current month for purposes

of section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, or aremainder or a reversionary interest forpurposes of section 7520.

September 5, 2000 248 2000–36 I.R.B.

REV. RUL. 2000–41 TABLE 1Applicable Federal Rates (AFR) for September 2000

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 6.33% 6.23% 6.18% 6.15%110% AFR 6.97% 6.85% 6.79% 6.75%120% AFR 7.62% 7.48% 7.41% 7.37%130% AFR 8.26% 8.10% 8.02% 7.97%

Mid-Term

AFR 6.22% 6.13% 6.08% 6.05%110% AFR 6.85% 6.74% 6.68% 6.65%120% AFR 7.50% 7.36% 7.29% 7.25%130% AFR 8.13% 7.97% 7.89% 7.84%150% AFR 9.41% 9.20% 9.10% 9.03%175% AFR 11.02% 10.73% 10.59% 10.50%

Long-Term

AFR 6.09% 6.00% 5.96% 5.93% 110% AFR 6.71% 6.60% 6.55% 6.51%120% AFR 7.33% 7.20% 7.14% 7.09%130% AFR 7.95% 7.80% 7.73% 7.68%

REV. RUL. 2000–41 TABLE 2Adjusted AFR for September 2000

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 4.38% 4.33% 4.31% 4.29%

Mid-termadjusted AFR 4.67% 4.62% 4.59% 4.58%

Long-term adjusted AFR 5.41% 5.34% 5.30% 5.28%

Section 1288.—Treatment ofOriginal Issue Discounts on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 6111.—GeneralRequirement of Return,Statement, or List

26 CFR 6011–4T: Requirement of statementdisclosing participation in certain transactions bycorporate taxpayers (Temporary).

T.D. 8896

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 301

Modification of Tax ShelterRules

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: These temporary regula-tions modify the rules relating to the filingby certain corporate taxpayers of a state-ment with their Federal corporate incometax returns under section 6011(a), the reg-istration of confidential corporate tax

shelters under section 6111(d), and themaintenance of lists of investors in poten-tially abusive tax shelters under section6112. These regulations provide the pub-lic with additional guidance needed tocomply with the disclosure rules, the reg-istration requirement, and the list mainte-nance requirement applicable to tax shel-ters. The temporary regulations affectcorporations participating in certain re-portable transactions, persons responsiblefor registering confidential corporate taxshelters, and organizers of potentiallyabusive tax shelters. The text of thesetemporary regulations also serves as thetext of the proposed regulations set forthin the notice of proposed rulemaking onthis subject in REG–103735–00,REG–110311–98, and REG–103736–00on page 258.

DATES: Effective Date: These temporaryregulations are effective August 11, 2000.

Applicability Date: For dates of applic-ability, see §§1.6011–4T(g), 301.6111–2T(h), and 301.6112–1T, A-22.

FOR FURTHER INFORMATION CON-TACT: Catherine Moore, (202) 622-3080,(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these regulations previouslyhave been reviewed and approved by the

Office of Management and Budget undercontrol numbers 1545-1685 and 1545-1686. No material changes to these col-lections of information are made by theseregulations.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validOMB control number.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

This document amends 26 CFR parts 1and 301 to provide modified rules relatingto the disclosure of certain tax shelters bycorporate investors on their Federal cor-porate income tax returns under section6011, the registration of confidential cor-porate tax shelters under section 6111,and the maintenance of lists of investorsin potentially abusive tax shelters undersection 6112.

On February 28, 2000, the IRS issuedtemporary and proposed regulations re-garding section 6011 (T.D. 8877, 2000–11I.R.B. 747; REG–103735–00, 2000–11I.R.B. 770), section 6111 (T.D. 8876,2000–11 I.R.B. 753; REG–110311–98,

2000–36 I.R.B. 249 September 5, 2000

REV. RUL. 2000-41 TABLE 3 Rates Under Section 382 for September 2000

Adjusted federal long-term rate for the current month 5.41%

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.) 5.79%

REV. RUL. 2000-41 TABLE 4Appropriate Percentages Under Section 42(b)(2) for September 2000

Appropriate percentage for the 70% present value low-income housing credit 8.44%

Appropriate percentage for the 30% present value low-income housing credit 3.62%

REV. RUL. 2000-41 TABLE 5Rate Under Section 7520 for September 2000

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 7.6%

2000–11 I.R.B. 767), and section 6112(T.D. 8875, 2000–11 I.R.B. 761;REG–103736–00, 2000–11 I.R.B. 768).The regulations were published in theFederal Register (65 F.R. 11205, 65 F.R.11215, 65 F.R. 11211) on March 2, 2000.

Based on comments that have been re-ceived, the IRS and Treasury have deter-mined that certain interim changes to thetemporary and proposed regulations arewarranted. The changes in the proposedrules are published in REG–103735–00,REG–110311–98, and REG–103736–00on page 258. The interim changes are in-tended to clarify certain provisions of theregulations, address certain practicalproblems relating to compliance with theregulations, and make certain otherchanges relating to the scope of the regu-lations.

It is anticipated that other changes willbe made in the final regulations. The IRSand Treasury have determined that addi-tional time is needed to evaluate a numberof the comments and recommendations.The IRS and Treasury continue to invitecomments on all provisions of the tempo-rary and proposed regulations, includingprovisions modified by this document.Furthermore, to the extent that taxpayersor other persons believe that there are spe-cific types of transactions for which dis-closure is required under the regulations,and that such disclosure is not consistentwith the purposes of the regulations, theIRS and Treasury solicit comments thatidentify such types of transactions and ex-plain those concerns. Such commentswill be taken into account in establishingthe scope of the final regulations and willalso assist the IRS and Treasury in deter-mining whether there are classes of trans-actions that should be specifically ex-cepted from disclosure under the finalregulations.

Explanation of Provisions

1. Disclosure Statement Required forCertain Corporate Taxpayers

The temporary regulations under sec-tion 6011 provide that every taxpayer thatis required to file a return for a taxableyear with respect to any tax imposedunder section 11 and that has participated,directly or indirectly, in a reportabletransaction shall attach a disclosure state-ment to its return for each taxable year for

which the taxpayer’s Federal income taxliability is affected by its participation inthe reportable transaction. It has come tothe attention of the IRS and Treasury thatthe temporary regulations under section6011 may have technically failed to in-clude insurance companies and mutualsavings banks conducting life insurancebusiness. The IRS and Treasury intendedthose corporations to be subject to the dis-closure requirement in the regulations.The regulations are amended accordingly.

2. Record Retention Requirement forCertain Reportable Transactions

The temporary regulations under sec-tion 6011 provide that a taxpayer must re-tain all documents relating to a reportabletransaction until the expiration of thestatute of limitations for the first taxableyear for which a disclosure statement isfiled with the taxpayer’s tax return.

The IRS and Treasury seek to clarifythe record retention requirement. Asmodified, the temporary regulations pro-vide that a taxpayer must retain a copy ofall documents and other records related toa transaction subject to disclosure underthis section that are material to an under-standing of the facts of the transaction,the expected tax treatment of the transac-tion, or the corporation’s decision to par-ticipate in the transaction.

3. Confidentiality

Under section 6111(d), a confidentialcorporate tax shelter must be registered.In describing confidentiality, the tempo-rary regulations under section 6111(d)provide that if an offeree’s disclosure ofthe structure or tax aspects of the transac-tion is limited in any way by an express orimplied understanding or agreement withor for the benefit of any tax shelter pro-moter, an offer is considered made underconditions of confidentiality, whether ornot such understanding or agreement islegally binding. An offer will also beconsidered made under conditions of con-fidentiality in the absence of any such un-derstanding or agreement if any tax shel-ter promoter knows or has reason to knowthat the transaction is protected from dis-closure or use in any other manner. How-ever, unless the facts and circumstancesclearly indicate otherwise, an offer is notconsidered made under conditions of con-fidentiality if the tax shelter promoter en-

ters into a written agreement with eachperson who participates or discusses par-ticipation in the transaction and suchagreement expressly authorizes such per-sons to disclose every aspect of the trans-action with any and all persons, withoutlimitation of any kind.

The IRS and Treasury understand that,in certain circumstances, limitations ondisclosure of the structure or tax aspectsof a transaction may be considered neces-sary to comply with Federal or state secu-rities laws. Consequently, the temporaryregulations under section 6111(d) aremodified to provide an exception for re-strictions on disclosure of the structure ortax aspects of the transaction reasonablynecessary to comply with those securitieslaws.

The IRS and Treasury received com-ments inquiring whether an exclusivityagreement (i.e., an agreement requiringthe offeree to pay a fee to a promoter ifthe offeree engages in the transaction,whether or not the offeree uses the ser-vices of that promoter) is a condition ofconfidentiality. It is the view of the IRSand Treasury that an exclusivity agree-ment is within the scope of section6111(d)(2)(B) because it is a limitation onuse, and the temporary regulations havebeen clarified to so provide. However,the regulations have also been clarified toprovide that an exclusivity arrangementordinarily will not result in an offer beingtreated as made under conditions of confi-dentiality if the tax shelter promoter pro-vides express written authorization fordisclosure. As modified, the written au-thorization rule is applicable if the pro-moter expressly authorizes each offeree todisclose the structure and tax aspects ofthe transaction to any and all persons,without limitation of any kind on suchdisclosure.

In addition, the temporary regulationsare modified to provide that, under sec-tion 6111(d)(2)(B), limitations on disclo-sure or use create a condition of confiden-tiality only if the limitations relate to thestructure or tax aspects of the transactionand such limitations are for the benefit ofany person other than the offeree.

4. Tax Shelter Promoter

The temporary regulations under sec-tion 6111(d) provide that the term taxshelter promoter includes a tax shelter or-

September 5, 2000 250 2000–36 I.R.B.

ganizer under section 6111(e)(1) and§301.6111–1T(Q&A-26 through Q&A-32) and any other person who participatesin the organization, management or saleof a tax shelter (other than a person whomerely performs services of the kind de-scribed in §301.6111–1T Q&A-33) or anyperson related (within the meaning of sec-tion 267 or 707) to such tax shelter orga-nizer or such other person.

The IRS and Treasury recognize thatthe definition of a promoter as currentlyworded implies that a person can be a pro-moter by participating in the organization,management or sale of a tax shelter in away other than as described in section6111(e)(1) and §301.6111–1T(Q&A-26through Q&A-32). The regulations undersection 6111(d) are amended to clarifythat a person is a promoter only if the per-son participates in the organization, man-agement or sale of a tax shelter under therules in section 6111(e)(1) and§301.6111–1T(Q&A-26 through Q&A-33), or is related to such person under sec-tion 267 or 707(b).

The regulations are also modified toclarify that only promoters that are classi-fied as organizers under section6111(e)(1) are required to register taxshelters.

5. Investor List Requirement of Section6112

Any person who organizes or sells aninterest in a confidential corporate taxshelter must maintain a list of personswho were sold an interest in the tax shel-ter and such other information as requiredby section 6112. See §301.6112–1T. Thetemporary regulations under section 6112require that, in addition to the lists re-quired for confidential corporate tax shel-ters, lists must also be maintained with re-spect to transactions for which theavoidance or evasion of Federal incometax is considered to be a significant pur-pose of the structure of the transaction, asdetermined in section 6111(d)(1)(A) and§301.6111–2T(b), whether or not thetransactions are offered under conditionsof confidentiality.

Section 6111(d)(1)(A) provides that theterm tax shelter includes any entity, plan,arrangement, or transaction a significantpurpose of the structure of which is theavoidance or evasion of Federal incometax for a direct or indirect participant

which is a corporation. The temporaryregulations cross-reference section6111(d)(1)(A) to provide the standard fordetermining whether the structure of atransaction has a significant purpose ofavoidance or evasion of Federal incometax. The temporary regulations areamended to provide that a transactionmay be subject to the list maintenance re-quirement whether or not the transactionis offered to corporate investors. Thus, alist of noncorporate investors will be re-quired to be maintained whether or notthe transaction is ever offered to a corpo-rate investor. However, as discussedbelow, the temporary regulations aremodified to include fee and tax reductionthresholds for list maintenance.

Two additional modifications are madeto the temporary regulations. First, thedefinitions of organizer and seller areclarified for purposes of section 6112.Second, the procedure for designating aperson to maintain the list under section6112 is modified for transactions otherthan section 6111(c) shelters and pro-jected income investments.

6. Tax Reduction and Fee Thresholds forInvestor List Requirement of Section 6112

The temporary regulations under sec-tion 6112 do not limit the investors whomust be included on the list. In responseto comments, the IRS and Treasury havedetermined that in certain cases organizersand sellers of interests in potentially abu-sive tax shelters should be required to in-clude on the list only investors that meetfee and tax reduction thresholds. Accord-ingly, the temporary regulations undersection 6112 are amended to provide that,for a potentially abusive tax shelter that isnot required to be registered under section6111, is not a listed transaction describedin §301.6111–2T(b)(2), and is not a pro-jected income investment as described in§301.6111–1T A-57A, an organizer orseller of an interest in a shelter may, but isnot required to, list an investor if the totalconsideration paid to all organizers andsellers with respect to such investor’s ac-quisition of the interest is less than$25,000, or if the organizer reasonably be-lieves that such investor’s acquisition ofthe interest will not result in a reduction ofthe Federal income tax liability of any cor-poration or corporations that exceeds, orexceeds in the aggregate, $1 million in any

single taxable year or a total of $2 millionfor any combination of taxable years andwill not result in a reduction of the Federalincome tax liability of any noncorporatetaxpayer or taxpayers that exceeds, or ex-ceeds in the aggregate, $250,000 in anysingle taxable year or a total of $500,000for any combination of taxable years.

7. Effective Date

The regulations are applicable August11, 2000. However, in general, taxpayersmay rely on the regulations after February28, 2000.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. Because these regulations imposeno new collection of information on smallentities, a Regulatory Flexibility Analysisunder the Regulatory Flexibility Act (5U.S.C. chapter 6) is not required. Pur-suant to section 7805(f) of the InternalRevenue Code, these temporary regula-tions will be submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on their im-pact on small business.

Drafting Information

The principal author of these regula-tions is Catherine Moore, Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the IRS and Treasury De-partment participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 301are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.6011–4T is amended

as follows:

2000–36 I.R.B. 251 September 5, 2000

1. The first sentence of paragraph (a) isrevised.

2. Paragraph (d)(1), second sentence,is amended by removing the language“LM:PF” and adding “LM:PFTG:OTSA”in its place.

3. Paragraphs (e) and (g) are revised.The revisions read as follows:

§1.6011–4T Requirement of statement dis-closing participation in certain transac-tions by corporate taxpayers (Temporary).

(a) In general. Every taxpayer that isrequired to file a return for a taxable yearwith respect to a tax imposed under sec-tion 11, 594, 801, or 831 and that has par-ticipated, directly or indirectly, in a re-portable transaction within the meaning ofparagraph (b) of this section must attach toits return for the taxable year described inparagraph (d) of this section a disclosurestatement in the form prescribed by para-graph (c) of this section. * * ** * * * *

(e) Retention of documents. The tax-payer must retain a copy of all documentsand other records related to a transactionsubject to disclosure under this sectionthat are material to an understanding ofthe facts of the transaction, the expectedtax treatment of the transaction, or thecorporation’s decision to participate in thetransaction. Such documents must be re-tained until the expiration of the statute oflimitations applicable to the first taxableyear for which disclosure of the transac-tion was made in accordance with the re-quirements of this section. (This docu-ment retention requirement is in additionto any document retention requirementsthat section 6001 generally imposes onthe taxpayer.) Such documents generallyinclude, but are not limited to, the follow-ing: marketing materials related to thetransaction; written analyses used in deci-sion-making related to the transaction;correspondence and agreements betweenthe taxpayer and any promoter, advisor,lender, or other party to the reportabletransaction that relate to the transaction;documents discussing, referring to, ordemonstrating the tax benefits arisingfrom the reportable transaction; and docu-ments, if any, referring to the businesspurposes for the reportable transaction. * * * * *

(g) Effective date. This section appliesto Federal corporate income tax returns

filed after February 28, 2000. However,paragraphs (a) and (e) of this sectionapply to Federal corporate income tax re-turns filed after August 11, 2000 and todocuments and other records that the tax-payer acquires, prepares, or has in its pos-session on or after August 11, 2000. Tax-payers may rely on the rules in paragraphs(a) and (e) of this section for Federal cor-porate income tax returns filed after Feb-ruary 28, 2000, and for documents andother records that the taxpayer acquires,prepares, or has in its possession on orafter February 28, 2000. Otherwise, therules that apply with respect to Federalcorporate income tax returns filed afterFebruary 28, 2000, and records that thetaxpayer acquires, prepares, or has in itspossession prior to August 11, 2000, arecontained in §1.6011–4T in effect prior toAugust 11, 2000 (see 26 CFR part 1 re-vised as of April 1, 2000).

PART 301—PROCEDURE ANDADMINISTRATION

Par. 3. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 4. Section 301.6111–2T is

amended as follows:1. Paragraph (b)(3)(ii) is amended by

removing the word “corporate”.2. Paragraph (c) is amended as fol-

lows:a. The last two sentences of paragraph

(c)(1) are revised.b. Paragraph (c)(2) is revised.c. Paragraph (c)(3) is added.3. Paragraphs (f) and (g)(1) are re-

vised.4. Paragraph (h) is amended by adding

three sentences at the end of the para-graph.

The revisions and additions read as fol-lows:

§301.6111–2T Confidential corporatetax shelters (temporary).

* * * * *(c) * * * (1) * * * Pursuant to section

6111(d)(2)(B), an offer will also be con-sidered made under conditions of confi-dentiality in the absence of any such un-derstanding or agreement if any tax shelterpromoter knows or has reason to knowthat the offeree’s use or disclosure of in-formation relating to the structure or taxaspects of the transaction is limited for the

benefit of any person other than the of-feree in any other manner, such as wherethe transaction is claimed to be proprietaryor exclusive to the tax shelter promoter orany party other than the offeree. An of-feree’s privilege to maintain the confiden-tiality of a communication relating to a taxshelter in which the offeree might partici-pate or has agreed to participate, includingan offeree’s confidential communicationwith the offeree’s attorney, is not itself acondition of confidentiality.

(2) Securities law exception. An offeris not considered made under conditionsof confidentiality if disclosure of thestructure or tax aspects of the transactionis subject to restrictions reasonably neces-sary to comply with federal or state secu-rities laws and such disclosure is not oth-erwise limited.

(3) Presumption. Unless facts and cir-cumstances clearly indicate otherwise, anoffer is not considered made under condi-tions of confidentiality if the tax shelterpromoter provides express written autho-rization to each offeree permitting the of-feree (and each employee, representative,or other agent of such offeree) to disclosethe structure and tax aspects of the trans-action to any and all persons, without lim-itation of any kind on such disclosure.* * * * *

(f) Definition of tax shelter promoter.For purposes of section 6111(d)(2) andthis section, the term tax shelter promoterincludes a tax shelter organizer and anyother person who participates in the orga-nization, management or sale of a taxshelter (as those persons are described insection 6111(e)(1) and §301.6111–1T(Q&A-26 through Q&A-33) or any per-son related (within the meaning of section267 or 707) to such tax shelter organizeror such other person.

(g) Person required to register—(1)Tax shelter promoters. The rules in sec-tion 6111(a) and (e) and §301.6111–1T(Q&A-34 through Q&A-39) determinewho is required to register a confidentialcorporate tax shelter. A promoter of aconfidential corporate tax shelter mustregister the tax shelter only if it is a per-son required to register under the rules insection 6111(a) and (e) and §301.6111–1T(Q&A-34 through Q&A-39).* * * * *

(h) * * * However, paragraphs(b)(3)(ii), (c)(1),(2) and (3), (f), and (g)(1)

September 5, 2000 252 2000–36 I.R.B.

of this section apply to confidential cor-porate tax shelters in which any interestsare offered for sale after August 11, 2000.The rules in paragraphs (b)(3)(ii),(c)(1),(2) and (3), (f), and (g)(1) of thissection may be relied upon for confiden-tial corporate tax shelters in which any in-terests are offered for sale after February28, 2000. Otherwise, the rules that applyto confidential corporate tax shelters inwhich any interests are offered for saleafter February 28, 2000, are contained in§301.6111–2T in effect prior to August11, 2000 (see 26 CFR part 301 revised asof April 1, 2000).

Par. 5. Section 301.6112–1T isamended as follows:

1. A-4(a) is revised.2. The last two sentences of A-5 are re-

moved and a new sentence is added intheir place.

3. A-6 is amended as follows:a. Paragraph (b) is amended by remov-

ing the language “and” at the end of theparagraph.

b. Paragraph (c) is amended by remov-ing the period at the end of the paragraphand adding “; and” in its place.

c. Paragraph (d) is added immediatelyafter paragraph (c).

4. The last sentence of A-7 is revised.5. A-8 is amended as follows:a. In A-8, introductory text and para-

graphs (a) through (e) are redesignated asparagraph (a) introductory text and para-graphs (a)(1) through (a)(5), respectively.

b. New paragraph (b) is added imme-diately after Example (2) in newly desig-nated paragraph (a)(5).

6. The last two sentences of A-9 areamended by removing the language“paragraph (e)” and adding“paragraph(a)(5)” in its place.

7. One sentence is added at the end ofA-10.

8. A-11 is amended as follows:a. In A-11, introductory text and para-

graphs (a) and (b) are redesignated asparagraph (a) introductory text and para-graphs (a)(1) and (a)(2), respectively.

b. New paragraph (b) is added.9. A-17 is amended as follows: a. Paragraph (a)(3) is revised.b. Paragraph (c) is added.10. The first and second sentences of A-

19 are amended by removing the language“paragraph (d) or paragraph (e)” and adding“paragraph (a)(4) or (5)” in its place.

11. A-22 is amended by adding threesentences before the last sentence.

The additions and revisions read as fol-lows:

§301.6112–1T Questions and answers re-lating to the requirement to maintain alist of investors in potentially abusive taxshelters (temporary).

* * * * *A-4.(a) Yes; for purposes of the list re-

quirement, a tax shelter includes any taxshelter that is a projected income invest-ment, as defined in §301.6111–1T A-57A,and any transaction a significant purposeof the structure of which is the avoidanceor evasion of Federal income tax withinthe meaning of section 6111(d)(1)(A) and§301.6111–2T(b) (whether or not offeredto any direct or indirect corporate partici-pant). For this purpose, as under§301.6111–2T, the term transaction in-cludes all of the factual elements neces-sary to support the tax benefits that areexpected to be claimed with respect toany entity, plan, or arrangement, includ-ing any series of related steps carried outas part of a prearranged plan.* * * * *

A-5. * * * In addition, an organizer isany other person who participates in the or-ganization or management of the tax shelterwithin the meaning of §301.6111–1T A-28or A-29, except those persons whose activi-ties do not constitute participation in the or-ganization or management of a tax shelterunder §301.6111–1T A-30 or A-33.* * * * *

A-6. * * * (d) Any other person who receives con-

sideration in connection with another per-son’s right to participate in a tax shelter,for services necessary to the organizationor structure of such tax shelter (other thanservices that do not constitute participa-tion in the organization or management ofa tax shelter under §301.6111–1T A-30 orA-33), or for information that is integralto participation in such tax shelter.* * * * *

A-7. * * * In addition, in any case inwhich a person has directly or indirectlypaid consideration to an organizer orseller for the right to participate in a taxshelter, for services necessary to the orga-nization or structure of such tax shelter(other than services that do not constituteparticipation in the organization or man-

agement of a tax shelter under§301.6111–1T A-30 or A-33), or for in-formation that is integral to participationin such tax shelter, the participant shall beconsidered to have acquired an interest inthe tax shelter and to have been sold aninterest in the tax shelter by the organizeror seller.* * * * *

A-8. * * * (b) An organizer may, but is not re-

quired to, list a person that acquired an in-terest in a potentially abusive tax shelter ifthe shelter is not subject to registrationunder section 6111, is not a listed transac-tion described in §301.6111–2T(b)(2),and is not a projected income investmentdescribed in §301.6111–1T A-57A, if thetotal consideration paid to all organizersand sellers with respect to such person’sacquisition of the interest is less than$25,000, or if the organizer reasonablybelieves that such person’s acquisition ofthe interest will not result in a reductionof the Federal income tax liability of anycorporation or corporations that exceeds,or exceeds in the aggregate, $1 million inany single taxable year or a total of $2million for any combination of taxableyears and will not result in a reduction ofthe Federal income tax liability of anynoncorporate taxpayer or taxpayers thatexceeds, or exceeds in the aggregate,$250,000 in any single taxable year or atotal of $500,000 for any combination oftaxable years. For purposes of this para-graph (b), the fees paid by or to, and thetax savings of, persons related within themeaning of section 267 or section 707(b)are aggregated.* * * * *

A-10. * * * However, a seller may, butis not required to, list a person that is de-scribed in A-8(b) of this section. * * * * *

A-11. * * * (b) In the case of a confidential corpo-

rate tax shelter under section 6111(d) and§301.6111–2T or a tax shelter describedin Q&A-4 of this section (other than onerequired to be registered under section6111(c) or a projected income investmentas described in §301.6111–1T A-57A),the rules contained in A-11(a)(1), A-13(a)(2), the second sentence of A-13(b),A-13(c) and A-14 of this section do notapply.* * * * *

2000–36 I.R.B. 253 September 5, 2000

A-17. (a) * * *(3) The name, address, and TIN (as de-

fined in section 7701(a)(41)) of each per-son who is required to be included on thelist under A-8 or A-10 of this section and,in the case of a tax shelter that is a trans-action described in section 6111(d)(1)(A)and §301.6111–2T(b) whether or not thedirect or indirect participant is a corpora-tion, the name, address, and TIN of eachinvestor and any indirect corporate partic-ipant in the shelter if known to the orga-nizer or seller;* * * * *

(c) No information needs to be in-cluded on a list with regard to any taxshelter for which no person is an investorrequired to be included on the list underA-8(b) or A-10 of this section.* * * * *

A-22. * * * However, the rules in A-4(a), A-5, A-6(d), A-7, A-8(b), A-10, A-11(b), and A-17(a)(3) and (c) of this sec-tion apply to any interest acquired by aninvestor (within the meaning of paragraph

(c) of A-6 of this section) in a potentiallyabusive tax shelter after August 11, 2000.The rules in A-4(a), A-5, A- 6(d), A-7, A-8(b), A-10, A-11(b), and A-17(a)(3) and(c) of this section may be relied upon forany interest acquired by an investor(within the meaning of paragraph (c) ofA-6 of this section) in a potentially abu-sive tax shelter after February 28, 2000.Otherwise, the rules that apply with re-spect to interests acquired in potentiallyabusive tax shelters after February 28,2000, are contained in §301.6112–1T ineffect prior to August 11, 2000 (see 26CFR part 301 revised as of April 1, 2000).* * *

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved August 8, 2000.

Jonathan Talisman,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on Au-gust 11, 2000, 8:45 a.m., and published in the issueof the Federal Register for August 16, 2000, 65 F.R.49909)

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

Section 7872.—Treatment ofLoans with Below-MarketInterest Rates

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof September 2000. See Rev. Rul. 2000–41, page248.

September 5, 2000 254 2000–36 I.R.B.

Tax Avoidance Using ArtificiallyHigh Basis

Notice 2000–44

In Notice 99–59, 1999–52 I.R.B. 761,the Internal Revenue Service and theTreasury Department described certaintransactions that were being marketed totaxpayers for the purpose of generatingartificial tax losses. This notice concernsother similar transactions that purport togenerate tax losses for taxpayers.

As stated in Notice 99–59, a loss is al-lowable as a deduction for federal incometax purposes only if it is bona fide and re-flects actual economic consequences. Anartificial loss lacking economic substanceis not allowable. See ACM Partnership v.Commissioner, 157 F.3d 231, 252 (3d Cir.1998), cert. denied, 526 U.S. 1017 (1999)(“Tax losses such as these . . . which donot correspond to any actual economiclosses, do not constitute the type of ‘bonafide’ losses that are deductible under theInternal Revenue Code and regula-tions.”); Scully v. United States, 840 F.2d478, 486 (7th Cir. 1988) (to be deductible,a loss must be a “genuine economicloss”); Shoenberg v. Commissioner, 77F.2d 446, 448 (8th Cir. 1935) (to be de-ductible, a loss must be “actual and real”);§ 1.165–1(b) of the Income Tax Regula-tions (“Only a bona fide loss is allowable.Substance and not mere form shall governin determining a deductible loss.”).

Notice 99–59 describes an arrangementthat purported to give rise to deductiblelosses on disposition of stock by applyingthe rules relating to distributions of en-cumbered property to shareholders inorder to create artificially high basis in thestock. The Service and the Treasury havebecome aware of similar arrangementsthat have been designed to producenoneconomic tax losses on the dispositionof partnership interests. These arrange-ments purport to give taxpayers artificiallyhigh basis in partnership interests andthereby give rise to deductible losses ondisposition of those partnership interests.

One variation involves a taxpayer’sborrowing at a premium and a partner-ship’s subsequent assumption of that in-debtedness. As an example of this varia-tion, a taxpayer may receive $3,000X in

cash from a lender under a loan agree-ment that provides for an inflated statedrate of interest and a stated principalamount of only $2,000X. The taxpayercontributes the $3,000X to a partnership,and the partnership assumes the indebted-ness. The partnership thereafter engagesin investment activities. At a later time,the taxpayer sells the partnership interest.

Under the position advanced by thepromoters of this arrangement, the tax-payer claims that only the stated principalamount of the indebtedness, $2,000X inthis example, is considered a liability as-sumed by the partnership that is treated asa distribution of money to the taxpayerthat reduces the basis of the taxpayer’spartnership interest under § 752 of the In-ternal Revenue Code. Therefore, disre-garding any additional amounts the tax-payer may contribute to the partnership,transaction costs, and any income realizedor expenses incurred at the partnershiplevel, the taxpayer purports to have abasis in the partnership interest equal tothe excess of the cash contributed over thestated principal amount of the indebted-ness, even though the taxpayer’s net eco-nomic outlay to acquire the partnershipinterest and the value of the partnershipinterest are nominal or zero. In this ex-ample, the taxpayer purports to have abasis in the partnership interest of$1,000X (the excess of the cash con-tributed ($3,000X) over the stated princi-pal amount of the indebtedness($2,000X)). On disposition of the part-nership interest, the taxpayer claims a taxloss with respect to that basis amount,even though the taxpayer has incurred nocorresponding economic loss.

In another variation, a taxpayer pur-chases and writes options and purports tocreate substantial positive basis in a part-nership interest by transferring those op-tion positions to a partnership. For exam-ple, a taxpayer might purchase calloptions for a cost of $1,000X and simulta-neously write offsetting call options, witha slightly higher strike price but the sameexpiration date, for a premium of slightlyless than $1,000X. Those option posi-tions are then transferred to a partnershipwhich, using additional amounts con-tributed to the partnership, may engage ininvestment activities.

Under the position advanced by thepromoters of this arrangement, the tax-payer claims that the basis in the tax-payer’s partnership interest is increasedby the cost of the purchased call optionsbut is not reduced under § 752 as a resultof the partnership’s assumption of the tax-payer’s obligation with respect to thewritten call options. Therefore, disre-garding additional amounts contributed tothe partnership, transaction costs, and anyincome realized and expenses incurred atthe partnership level, the taxpayer pur-ports to have a basis in the partnership in-terest equal to the cost of the purchasedcall options ($1,000X in this example),even though the taxpayer’s net economicoutlay to acquire the partnership interestand the value of the partnership interestare nominal or zero. On the disposition ofthe partnership interest, the taxpayerclaims a tax loss ($1,000X in this exam-ple), even though the taxpayer has in-curred no corresponding economic loss.

The purported losses resulting from thetransactions described above do not repre-sent bona fide losses reflecting actual eco-nomic consequences as required for pur-poses of § 165. The purported lossesfrom these transactions (and from anysimilar arrangements designed to producenoneconomic tax losses by artificiallyoverstating basis in partnership interests)are not allowable as deductions for fed-eral income tax purposes. The purportedtax benefits from these transactions mayalso be subject to disallowance underother provisions of the Code and regula-tions. In particular, the transactions maybe subject to challenge under § 752, orunder § 1.701–2 or other anti-abuse rules.In addition, in the case of individuals,these transactions may be subject to chal-lenge under § 165(c)(2). See Fox v. Com-missioner, 82 T.C. 1001 (1984). Further-more, tax losses from similar transactionsdesigned to produce noneconomic taxlosses by artificially overstating basis incorporate stock or other property are notallowable as deductions for federal in-come tax purposes.

Appropriate penalties may be imposedon participants in these transactions or, asapplicable, on persons who participate inthe promotion or reporting of these trans-actions, including the accuracy-related

2000–36 I.R.B. 255 September 5, 2000

Part III. Administrative, Procedural, and Miscellaneous

penalty under § 6662, the return preparerpenalty under § 6694, the promoterpenalty under § 6700, and the aiding andabetting penalty under § 6701.

Transactions that are the same as orsubstantially similar to the transactions de-scribed in this Notice 2000–44 are identi-fied as “listed transactions” for the pur-poses of § 1.6011–4T(b)(2) of theTemporary Income Tax Regulations and § 301.6111– 2T(b)(2) of the TemporaryProcedure and Administration Regula-tions. See also § 301.6112–1T, A-4. Itshould be noted that, independent of theirclassification as “listed transactions” forpurposes of §§ 1.6011–4T(b)(2) and301.6111–2T(b)(2), the transactions de-scribed in this Notice 2000–44 may al-ready be subject to the tax shelter registra-tion and list maintenance requirements of§§ 6111 and 6112 under the regulations is-sued in February 2000 (§§ 301.6111–2Tand 301.6112–1T, A-4), as well as the reg-ulations issued in 1984 and amended in1986 (§§ 301.6111–1T and 301.6112–1T,A-3). Persons required to register thesetax shelters who have failed to register theshelters may be subject to the penaltyunder § 6707(a) and to the penalty under § 6708(a) if the requirements of § 6112 arenot satisfied.

In addition, the Service and the Treasuryhave learned that certain persons who havepromoted participation in transactions de-scribed in this notice have encouraged in-dividual taxpayers to participate in suchtransactions in a manner designed to avoidthe reporting of large capital gains fromunrelated transactions on their individualincome tax returns (Form 1040). Certainpromoters have recommended that taxpay-ers participate in these transactions throughgrantor trusts and use the same grantortrusts as vehicles to realize the capitalgains. Further, although each separate cap-ital gain and loss attributable to a portionof a trust that is treated as owned by agrantor under the grantor trust provisionsof the Code (§ 671 and following) is prop-erly reported as a separate item on thegrantor’s individual income tax return (see§ 1.671–2(c) and the Instructions to Form1041, U.S. Income Tax Return for Estatesand Trusts), the Service and the Treasuryunderstand that these promoters have ad-vised that the capital gains and losses fromthese transactions may be netted, so thatonly a small net capital gain or loss is re-

ported on the taxpayer’s individual incometax return. In addition to other penalties,any person who willfully conceals theamount of capital gains and losses in thismanner, or who willfully counsels or ad-vises such concealment, may be guilty of acriminal offense under §§ 7201, 7203,7206, or 7212(a) or other provisions offederal law.

The principal authors of this notice areDavid A. Shulman of the Office of Asso-ciate Chief Counsel (Passthroughs andSpecial Industries) and Victoria S. Bal-acek of the Office of Associate ChiefCounsel (Financial Instruments and Prod-ucts). For further information regardingthis notice, contact Mr. Shulman at (202)622-3080 or Ms. Balacek at (202) 622-3930 (not toll free calls).

List of Plants, Grown inCommercial Quantities in theUnited States, Having aPreproductive Period in Excessof Two Years Based on theNationwide Weighted AveragePreproductive Period for SuchPlant

Notice 2000–45

PURPOSE

This notice provides guidance to tax-payers engaged in the trade or business offarming in determining whether a planthas a preproductive period in excess of 2years for purposes of § 263A(d) of the In-ternal Revenue Code. This guidance isderived from the nationwide weighted av-erage preproductive period for variousplants grown in commercial quantities inthe United States.

BACKGROUND

Section 263A requires generally that thedirect costs and an allocable share of indi-rect costs of real or tangible personal prop-erty produced by a taxpayer be capitalized.Under § 263A, taxpayers generally are re-quired to capitalize the costs of producingproperty in a farming business (includinganimals and plants without regard to thelength of their preproductive period).

Sections 263A(d) and (e) set forth spe-cial rules for property produced in the

trade or business of farming. Under § 263A(d)(1) and § 1.263A–4(a)(2) of theIncome Tax Regulations, taxpayers nei-ther required by § 447 to use an accrualmethod nor prohibited by § 448(a)(3)from using the cash method (“qualifiedtaxpayers”) are not required to capitalizethe costs of producing plants that have apreproductive period of 2 years or less oranimals. In addition, under § 263A(d)(3)and § 1.263A–4(d), a qualified taxpayermay elect to have § 263A not apply to thecost of producing plants in a farmingbusiness. Thus, unless an election ismade to have § 263A not apply in accor-dance with § 263A(d)(3), qualified tax-payers generally are required to capitalizethe costs of producing plants that have apreproductive period in excess of 2 years.

Section 263A(e)(3)(B) and § 1.263A–4(b)(2)(i)(B) provide that, for purposes ofdetermining whether a plant has a prepro-ductive period in excess of 2 years, the pre-productive period of plants grown in com-mercial quantities in the United States mustbe based on the nationwide weighted aver-age preproductive period for such plants.The legislative history of § 263A explainsthat Congress expected the Treasury De-partment to periodically publish a list of thepreproductive periods of various plantsbased on the nationwide weighted averagesfor such plants. See H.R. Rep. No. 426, 99th

Cong., 1st Sess. 628 (1985), 1986–3 (Vol. 2)C.B. 628. A proposed list was included inthe preamble of the proposed § 1.263A–4regulations (62 FR 44542). The InternalRevenue Service and Treasury Departmentreceived and considered comment letters re-lating to this proposed list.

Based upon information provided bythe United States Department of Agricul-ture, the Service Treasury Departmenthave determined that plants producing thefollowing crops or yields have a nation-wide weighted average preproductive pe-riod in excess of 2 years:

almonds, apples, apricots, avocados,blackberries, blueberries, cherries,chestnuts, coffee beans, currants, dates,figs, grapefruit, grapes, guavas, ki-wifruit, kumquats, lemons, limes,macadamia nuts, mangoes, nectarines,olives, oranges, papayas, peaches,pears, pecans, persimmons, pistachionuts, plums, pomegranates, prunes,raspberries, tangelos, tangerines, tan-gors, and walnuts.

September 5, 2000 256 2000–36 I.R.B.

2000–36 I.R.B. 257 September 5, 2000

This guidance is not an all-inclusive listof plants that have a nationwide weightedaverage preproductive period in excess of 2years. In the case of other plants grown incommercial quantities in the United States,the nationwide weighted average prepro-ductive period must be determined basedon available statistical data. The Serviceand Treasury Department intend to updatethis guidance periodically as needed.

DRAFTING INFORMATION

The principal author of this notice isRichard C. Farley, Jr. previously of theOffice of the Associate Chief Counsel (In-come Tax and Accounting). For furtherinformation regarding this notice contactGrant D. Anderson at (202) 622-4970 (nota toll-free call).

26 CFR 601.105: Examination of returns andclaims for refund, credit, or abatement;determination of correct tax liability.(Also Part I, §§ 61, 108; 1.61-12, 1.108-2).

Rev. Proc. 2000–33

SECTION 1. PURPOSE

This revenue procedure provides guid-ance on whether an acquisition of corpo-rate debt by a beneficiary of the decedentcreditor’s estate or by a beneficiary of arevocable trust that became irrevocableupon the creditor’s death is a direct acqui-sition within the meaning of § 1.108–2(b)of the Income Tax Regulations.

SECTION 2. BACKGROUND

Section 61(a)(12) of the Internal Rev-enue Code provides that gross income in-cludes income from the discharge of in-debtedness.

Section 108(e)(4) provides that for pur-poses of determining the income of thedebtor from discharge of indebtedness, tothe extent provided in regulations pre-scribed by the Secretary, the acquisitionof outstanding indebtedness by a personbearing a relationship to the debtor speci-fied in § 267(b) or § 707(b)(1) from a per-son who does not bear such a relationshipto the debtor shall be treated as the acqui-sition of such indebtedness by the debtor.

Section 1.108–2(a) provides that theacquisition of outstanding indebtednessby a person related to the debtor from aperson who is not related to the debtor re-sults in the realization by the debtor of in-come from discharge of indebtedness.The rules of that paragraph apply if in-debtedness is acquired directly by a per-son related to the debtor in a direct acqui-sition or if a holder of indebtednessbecomes related to the debtor in an indi-rect acquisition.

Section 1.108–2(b) provides in partthat an acquisition of outstanding indebt-edness is a direct acquisition if a personrelated to the debtor acquires the indebt-edness from a person who is not related tothe debtor. That paragraph further pro-vides that notwithstanding the foregoing,the Commissioner may provide by Rev-enue Procedure or other published guid-ance that certain acquisitions of indebted-ness described in the preceding sentenceare not direct acquisitions for purposes ofthis section.

SECTION 3. SCOPE

This revenue procedure applies to anyacquisition of corporate debt by a benefi-ciary of a decedent creditor’s estate or bya beneficiary of a revocable trust that be-came irrevocable upon the creditor’s

death where the beneficiary of the estateis related to the corporate debtor, thedecedent creditor was also related to thecorporate debtor, but the estate or trust isnot related to the corporate debtor.

SECTION 4. APPLICATION

The acquisition of a debt in the situa-tion described in section 3 is not a directacquisition within the meaning of § 1.108–2(b).

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective Au-gust 16, 2000. However, the Service willnot challenge a taxpayer’s application ofthe rule provided in section 4 of this rev-enue procedure in prior years to an acqui-sition of an indebtedness, provided therule is applied consistently with respect tothat indebtedness by the taxpayer and anyrelevant related parties in all affectedyears.

SECTION 6. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Vincent Daly of the Office ofthe Associate Chief Counsel (Corporate).For further information regarding thisrevenue procedure contact Mr. Daly on(202) 622-7770 (not a toll free call).

September 5, 2000 258 2000–36 I.R.B.

Notice of Proposed Rulemaking

Modification of Tax ShelterRules

REG–103735–00;REG–110311–98;REG–103736–00

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Cross-reference notice of pro-posed rulemaking.

SUMMARY: These proposed rules relateto the modification of tax shelters undersections 6011, 6111, and 6112. The pro-posed rules provide the public with addi-tional guidance needed to comply withthe disclosure rules, the registration re-quirement, and the list maintenance re-quirement applicable to tax shelters. Theproposed rules affect corporations partici-pating in certain reportable transactions,persons responsible for registering confi-dential corporate tax shelters, and orga-nizers of potentially abusive tax shelters.The IRS is issuing temporary regulations,T.D. 8896 on page 249, modifying therules relating to the requirement that cer-tain corporate taxpayers file a statementwith their Federal corporate income taxreturns under section 6011(a), the regis-tration of confidential corporate tax shel-ters under section 6111(d), and the main-tenance of lists of investors in potentiallyabusive tax shelters under section 6112.The text of those temporary regulationsalso serves as the text of these proposedregulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by November 14, 2000.

ADDRESSES: Send submissions to:CC:M&SP:RU (REG–103735–00; REG–110311–98; REG–103736–00), room 5226,Internal Revenue Service, POB 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered be-tween the hours of 8 a.m. and 5 p.m. to:CC:M&SP:RU (REG–103735–00; REG–110311–98; REG–103736– 00), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue NW., Washington DC. Al-ternatively, taxpayers may submit com-

ments electronically via the Internet by se-lecting the “Tax Regs” option of the IRSHome Page or by submitting comments di-rectly to the IRS Internet site athttp://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Catherine Moore, (202) 622-3070; con-cerning submissions, Guy Traynor, (202)622-7180.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in this notice of proposed rulemak-ing previously have been reviewed andapproved by the Office of Managementand Budget in accordance with the Paper-work Reduction Act of 1995 (44 U.S.C.3507(d)). No material changes to thesecollections of information are proposed inthese regulations.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless it dis-plays a valid control number assigned bythe Office of Management and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

The temporary regulations in T.D.8896 on page 249 amend the IncomeTax Regulations (26 CFR part 1) regard-ing rules relating to the fi l ing andrecords requirements for certain corpo-rate taxpayers under section 6011. Thetemporary regulations also amend thetemporary procedure and administrationregulations (26 CFR part 301) regardingthe registration of confidential corporatetax shelters under section 6111 and themaintenance of lists of investors in po-tentially abusive tax shelters under sec-tion 6112.

The text of the temporary regulationsalso serves as the text of these proposedregulations. The preamble to the tempo-rary regulations explains the regulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It hasalso been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations. Because these regulationsimpose no new collection of informationon small entities, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(preferably a signed original and eight (8)copies) or electronically generated com-ments that are submitted timely to the IRS.The IRS and Treasury request commentson the clarity of the proposed rules and howthey can be made easier to understand. Allcomments will be available for public in-spection and copying. A public hearingwill be scheduled if requested in writing byany person that timely submits writtencomments. If a public hearing is sched-uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.

Drafting Information

The principal author of these regulationsis Catherine Moore, Office of the AssociateChief Counsel (Passthroughs and SpecialIndustries). However, other personnel fromthe IRS and Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 301,which were proposed to be amended on

Part IV. Items of General Interest

2000–36 I.R.B. 259 September 5, 2000

August 29, 1984, and March 2, 2000, areproposed to be further amended as fol-lows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.6011–4 as proposed

to be added at 65 F.R. 11271 (March 2,2000) is amended as follows:

1. The first sentence of paragraph (a) isrevised.

2. Paragraph (d)(1), second sentence,is amended by removing the language“LM:PF” and adding “LM:PFTG:OTSA”in its place.

3. Paragraphs (e) and (g) are revised.The revisions read as follows:

§1.6011–4 Requirement of statement dis-closing participation in certain transac-tions by corporate taxpayers.

[The text of the amendments to thisproposed section is the same as the text ofthe amendments to §1.6011–4T publishedin T.D. 8896.]

PART 301— PROCEDURE ANDADMINISTRATION

Par. 3. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 4. Section 301.6111–2 as pro-

posed to be added at 65 F.R. 11274(March 2, 2000) is amended as follows:

1. Paragraph (b)(3)(ii) is amended byremoving the word “corporate”.

2. Paragraph (c) is amended as fol-lows:

a. The last two sentences of paragraph(c)(1) are revised.

b. Paragraph (c)(2) is revised.c. Paragraph (c)(3) is added.3. Paragraphs (f) and (g)(1) are re-

vised.4. Paragraph (h) is amended by adding

three sentences at the end of the para-graph.

The revisions and additions read as fol-lows:

§301.6111–2 Confidential corporate taxshelters.

[The text of the amendments to thisproposed section is the same as the text ofthe amendments to §301.6111–2T pub-lished in T.D. 8896.]

Par. 5. Section 301.6112–1 as pro-posed to be added at 49 F.R. 34246 (Au-gust 29, 1984) and 65 F.R. 11272 (March2, 2000) is amended as follows:

0. The section heading is added.1. A-4(a) is revised.2. The last two sentences of A-5 are re-

moved and a new sentence is added intheir place.

3. A-6 is amended as follows:a. Paragraph (b) is amended by remov-

ing the language “and” at the end of theparagraph.

b. Paragraph (c) is amended by remov-ing the period at the end of the paragraphand adding “; and” in its place.

c. Paragraph (d) is added immediatelyafter paragraph (c).

4. The last sentence of A-7 is revised.5. A-8 is amended as follows:a. In A-8,introductory text and para-

graphs (a) through (e) are redesignated asparagraph (a) introductory text and para-graphs (a)(1) through (a)(5), respectively.

b. New paragraph (b) is added imme-diately after Example (2) in newly desig-nated paragraph (a)(5).

6. The last two sentences of A-9 areamended by removing the language“paragraph (e)” and adding “paragraph(a)(5)” in its place.

7. One sentence is added at the end ofA-10.

8. A-11 is amended as follows:a. In A-11, introductory text and para-

graphs (a) and (b) are redesignated asparagraph (a) introductory text and para-graphs (a)(1) and (a)(2), respectively.

b. New paragraph (b) is added.9. A-17 is amended as follows: a. Paragraph (a)(3) is revised.b. Paragraph (c) is added.10. The first and second sentences of

A-19 are amended by removing the lan-guage “paragraph (d) or paragraph (e)”and adding “paragraph (a)(4) or (5)” in itsplace.

11. A-22 is amended by adding threesentences before the last sentence.

The additions and revisions read as fol-lows:

§301.6112-1 Questions and answers re-lating to the requirement to maintain alist of investors in potentially abusive taxshelters.

[The text of the amendments to thisproposed section is the same as the text ofthe amendments to §301.6112-1T pub-lished in T.D. 8896.]

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on Au-gust 11, 2000, 8:45 a.m., and published in the issueof the Federal Register for August 16, 2000, 65 F.R.49955)

September 5, 2000 260 2000–36 I.R.B.

Availability of the Revised Forms W-2 and W-3

Announcement 2000–76

Background Based on recommendations from the Information Reporting ProgramAdvisory Committee (IRPAC), the Social Security Administration(SSA), and others, the Internal Revenue Service (IRS) initiated plansto revise Form W-2, Wage and Tax Statement, and Form W-3, Trans-mittal of Wage and Tax Statements, for 2001 to be filed in 2002.

An April 26, 2000, announcement on the IRS Web Site requestedcomments on proposed changes to the 2001 Forms W-2 and W-3. Cur-rent drafts of the forms on the web site include adopted commentsfrom the public.

Purpose The purpose of this announcement is to provide guidance on when the2001 Forms W-2 and W-3 containing all planned changes will beavailable.

Planned Changes to Forms W-2 and W-3 The IRS expects to post the 2001 Forms W-2 and W-3 containing allplanned changes on the IRS Web Site by mid-October 2000. Accessthe latest drafts of Forms W-2 and W-3 on the IRS Web Site athttp://www.irs.gov. Follow the links for “Tax Info for Business” /“Tax Professionals’ Corner” / “Early Release DRAFTS of Forms.”

Determination LetterApplications for VolumeSubmitter Plans

Announcement 2000–77

Purpose

The purpose of this announcement is toassist practitioners and plan sponsors infiling determination letter applications forvolume submitter plans where the volumesubmitter specimen plan has not receivedan advisory letter that considers all thechanges in the qualification requirementsmade by GUST. The announcement pro-vides guidance on the types of planamendments that may be needed to obtaina favorable determination letter. It alsodiscusses certain procedural requirementsrelated to the application process.

Background

Rev. Proc. 2000–27, 2000–26 I.R.B.1272, provides that determination letterapplications for individually-designedplans, including volume submitter plans,that are filed with the Service on or afterJune 26, 2000, will generally be reviewedtaking into account all the changes in thequalification requirements made byGUST. (GUST is an acronym for theUruguay Round Agreements Act (GATT),the Uniformed Services Employment andReemployment Rights Act of 1994

(USERRA), the Small Business Job Pro-tection Act of 1996 (SBJPA), the Tax-payer Relief Act of 1997 (TRA ‘97) andthe Internal Revenue Service Restructur-ing and Reform Act of 1998 (RRA ‘98).)A letter that takes into account all of therequirements of GUST is referred to as aGUST II letter.

Prior to June 26, 2000, plan sponsorscould not request complete GUST lettersexcept for terminating plans. Rather, theyhad the option of requesting one of twolimited scope determination letters: a let-ter that excludes consideration of any ofthe qualification changes made by GUST,or a letter that generally considers GUSTbut excludes consideration of certainqualification changes effective after 1998.These letters are referred to as pre-GATTand GUST I letters, respectively. Untilfurther notice, plan sponsors will continueto have the option of requesting either ofthese limited scope letters, except, ofcourse, in the case of terminating plans.However, unless the plan sponsor re-quests a limited scope review in the coverletter for its application, a determinationletter application for an individually-de-signed plan, including a volume submitterplan, that is filed on or after June 26,2000, will be reviewed taking into ac-count all of the requirements of GUST.See section 3.01 of Rev. Proc. 2000–27.

Volume submitter practitioners havebeen able to obtain GUST II advisory let-

ters for their volume submitter specimenplans since March 8, 2000. However, asof now, the latest advisory letter issuedfor most specimen plans is either a pre-GATT letter or a GUST I letter.

General Guidelines for DeterminationLetter Applications for VolumeSubmitter Plans That Have NotReceived GUST II Advisory Letters

The guidelines that follow are intendedto ensure that volume submitter determi-nation letter applications are processed ef-ficiently and correctly. Practitioners andplan sponsors should note that failure tofollow these guidelines may result in pro-cessing delays, unnecessary taxpayer con-tacts, requests for plan restatement, newapplications or additional user fees, andpossible issuance of incorrect letters.

The effect of Rev. Proc. 2000–27 onthe review of applications for determina-tion letters for volume submitter plansthat are filed on or after June 26, 2000, isas follows: These applications will be re-viewed as GUST II applications in allcases, even if the latest advisory letter forthe specimen plan is a GUST I or pre-GATT letter, unless the application orcover letter specifically requests a GUSTI or pre-GATT determination letter.

Consequently, practitioners and plansponsors who will be filing determinationletter applications for volume submitterplans where a GUST II advisory letter has

2000–36 I.R.B. 261 September 5, 2000

not been issued for the specimen planshould carefully consider the require-ments that may have to be satisfied inorder to receive a GUST II determinationletter. In addition to necessary planamendments, these requirements may en-tail plan restatement, the filing of Form5300 instead of Form 5307 and the pay-ment of a higher user fee. These require-ments, including certain plan amend-ments that may be needed, are discussedbelow under Specific Guidelines for De-termination Letter Applications for Vol-ume Submitter Plans That Have Not Re-ceived GUST II Advisory Letters.

In addition, practitioners and plansponsors are reminded that until proposedregulations under § 411(d)(6) of the Codeare finalized, the Service will not issue afavorable determination letter for a planthat is amended to eliminate or reducebenefits in a manner that is not permittedunder regulations now in effect. There-fore, plan sponsors who are consideringsubmitting determination letter applica-tions before the proposed regulationsunder § 411(d)(6) are finalized shouldalso be aware that they may have to sub-mit another application and pay anotheruser fee if they wish to adopt plan amend-ments as a result of the final regulations.In view of the foregoing, plan sponsorsmay wish to consider deferring their re-quests for determination letters until thefinal § 411(d)(6) regulations have been is-sued and a GUST II letter has been issuedfor the volume submitter specimen plan.Also see section 19 of Rev. Proc.2000–20, 2000–6 I.R.B. 553, and section4 of Rev. Proc. 2000–27 regarding the re-medial amendment period for volumesubmitter plan sponsors.

If the plan sponsor desires a GUST IIletter, the determination letter application

should include all necessary GUSTamendments as well as any other permis-sible amendments the plan sponsorwishes to make. The practitioner andplan sponsor are also urged to include acover letter stating that the application isfor a GUST II determination letter. In ac-cordance with section 9.08(2)(e) of Rev.Proc. 2000–6, 2000–1 I.R.B. 187, the ap-plication must also include a statement bythe practitioner identifying and describingeach deviation from the language of theapproved specimen plan.

If the plan sponsor does not desire aGUST II letter, it must indicate on the ap-plication or in a cover letter whether it isrequesting a pre-GATT or GUST I deter-mination letter.

Specific Guidelines for DeterminationLetter Applications for VolumeSubmitter Plans That Have NotReceived GUST II Advisory Letters

The following guidelines address theplan amendments that may be needed toobtain a GUST II determination letterwhere the specimen plan’s latest advisoryletter is a GUST I letter. The guidelinesalso address the situations in which a re-quest for a GUST II determination lettermay require plan restatement, use ofForm 5300 instead of Form 5307 and pay-ment of a higher user fee.

1. Where the latest advisory letterfor the specimen plan is a GUSTI letter:

A. If the plan is not intended to sat-isfy the safe harbors under § 401(k)(12) and § 401(m)(11),the plan amendments that maybe needed for a GUST II deter-mination letter should in mostcases be limited. These includeamendments related to the repeal

of the combined plan limitationof § 415(e) and, for § 401(k),profit–sharing and stock bonusplans, amendments related to theaddition of § 402(c)(4)(C) whichchanged the definition of eligiblerollover distribution. See Notice99–44, 1999–35 I.R.B. 326, No-tice 99–5, 1999–3 I.R.B. 10, andNotice 2000–32, 2000–26 I.R.B.1274, regarding these changes.These amendments should usu-ally be minor and should not, ofthemselves, either require planrestatement or affect the plansponsor’s ability to use Form5307.

B. If the plan is adding the safe har-bors under § 401(k)(12) and § 401(m)(11), the plan must berestated and the plan sponsorcannot use Form 5307 but mustinstead use Form 5300 and paythe user fee for an individually-designed plan that is not a vol-ume submitter plan.

2. Where the latest advisory letterfor the specimen plan is a pre-GATT letter:

A. Except as provided in B., below,the plan must be restated and theplan sponsor cannot use Form5307 but must instead use Form5300 and pay the user fee for anindividually-designed plan thatis not a volume submitter plan.

B. If the plan is a defined contribu-tion plan under which the onlycontributions are nonelectiveemployer contributions, then theplan does not have to be restatedand the plan sponsor can useForm 5307.

September 5, 2000 262 2000–36 I.R.B.

Under 31 Code of Federal Regulations,Part 10, an attorney, certified public ac-countant, enrolled agent or enrolled actu-ary, in order to avoid the institution orconclusion of a proceeding for his disbar-ment or suspension from practice beforethe Internal Revenue Service, may offerhis consent to suspension from such prac-tice. The Director of Practice, in his dis-cretion, may suspend an attorney, certi-fied public accountant, enrolled agent orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public accountants,enrolled agents and enrolled actuaries areprohibited in any Internal Revenue Ser-

vice matter from directly or indirectly em-ploying, accepting assistance from, beingemployed by or sharing fees with, anypractitioner disbarred or suspended frompractice before the Internal Revenue Ser-vice.

To enable attorneys, certified public ac-countants, enrolled agents and enrolledactuaries to identify practitioners underconsent suspension from practice beforethe Internal Revenue Service, the Directorof Practice will announce in the InternalRevenue Bulletin the names and ad-dresses of practitioners who have beensuspended from such practice, their desig-nation as attorney, certified public ac-

countant, enrolled agent or enrolled actu-ary, and date or period of suspension.This announcement will appear in theweekly Bulletin at the earliest practicabledate after such action and will continue toappear in the weekly Bulletins for fivesuccessive weeks or for as many weeks asis practicable for each attorney, certifiedpublic accountant, enrolled agent or en-rolled actuary so suspended and will beconsolidated and published in the Cumu-lative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal Revenue Ser-vice:

Announcement of the Consent Voluntary Suspension of Attorneys,Certified Public Accountants, Enrolled Agents, and Enrolled ActuariesFrom Practice Before the Internal Revenue Service

Date ofName Address Designation Suspension

Stoppenhagen, Larry Ft. Wayne, IN CPA April 14, 2000to

April 13, 2001

Chon, James N. Hollywood, CA CPA May 22, 2000to

May 21, 2003

Bleyer, Stephen A. Bala Cynwyd, PA CPA June 26, 2000 to

December 25, 2000

Knutson, Owen Ouray, CO CPA July 3, 2000to

January 2, 2003

Silverman, Richard E. Fayetteville, NY CPA August 1, 2000to

March 31, 2004

Holt, Jeffrey Little Rock, AR Enrolled October 1, 2000Agent to

March 31, 2003

Barbagallo, Joseph Newton, PA CPA October 15, 2000

toOctober 14, 2004

2000–36 I.R.B. 263 September 5, 2000

Under Section 330, Title 31 of theUnited States Code, the Secretary of theTreasury, after due notice and opportunityfor hearing, is authorized to suspend ordisbar from practice before the InternalRevenue Service any person who has vio-lated the rules and regulations governingthe recognition of attorneys, certifiedpublic accountants, enrolled agents or en-rolled actuaries to practice before the In-ternal Revenue Service.

Attorneys, certified public accountants,enrolled agents, and enrolled actuaries areprohibited in any Internal Revenue Ser-vice matter from directly or indirectly em-

ploying, accepting assistance from, beingemployed by or sharing fees with, anypractitioner disbarred or under suspensionfrom practice before the Internal RevenueService.

To enable attorneys, certified public ac-countants, enrolled agents and enrolledactuaries to identify such disbarred or sus-pended practitioners, the Director of Prac-tice will announce in the Internal RevenueBulletin the names and addresses of prac-titioners who have been suspended fromsuch practice, their designation as attor-ney, certified public accountant, enrolledagent or enrolled actuary, and the date of

disbarment or period of suspension. Thisannouncement will appear in the weeklyBulletin for five successive weeks or aslong as it is practicable for each attorney,certified public accountant, enrolled agentor enrolled actuary so suspended or dis-barred and will be consolidated and pub-lished in the Cumulative Bulletin.

After due notice and opportunity forhearing before an administrative lawjudge, the following individuals has beendisbarred from further practice before theInternal Revenue Service:

Announcement of the Disbarment and Suspension of Attorneys,Certified Public Accountants, Enrolled Agents, and Enrolled ActuariesFrom Practice Before the Internal Revenue Service

Name Address Designation Effective Date

Luebben, William Hot Springs, AR CPA February 11, 2000

September 5, 2000 i 2000–36 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

2000–36 I.R.B. ii September 5, 2000

Numerical Finding List1

Bulletins 2000–27 through 2000–35

Announcements:

2000–57, 2000–28 I.R.B. 1152000–58, 2000–30 I.R.B. 1352000–59, 2000–29 I.R.B. 1202000–60, 2000–31 I.R.B. 1492000–61, 2000–30 I.R.B. 1362000–62, 2000–30 I.R.B. 1372000–63, 2000–31 I.R.B. 1492000–64, 2000–31 I.R.B. 1492000–65, 2000–31 I.R.B. 1502000–66, 2000–32 I.R.B. 1602000–67, 2000–32 I.R.B. 1602000–68, 2000–32 I.R.B. 1612000–69, 2000–33 I.R.B. 1832000–70, 2000–34 I.R.B. 2042000–72, 2000–35 I.R.B. 2262000–73, 2000–35 I.R.B. 2302000–74, 2000–35 I.R.B. 230

Court Decisions:

2068, 2000–28 I.R.B. 109

Notices:

2000–33, 2000–27 I.R.B. 972000–34, 2000–33 I.R.B. 1722000–35, 2000–29 I.R.B. 1182000–36, 2000–33 I.R.B. 1732000–37, 2000–29 I.R.B. 1182000–38, 2000–33 I.R.B. 1742000–39, 2000–30 I.R.B. 1322000–40, 2000–30 I.R.B. 1342000–41, 2000–33 I.R.B. 1772000–43, 2000–35 I.R.B. 209

Proposed Regulations:

REG–209038–89, 2000–34 I.R.B. 191REG–105316–98, 2000–27 I.R.B. 98REG–116495–99, 2000–33 I.R.B. 179REG–108522–00, 2000–34 I.R.B. 187

Railroad Retirement Quarterly Rate:

2000–28, I.R.B. 1122000–29, I.R.B. 117

Revenue Procedures:

2000–28, 2000–27 I.R.B. 602000–29, 2000–28 I.R.B. 1132000–30, 2000–28 I.R.B. 1132000–31, 2000–31 I.R.B. 1462000–32, 2000–33 I.R.B. 1722000–34, 2000–34 I.R.B. 1862000–35, 2000–35 I.R.B. 211

Revenue Rulings:

2000–32, 2000–27 I.R.B. 12000–33, 2000–31 I.R.B. 1422000–34, 2000–29 I.R.B. 1162000–35, 2000–31 I.R.B. 1382000–36, 2000–31 I.R.B. 1402000–37, 2000–32 I.R.B. 1562000–38, 2000–32 I.R.B. 1572000–39, 2000–34 I.R.B. 1842000–40, 2000–35 I.R.B. 208

Treasury Decisions:

8886, 2000–27 I.R.B. 38888, 2000–27 I.R.B. 38889, 2000–30 I.R.B. 1248890, 2000–30 I.R.B. 1228891, 2000–32 I.R.B. 1528892, 2000–32 I.R.B. 1588893, 2000–31 I.R.B. 1438894, 2000–33 I.R.B. 162

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2000–1 through 2000–26is in Internal Revenue Bulletin 2000–27, dated July3, 2000.

September 5, 2000 iii 2000–36 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2000–27 through 2000–35

Proposed Regulations:

FI–42–90Withdrawn byAnnouncement 2000–63, 2000–31 I.R.B. 149

IA–38–93Withdrawn byAnnouncement 2000–68, 2000–32 I.R.B. 161

REG–107644–98Corrected byAnnouncement 2000–66, 2000–32 I.R.B. 160

Revenue Procedures:

88–23Superseded byRev. Proc. 2000–35, 2000–35 I.R.B. 211

98–50Modified and superseded byRev. Proc. 2000–31, 2000–31 I.R.B. 146

98–51Modified and superseded byRev. Proc. 2000–31, 2000–31 I.R.B. 146

99–18Modified by Rev. Proc. 2000–29, 2000–28 I.R.B. 113

99–34Superseded by Rev. Proc. 2000–28, 2000–27 I.R.B. 60

Treasury Decisions:

8873Corrected by Announcement 2000–74, 2000–35 I.R.B. 230

8883Corrected by Announcement 2000–57, 2000–28 I.R.B. 115

8884Corrected by Announcement 2000–73, 2000–35 I.R.B. 230

1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2000–1 through 2000–26 is in Internal RevenueBulletin 2000–27, dated July 3, 2000.

IndexInternal Revenue Bulletins2000–27 Through 2000–35

The abbreviation and number in paren-thesis following the index entry refer tothe specific item; numbers in roman anditalic type following the parenthesis referto the Internal Revenue Bulletin in whichthe item may be found and the pagenumber on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction

ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural

RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSAccrued benefits, involuntary cash-out of

(TD 8891) 32, 152Cafeteria plans (Ann 65) 31, 150Elective deferrals, section 403(b) plans

(RR 35) 31, 138Full funding limitations, weighted aver-

age interest rate for July 2000 (Notice40) 30, 134

Letter rulings, determination letters, andinformation letters issued by theOffice of Chief Counsel (Notice 35)29, 118

Loans to plan participants (TD 8894) 33,162; (REG–116495–99) 33, 179

New technologies in retirement plans,notices and consents (Ann 74) 35, 230

Nonqualified deferred compensation:Cash or deferred arrangements (RR

33) 31, 142State and local governments or tax-

exempt organizations (Notice 38)33, 174

Proposed Regulations: 26 CFR 1.72(p)–1, amended; loans to

plan participants (REG–116495–99)33, 179

Protected benefits, direct rollover (RR36) 31, 140

Prototype plans, automatic enrollmentfeatures (Ann 60) 31, 149

Regulations:26 CFR 1.72–17A, amended;

1.72(p)–1, added; loans to plan par-ticipants (TD 8894) 33, 162

26 CFR 31.3121(b)(7)–2, amended;accrued benefits, involuntary cash-out of (TD 8891) 32, 152

26 CFR 35.3405–1, correction; newtechnologies in retirement plans(Ann 74) 35, 230

EMPLOYMENT TAX

Comprehensive case resolution program(Notice 43) 35, 209

Nonqualified deferred compensation,state and local governments or tax-exempt organizations (Notice 38) 33,174

Railroad retirement, rate determination,quarterly:April 1, 2000, 28, 112July 1, 2000, 29, 117

ESTATE TAX

Actuarial tables for valuation of annu-ities, interests for life or term of years,and remainder or reversionary interests(TD 8886) 27, 3

Charitable remainder trusts sampleforms, revision (Notice 37) 29, 118

Regulations:26 CFR 20.2031-0, -7, amended;

20.2031-7T, removed; 20.7520-1,amended; 20.7520-1T, removed; actu-arial tables for valuation of annuities,interests for life or term of years, andremainder or reversionary interests(TD 8886) 27, 3

EXCISE TAX

Taxable fuel, measurement of (Notice33) 27, 97

EXEMPT ORGANIZATIONS

Forms:8871, Political Organization Notice of

Section 527 Status (Notice 36) 33, 1738872, Political Organization Report of

Contributions and Expenditures(Notice 41) 33, 177

Letter rulings, determination letters, andinformation letters issued by the Officeof Chief Counsel (Notice 35) 29, 118

List of organizations classified as privatefoundations (Ann 61) 30, 136; (Ann67) 32, 160; (Ann 70) 34, 204

Political organizations:Contributions and expenditures, Form

8872 (Notice 41) 33, 177Notice of section 527 status, Form

8871 (Notice 36) 33, 173Proposed revenue ruling on reporting

requirements (Ann 72) 35, 226Revocations (Ann 62) 30, 137; (Ann 69)

33, 183

GIFT TAX

Actuarial tables for valuation of annu-ities, interests for life or term of years,and remainder or reversionary interests(TD 8886) 27, 3

Adequate disclosure, status of limitations(RP 34) 34, 186

Regulations:26 CFR 25.2512-0, amended;

25.2512-5, amended; 25.2512-5T,removed; 25.7520-1, amended;25.7520-1T, removed; actuarialtables for valuation of annuities,interests for life or term of years,and remainder or reversionary inter-ests (TD 8886) 27, 3

INCOME TAX

Actuarial tables for valuation of annu-ities, interests for life or term of years,and remainder or reversionary interests(TD 8886) 27, 3

Bad debt reserves of thrift institutions(Ann 63) 31, 149

Charitable remainder trusts sampleforms, revision (Notice 37) 29, 118

Collateralized debt obligations (CDOs),reporting requirements (TD 8888) 27, 3

2000–36 I.R.B. iv September 5, 2000

EMPLOYEE PLANS—cont.

Comprehensive case resolution program(Notice 43) 35, 209

Consolidated returns, limitations on theuse of certain credits (Ann 73) 35, 230

Corporations, disposition of stock in ataxable transaction (Ann 57) 28, 115

Credit, Targeted Jobs Tax Credit, settle-ment initiative (Ann 58) 30, 135

Debt roll-ups, election to treat certaindebt substitutions as realization events(RP 29) 28, 113

Foreign trusts:Transfers of:

Appreciated property to(REG–108522–00) 34, 187

Property to trusts with U.S. benefi-ciaries (REG–209038–89) 34, 191

Forms:1040, e-file program (RP 31) 31, 1461096, 1098, 1099, 5498, and W-2G,

substitute forms specifications (RP28) 27, 60

8871, Political Organization Notice ofSection 527 Status (Notice 36) 33,173

8872, Political Organization Report ofContributions and Expenditures(Notice 41) 33, 177

Fringe benefits, aircraft valuation formu-la (RR 40) 35, 208

Gross income, de minimis premiums,treatment of (RP 30) 28, 113

Guidance regarding claims for certainincome tax convention benefits (TD8889) 30, 124

Individual retirement arrangements,returned or recharacterized contribu-tions, net income calculation (Notice39) 30, 132

Information reporting, payments andreimbursements of qualified tuitionand related expenses (REG-105316-98) 27, 98

Information returns, magnetic media fil-ing requirements (REG-105316-98)27, 98

Insurance companies:Differential earnings rate and recom-

puted differential earnings rate formutual life insurance companies(RR 37) 32, 156

Foreign companies, minimum effec-tively connected net investmentincome (RP 32) 33, 172

Interest:Investment:

Federal short-term, mid-term, andlong-term rates for:

July 2000 (RR 32) 27, 1August 2000 (RR 38) 32, 157

Inventory:LIFO:

Price indexes, department stores, for: May 2000 (RR 34) 29, 116June 2000 (RR 39) 34, 184

Dollar-value LIFO and inventory priceindex computation (IPIC) methods(Ann 66) 32, 160

Letter rulings, determination letters, andinformation letters issued by the Officeof Chief Counsel (Notice 35) 29, 118

Loss deductions, challenge of, BlueCross Blue Shield organizations(Notice 34) 33, 172

Private foundations, organizations nowclassified as (Ann 61) 30, 136; (Ann67) 32, 160; (Ann 70) 34, 204

Proposed Regulations:26 CFR 1.679–1, –2, –3, –4, –5, –6,

–7, added; 1.958–1, –2, amended;foreign trusts with U.S. beneficia-ries (REG–209038–89) 34, 191

26 CFR 1.684–1, –2, –3, –4, –5,added; tax on transfers of appreciat-ed property to foreign trusts and for-eign estates (REG–108522–00) 34,187

26 CFR 1.6050S-0, -1,-2, added;301.6011-2, amended; informationreporting, payments and reimburse-ments of qualified tuition and relat-ed expenses (REG-105316-98) 27,98

Publications:515, changes in tables 1 and 2 for

Denmark treaty (Ann 59) 29, 120901, changes in tables 1 and 2 for

Denmark treaty (Ann 59) 29, 1201212, supplemental information on

short-term Treasury bills (Ann 64)31, 149

Real estate mortgage investment conduits(REMICs), reporting requirements(TD 8888) 27, 3

Regulations:26 CFR 1.170A-12, amended; 1.170A-

12T, removed; 1.642(c)-6, amended;1.642(c)-6T, removed; 1.664-4,

amended; 1.664-4T, removed; 1.7520-1, amended; 1.7520-1T, removed;actuarial tables for valuation of annu-ities, interests for life or term of years,and remainder or reversionary inter-ests (TD 8886) 27, 3

26 CFR 1.401(a)–20, amended;1.401(a)(4)–4, amended;1.401(a)(26)–4, –6, amended;1.411(a)–7, –11, amended;1.411(a)–7T, removed;1.411(a)–11T, removed; 1.411(d)–4,amended; 1.417(e)–1, amended;accrued benefits, involuntary cash-out of (TD 8891) 32, 152

26 CFR 1.472–8, correction; dollar-value LIFO regulations, inventoryprice index computation (IPIC)method (Ann 66) 32, 160

26 CFR 1.643(h)-1, amended; 1.671-2(e), revised; 1.671-2T, removed;1.672(f)-2, -3, -4, -5, amended; defi-nition of grantor (TD 8890) 30, 122

26 CFR 1.894-1, revised; guidanceregarding claims for certain incometax convention benefits (TD 8889)30, 124

26 CFR 1.1032-3, correction; disposi-tion of stock in a taxable transaction(Ann 57) 28, 115

26 CFR 1.1502–3, correction; consoli-dated returns, limitations on the useof certain credits (Ann 73) 35, 230

26 CFR 1.6012–7T, removed;1.6061–2T, removed; 1.6065–2T,removed; 602.101(c), amended;telefile voice signature test (TD8892) 32, 158

26 CFR 1.6049-7, amended; real estatemortgage investment conduits; re-porting requirements and otheradministrative matters (TD 8888)27, 3

26 CFR 1.6695-1, amended; 1.6695-1T, removed; requirement to retaincopy of return or claim signed bypreparer (TD 8893) 31, 143

Retention of return or claim signed bytax preparer (TD 8893) 31, 143

Revocations, exempt organizations (Ann62) 30, 137; (Ann 69) 33, 183

Substitute forms, 1096, 1098, 1099,5498, and W-2G, rules and specifica-tions (RP 28) 27, 60

September 5, 2000 v 2000–36 I.R.B.

INCOME TAX—cont. INCOME TAX—cont. INCOME TAX—cont.

Tax claims in bankruptcy court (CD2068) 28, 109

Telefile voice signature test:Notice of proposed rulemaking with-

drawn (Ann 68) 32, 161Temporary regulations removed (TD

8892) 32, 158Treaties:

Denmark, Publications 515 and 901(Ann 59) 29, 120

Withholding rates, tax treaty benefits(TD 8889) 30, 124

Trusts, definition of grantor (TD 8890)30, 122

Withholding certificate guidance (RP 35)35, 211

2000–36 I.R.B. vi September 5, 2000

INCOME TAX—cont.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by theSuperintendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Pleaseallow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THEINTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, wewould be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the IRS Bulletin Unit, OP:FS:FP:P:1, Room 5617, 1111 Constitution Avenue NW, Washington, DC 20224.

Internal Revenue ServiceWashington, DC 20224

Official BusinessPenalty for Private Use, $300