INCOME TAX

Rev. Rul. 2001–1, page 726.E & P adjustments on exercise of option. The earningsand profits of a corporate employer are reduced to reflectthe deduction the corporation takes when an employeereceives stock upon exercise of a nonstatutory stockoption.

Rev. Rul. 2001–8, page 726.Inventories; floor stocks payments. Payments made orreceived with respect to floor stocks must be accounted foras adjustments to the invoice price or production cost of thegoods physically held on the floor stocks date to which thepayments relate, rather than as an adjustment to the taxbasis (carrying value) of those goods. This ruling provides,for costing purposes, an optional simplifying assumption forLIFO taxpayers regarding identification of the goods physi-cally held on the floor stocks date to which the floor stockspayments relate. Rev. Ruls. 85–30 and 88–95 clarified. Rev.Proc. 99–49 modified and amplified.

EXEMPT ORGANIZATIONS

Rev. Proc. 2001–20, page 738.This procedure describes the Voluntary Compliance on AlienWithholding Program (VCAP), which is available to certain pub-lic and other not-for-profit colleges and universities and theircharitable affiliates to resolve issues arising from the pay-ment, withholding, and reporting of certain taxes due on pay-ments made to alien individuals.

ADMINISTRATIVE

T.D. 8936, page 720.Final regulations under section 118(c) of the Code relate tothe exclusion from gross income for a contribution in aid ofconstruction (CIAC) from any person (whether or not a share-holder) to a regulated public utility that provides water orsewerage disposal services. The regulations define whatproperty constitutes a CIAC for purposes of the exclusionfrom gross income and provide rules for adjusting the basisof water or sewerage disposal facilities acquired as, oracquired or constructed with any money received as, a CIAC.The regulations also provide the time and manner for tax-payers to notify the Secretary of amounts treated as a con-tribution to capital under this provision.

Notice 2001–16, page 730.Intermediary transactions tax shelter. The Service may chal-lenge certain transactions in which the assets of a corporationare sold following the purported sale of the corporation’s stockto an intermediary. Such transactions are designated as “listedtransactions” for purposes of sections 1.6011–4T(b)(2) and301.6111–2T of the regulations.

Notice 2001–17, page 730.Contingent liability tax shelter. The Service may chal-lenge certain transactions in which a taxpayer transfersassets to a corporation and the transferee assumes a lia-bility that the transferor has not yet taken into account forfederal income tax purposes. Such transactions are des-ignated as “listed transactions” for purposes of sections1.6011–4T(b)(2) and 301.6111–2T of the regulations.

Internal Revenue

bbuulllleettiinnBulletin No. 2001–9February 26, 2001

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

Actions Relating to Court Decisions is on the page following the Introduction.Finding Lists begin on page ii.Announcements of Disbarments and Suspensions begin on page 752.

(Continued on the next page)

February 26, 2001 2001–9 I.R.B.

Notice 2001–18, page 731.This notice provides an exception from the registrationrequirements under section 6111(d) of the Code and the listmaintenance requirements under section 6112 for certainleasing transactions, except as may be provided in subse-quent guidance.

Rev. Proc. 2001–19, page 732.Automobile owners and lessees. This procedure providesowners and lessees of passenger automobiles (includingelectric automobiles) with tables detailing the limitations ondepreciation deductions for automobiles first placed in ser-vice during calendar year 2001 and the amounts to beincluded in income for automobiles first leased during calen-dar year 2001. In addition, this procedure provides the max-imum allowable value of employer-provided automobiles firstmade available to employees for personal use in calendaryear 2001 for which the vehicle cents-per-mile valuation ruleprovided under section 1.61–21(e) of the regulations may beapplicable.

Rev. Proc. 2001–21, page 742.Election to treat certain debt substitutions as realiza-tion events. The procedure provides for an election thatallows taxpayers to treat a debt substitution, in certain cir-cumstances, as a realization event even though it does not

result in a significant modification under section 1.1001–3of the regulations. Rev. Proc. 99–18 modified and super-seded.

Rev. Proc. 2001–22, page 745.Pre-filing agreement program. This procedure permits ataxpayer subject to the jurisdiction of the Large and Mid-SizeBusiness Division (LMSB) of the Service to request the exam-ination of specific issues relating to a tax return before thereturn is timely filed. If the taxpayer and the Service are ableto resolve the examined issues prior to the filing of thereturn, this procedure authorizes the taxpayer and theService to finalize their resolution by executing an LMSB Pre-Filing Agreement.

Announcement 2001–13, page 752.New Schedule N (Form 1120), Foreign Operations of U.S.Corporations, is now available. This form is used by corpo-rations that have assets in, or operate a business in, a for-eign country or U.S. possession.

Announcement 2001–21, page 752.This announcement advises trustees and custodians of med-ical savings accounts of the extension of the requirement tofile Form 8851, Summary of Archer MSAs, and changes formagnetic and electronic filing.

2001–9 I.R.B. February 26, 2001

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 oth-erwise 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 Ser-vice personnel in the disposition of other cases. In applyingpublished rulings and procedures, the effect of subsequentlegislation, regulations, court decisions, rulings, and proce-

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

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on 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 Ad-ministrative Rulings. Bank Secrecy Act Administrative Rul-ings are issued by the Department of the Treasury’s Officeof the Assistant 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 semiannualbasis, and are published in the first Bulletin of the succeed-ing semiannual 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.

February 26, 2001 2001–9 I.R.B.

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions.

Prior to 1991, the Service published ac-quiescence or nonacquiescence only incertain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now may ac-quiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquies-cence” and “acquiescence in result only”mean that the Service accepts the holdingof the court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or all

of those reasons. “Nonacquiescence” sig-nifies that, although no further reviewwas sought, the Service does not agreewith the holding of the court and, gener-ally, will not follow the decision in dis-posing of cases involving other taxpay-ers. In reference to an opinion of a circuitcourt of appeals, a “nonacquiescence” in-dicates that the Service will not followthe holding on a nationwide basis. How-ever, the Service will recognize theprecedential impact of the opinion oncases arising within the venue of the de-ciding circuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear inthe first Bulletin for July and the Cumu-lative Bulletin for the first half of theyear. A semiannual consolidation also ap-pears in the first Bulletin for the follow-ing January and in the Cumulative Bul-letin for the last half of the year.

The Commissioner does NOT ACQUI-ESCE in the following decision:

Arnold W. Vinick v. United States,1

205 F.3d 1 (1st Cir. 2000)

Actions Relating to Decisions of the Tax Court

1 Nonacquiescence as to whether actual, exercised authority over a company’s financial matters, including the duty and power to determine which creditors to pay,is necessary for a finding that a taxpayer is a responsible person under I.R.C. section 6672.

February 26, 2001 720 2001–9 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986Section 56.—Adjustments inComputing Alternative MinimumTaxable Income

This Rev. Rul. announces that the earnings andprofits of a corporate employer are reduced to re-flect the deduction the corporation takes when anemployee receives stock upon exercise of a non-statutory stock option. Because this item reducesearnings and profits, § 56(g)(4)(C)(i) does notdisallow the deduction of the item in computingadjusted current earnings for purposes of alterna-tive minimum tax. See Rev. Rul. 2001–1, page726.

Section 61.—Gross IncomeDefined

26 CFR 1.61–1: Gross income.

Must payments made or received with respect tofloor stocks be accounted for as adjustments to theinvoice price or production cost of the goods physi-cally held on the floor stocks date to which the pay-ments relate, rather than as an adjustment to the taxbasis (carrying value) of those goods. See Rev. Rul.2001–8, page 726.

26 CFR 1.61–21: Taxation of fringe benefits.

This procedure provides the maximum value ofemployer-provided automobiles first made availableto employees for personal use in calendar year 2001for which the vehicle cents-per-mile valuation ruleprovided under § 1.61–21(e) of the Income Tax Reg-ulations may be applicable. See Rev. Proc. 2001–19,page 732.

Section 83.—PropertyTransferred in Connection WithPerformance of Services

26 CFR 1.83–6: Deduction by employer.

This Rev. Rul. announces that the earnings andprofits of a corporate employer are reduced to reflectthe deduction the corporation takes when an em-ployee receives stock upon exercise of a nonstatu-tory stock option. See Rev. Rul. 2001–1, page 726.

Section 111.—Recovery of TaxBenefit Items

26 CFR 1.111–1: Recovery of certain itemspreviously deducted or credited.

Must payments made or received with respect tofloor stocks be accounted for as adjustments to the

invoice price or production cost of the goods physi-cally held on the floor stocks date to which the pay-ments relate, rather than as an adjustment to the taxbasis (carrying value) of those goods. See Rev. Rul.2001–8, page 726.

Section 118.—Contributions tothe Capital of a Corporation

26 CFR 1.118–2: Contribution in aid ofconstruction.

T.D. 8936

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 602

Definition of Contribution in Aidof Construction UnderSection 118(c)

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations concerning an exclusionfrom gross income for a contribution inaid of construction under section 118(c)that is treated as a contribution to capitalunder section 118(a). The final regula-tions affect a regulated public utility thatprovides water or sewerage servicesbecause a qualifying contribution in aid ofconstruction is treated as a contribution tothe capital of the utility and excludedfrom gross income. The final regulationsprovide guidance on the definition of acontribution in aid of construction, theadjusted basis of any property acquiredwith a contribution in aid of construction,the information relating to a contributionin aid of construction required to be fur-nished by the utility, and the time andmanner for providing that information tothe IRS.

DATES: Effective Date: These regula-tions are effective January 11, 2001.

Date of Applicability: For date ofapplicability of §1.118–2, see§1.118–2(f).

FOR FURTHER INFORMATION CON-TACT: Paul Handleman, (202) 622-3040(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations havebeen reviewed and approved by theOffice of Management and Budget inaccordance with the PaperworkReduction Act of 1995 (44 U.S.C. 3507)under control number 1545–1639.Responses to these collections of infor-mation are mandatory.

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 validcontrol number.

The estimated annual burden perrespondent varies from .5 hour to 5 hours,depending on individual circumstances,with an estimated average of 1 hour.

Comments concerning the accuracy ofthese burden estimates and suggestionsfor reducing these burdens should be sentto the Internal Revenue Service, Attn:IRS Reports Clearance Officer,W:CAR:MP:FP:S:O, Washington, DC20224, and to the Office of Managementand Budget, Attn: Desk Officer for theDepartment of the Treasury, Office ofInformation and Regulatory Affairs,Washington, DC 20503.

Books or records relating to this 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

On December 20, 1999, the IRS publishedproposed regulations (REG–106012–98,2000–2 I.R.B. 290) in the Federal Register(64 F.R. 71082) inviting comments undersection 118(c). A public hearing was heldApril 27, 2000. Numerous comments havebeen received. After consideration of all thecomments, the proposed regulations areadopted as revised by this Treasury decision.

Summary of Comments

Under section 118(a), gross incomedoes not include any contribution to the

capital of the taxpayer. Section 118(c)(1)provides that a contribution to the capitalof a taxpayer includes any amount ofmoney or other property received fromany person (whether or not a shareholder)by a regulated public utility that provideswater or sewerage disposal services if theamount is a contribution in aid of con-struction, satisfies the expenditure rule,and is not included in rate base forratemaking purposes. Pursuant to theauthority granted to the Secretary undersection 118(c)(3)(A), the proposed regula-tions define a contribution in aid of con-struction as any amount of money or otherproperty contributed to a regulated publicutility that provides water or seweragedisposal services to the extent that thepurpose of the contribution is to providefor the expansion, improvement, orreplacement of the utility’s water or sew-erage disposal facilities.

Customer Connection Fees

The proposed regulations define non-taxable contributions in aid of construc-tion to exclude customer connection fees.Customer connection fees are defined inthe proposed regulations to includeamounts paid for the cost of installing aconnection or service line (including thecost of meters and piping) from the utili-ty’s main lines to the lines owned by thecustomer, unless the connection or serviceline serves, or is designed to serve, morethan one customer. Customer connectionfees also are defined in the proposed reg-ulations to include any amounts paid asservice charges for starting or stoppingservices.

Several commentators contend thatconnection and service lines should not betreated as taxable customer connectionfees for a number of reasons. For exam-ple, these commentators argue that theomission from the current law of the lan-guage included in formersection 118(b)(3)(A) that directed theSecretary to define a contribution in aid ofconstruction to exclude amounts paid toconnect the customer’s line to a mainwater or sewer line signals congressionalintent to include connection and servicelines in the definition of a nontaxable con-tribution in aid of construction. In addi-tion, some of these commentators believethat the inclusion of connection and ser-

vice lines as taxable customer connectionfees is inconsistent with the judicial inter-pretation of a contribution in aid of con-struction, which arguably would treat con-tributions for main lines and connectionand service lines as taxable prerequisitesfor services under the Supreme Court’sdecision in United States v. Chicago,Burlington & Quincy R.R., 412 U.S. 401(1973) (1973–2 C.B. 428). Some of thesecommentators also contend that the exclu-sion of connection and service lines fromthe definition of a nontaxable contributionin aid of construction is inconsistent withregulatory accounting treatment, whichdoes not distinguish between main linesand connection and service lines for pur-poses of classifying property or for pur-poses of ratemaking. Finally, a few ofthese commentators point out that theinclusion of connection and service linesas taxable customer connection fees willresult in customers being required togross-up their contributions of connectionand service lines for taxes, increasing thecost of housing and development and cre-ating a competitive disadvantage forinvestor-owned utilities.

The IRS and Treasury Department donot agree with the commentators’ positionwith respect to connection and servicelines. As explained in the preamble to theproposed regulations, the inclusion ofconnection and service lines in the defini-tion of taxable customer connection feesis consistent with the legislative historyexplanation that section 118(c) wasintended to restore the contribution in aidof construction provision of former sec-tion 118(b) that was repealed by The TaxReform Act of 1986 for regulated publicutilities that provide water or seweragedisposal services. H.R. Conf. Rep. No.737, 104th Cong., 2d Sess. 316 (1996)(1996–3 C.B. 741, 1056). While the lan-guage regarding the definition of a contri-bution in aid of construction did changefrom the language in former section118(b), Congress did not explicitlyinclude connection and service lines in thedefinition of a contribution in aid of con-struction but instead directed theSecretary to define a contribution in aid ofconstruction, presumably aware of theIRS’ and Treasury Department’s positionthat connection and service lines are tax-able customer connection fees based on

Rev. Rul. 75–557 (1975–2 C.B. 33), andthe proposed regulations under formersection 118(b) (43 F.R. 22997(May 30, 1978)). Moreover, the IRS andTreasury Department continue to believethat the exclusion of connection and ser-vice lines from a nontaxable contributionin aid of construction is more consistentwith the judicial and regulatory interpreta-tion of a contribution in aid of construc-tion and with the Supreme Court’s direc-tive that exclusions be narrowlyconstrued. See, for example, Edwards v.Cuba R.R., 268 U.S. 628 (1925) (IV-2C.B. 122); Detroit Edison Co. v.Commissioner, 319 U.S. 98 (1943) (1943C.B. 1019); Chicago, Burlington &Quincy R.R., 412 U.S. at 401; FloridaProgress Corp. v. United States, No.93–246–CIV–T–25A (M.D. Fla.July 2, 1998), appeal docketed,No. 99–15389–FF (11th Cir.Dec. 29, 1999); Commissioner v. Schleier,515 U.S. 323, 328 (1995); and Rev. Rul.75–557. As explained by the court in TecoEnergy, Inc. v. Unites States,No. 98–430–Civ–J–TJC (M.D. Fla. Oct.21, 1999), “former [section] 118(b) codi-fies the principles of Edwards that pay-ments made by a government or othergroup to a utility to encourage the exten-sion of facilities into new areas benefit-ting a large number of people are giventax free status, while also affirming thereasoning of Detroit Edison and RevenueRuling 75-557, that payments made by anindividual or business entity to a utility asa prerequisite to receiving water orsewage services would be treated as tax-able income to the utility.” Further, theIRS and Treasury Department believe thatthe definition of a contribution in aid ofconstruction used for regulatory account-ing purposes should not control for taxpurposes. See, for example, Thor PowerTool Co. v. Commissioner, 439 U.S. 522,541–45 (1979) (1979–1 C.B. 167).Accordingly, the final regulations retainthe exclusion of connection and servicelines from the definition of a nontaxablecontribution in aid of construction.

Some commentators state that, beforethe proposed regulations were published,some utilities took the position that pay-ments for connection and service lineswere not taxable and did not charge theircontributors a sufficient amount to cover

2001–9 I.R.B. 721 February 26, 2001

their tax liabilities. The IRS and TreasuryDepartment understand that there wasuncertainty before the proposed regula-tions were published and that some utili-ties may have reasonably interpreted sec-tion 118(c)(3)(A) to mean that connectionand service lines should not be treated astaxable. It is clear that these final regula-tions apply to money and other propertyreceived on or after January 11, 2001, anddo not apply to transactions entered intoprior to that date. In addition, the IRS willtake into account all the facts and circum-stances in applying section 118(c) to suchtransactions.

Commentators suggest that customerconnection fees relating to services pro-vided to public authorities, such asschools, hospitals, public libraries, andgovernmental entities, should be includ-ed in the definition of nontaxable contri-butions in aid of construction becausethese services provide a broad publicbenefit. In addition, commentators rec-ommend that customer connection feesrelating to fire protection services shouldqualify as nontaxable contributions inaid of construction because a utilityreceives no revenue for public fire pro-tection services and only a nominalstandby fee for private fire protectionservices. The IRS and TreasuryDepartment believe that, regardless ofwhether the activities of public authori-ties provide a public benefit, connectionand service lines that serve these cus-tomers should be treated in the samemanner as connection or service lines toany paying customer — as a prerequisitefor services. Consequently, the final reg-ulations continue to treat amounts paidfor connection and service lines withrespect to public authorities as customerconnection fees. However, the IRS andthe Treasury Department agree withcommentators that amounts paid withrespect to fire protection services shouldnot be considered customer connectionfees.

Several commentators suggest that con-nection and service lines that serve morethan one user, such as lines for apartmenthouses, condominium projects, shoppingmalls, and office buildings, should beconsidered to serve more than one cus-tomer and, thus, be excluded from taxablecustomer connection fees, regardless of

whether the utility treats the facility asone customer or many. The final regula-tions do not adopt this suggestion becausewhether connection or service lines aredesigned to serve more than one customerdoes not depend on the number of usersbut upon the number of customers. Thus,for example, if a water or sewerage dis-posal utility treats an apartment or officebuilding as one utility customer, then thecost of connecting the utility’s main linesto the connection or service lines servingthat single customer is a taxable customerconnection fee.

Binding Agreement Rule

The proposed regulations provide thatif a water or sewerage disposal facility isplaced in service by the utility before anamount is contributed to the utility, thecontribution is not a nontaxable contribu-tion in aid of construction unless, at thetime the facility is placed in service by theutility, there is an agreement, bindingunder local law between the prospectivecontributor and the utility, that the utilityis to receive the amount as reimbursementfor the cost of acquiring or constructingthe facility.

Commentators suggest that the bind-ing agreement rule should be expandedto include enforceable public utilitycommission orders and tariffs. The finalregulations adopt this suggestion bytreating an order or a tariff, issued orapproved by the applicable public utilitycommission, that requires a current orprospective customer to reimburse theutility for the cost of acquiring or con-structing the facility as a binding agree-ment. Because public utility commis-sion orders or tariffs may be issued orapproved before or after the facility isplaced in service, the final regulationsalso extend the time for entering into abinding agreement or the issuance orapproval of an order or a tariff to no laterthan 82 months after the close of the tax-able year (the usual due date with exten-sions for a taxpayer’s return) in whichthe facility is placed in service.

One commentator suggests adding anexample demonstrating that paymentsmade pursuant to a binding agreementqualify as a contribution in aid of con-struction under section 118(c). The finalregulations adopt this suggestion.

Basis Rules

The proposed regulations provide thatthe basis of a water or sewerage facilityacquired or constructed with a contribu-tion under a binding agreement must bereduced by the amount of the contributionat the time the facility is placed in service.Several commentators suggest that if thereceipt of all of the expected contributionsunder the agreement occurs more than oneor two years after a facility is placed inservice, the utility should be permitted toclaim the full cost of the facility as basisfor depreciation purposes, subject toadjustment as the contributions arereceived. The final regulations do notadopt this comment because sec-tion 118(c)(4) disallows any depreciationdeductions for a water or sewerage dis-posal facility that is fully paid with a non-taxable contribution in aid of constructionunder section under section 118(c). Thisresult is consistent with similar rules thateither exclude expected contributionsfrom basis or deny a deduction to theextent the taxpayer has a right to, or rea-sonable prospect of, reimbursement. See,for example, §1.110–1(b)(4)(ii)(B);§1.165–1(d)(2)(i); and Rev. Rul. 79–263(1979–2 C.B. 82).

The proposed regulations providethat, if a contribution in aid of construc-tion treated as a contribution to the cap-ital of the taxpayer is repaid to the con-tributor, either in whole or in part, thenthe repayment amount is a capital expen-diture in the taxable year in which it ispaid or incurred, resulting in an increasein the property’s adjusted basis in suchyear. A couple of commentators suggestthat the repayment should be depreciat-ed over the remaining life of the proper-ty. The final regulations adopt this sug-gestion.

Reporting Requirement

The proposed regulations provide that ataxpayer treating a contribution in aid ofconstruction as a contribution to capitalmust file a statement with its tax returns toreport the amount of the contribution inaid of construction the taxpayer: (1)expended during the taxable year forproperty described in section118(c)(2)(A) (qualified property); (2)does not intend to expend for qualified

February 26, 2001 722 2001–9 I.R.B.

property; and (3) failed to expend forqualified property. Several commentatorsexpress concern that the reporting require-ment in the proposed regulations exceedsthe intent of the statute because sec-tion 118(c)(2)(C) only requires the main-tenance of adequate records. However,section 118(d)(1) provides that if the tax-payer for any taxable year treats anamount as a contribution to the capital ofthe taxpayer described in section 118(c),then the statutory period for the assess-ment of any deficiency attributable to anypart of the amount does not expire beforethe expiration of 3 years from the date theSecretary is notified by the taxpayer (insuch manner as the Secretary may pre-scribe) of the amount of the expenditurereferred to in section 118(c)(2)(A), of thetaxpayer’s intention not to make theexpenditures referred to in section 118(c)(2)(A), or of a failure to make the expen-diture within the period described in sec-tion 118(c)(2)(B). Thus, the regulationsdo not impose an additional reportingrequirement but merely provide the timeand manner in which taxpayers must noti-fy the Secretary under section 118(d)(1)of amounts treated as contributions in aidof construction.

Collection of Information underPaperwork Reduction Act

Two comments were sent to OMB onthe collection of information contained inthe proposed regulations, with copies ofthe comments sent to the IRS ReportsClearance Officer. The commentatorsestimate that complying with the record-keeping requirements of section 118(c)(2)(C) involves more hours and that thenumber of respondents is greater thanestimated. The collection of informationburden under the proposed regulations isbased only upon the time for notifying theIRS of the required information undersection 118(d)(1) and is not required toinclude the time for maintaining accuratebooks and records. Thus, the individualtime to comply with the collection ofinformation burden was not increased toreflect these commentators concerns.However, the estimated number of annualrespondents has been increased to 300 andthe estimated total annual reporting bur-den has been increased to 300 hours.

Special Analyses

It has been determined that thisTreasury decision is not a significant reg-ulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It also hasbeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations. It is hereby certified that thecollection of information in these regula-tions will not have a significant econom-ic impact on a substantial number ofsmall entities. This certification is basedupon the fact that any burden on taxpay-ers is minimal. Accordingly, aRegulatory Flexibility Analysis underthe Regulatory Flexibility Act (5 U.S.C.chapter 6) is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, the notice of proposed rulemakingpreceding these regulations was submit-ted to the Chief Counsel for Advocacy ofthe Small Business Administration forcomment on its impact on small busi-ness.

Drafting Information

The principal author of these regula-tions is Paul F. Handleman, Office of theAssociate Chief Counsel (Passthroughsand Special Industries), IRS. However,other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.118–2 also issued under

26 U.S.C. 118(c)(3)(A); * * *Par. 2. Section 1.118–2 is added to read

as follows:

§1.118–2 Contribution in aid ofconstruction.

(a) Special rule for water and sewer-age disposal utilities—(1) In general.

For purposes of section 118, the termcontribution to the capital of the tax-payer includes any amount of money orother property received from any per-son (whether or not a shareholder) by aregulated public utility that provideswater or sewerage disposal servicesif—

(i) The amount is a contribution in aidof construction under paragraph (b) of thissection;

(ii) In the case of a contribution ofproperty other than water or sewerage dis-posal facilities, the amount satisfies theexpenditure rule under paragraph (c) ofthis section; and

(iii) The amount (or any propertyacquired or constructed with the amount)is not included in the taxpayer’s rate basefor ratemaking purposes.

(2) Definitions—(i) Regulated publicutility has the meaning given such term bysection 7701(a)(33), except that such termdoes not include any utility which is notrequired to provide water or sewerage dis-posal services to members of the generalpublic in its service area.

(ii) Water or sewerage disposal facili-ty is defined as tangible propertydescribed in section 1231(b) that is usedpredominately (80% or more) in the tradeor business of furnishing water or sewer-age disposal services.

(b) Contribution in aid of construc-tion—(1) In general. For purposes ofsection 118(c) and this section, the termcontribution in aid of construction meansany amount of money or other propertycontributed to a regulated public utilitythat provides water or sewerage disposalservices to the extent that the purpose ofthe contribution is to provide for theexpansion, improvement, or replacementof the utility’s water or sewerage disposalfacilities.

(2) Advances. A contribution in aid ofconstruction may include an amount ofmoney or other property contributed to aregulated public utility for a water or sew-erage disposal facility subject to a contin-gent obligation to repay the amount, inwhole or in part, to the contributor (com-monly referred to as an advance). Forexample, an amount received by a utilityfrom a developer to construct a waterfacility pursuant to an agreement underwhich the utility will pay the developer a

2001–9 I.R.B. 723 February 26, 2001

percentage of the receipts from the facili-ty over a fixed period may constitute acontribution in aid of construction.Whether an advance is a contribution or aloan is determined under general princi-ples of federal tax law based on all thefacts and circumstances. For the treat-ment of any amount of a contribution inaid of construction that is repaid by theutility to the contributor, see paragraphs(c)(2)(ii) and (d)(2) of this section.

(3) Customer connection fee—(i) Ingeneral. Except as provided in para-graph (b)(3)(ii) of this section, a customerconnection fee is not a contribution in aidof construction under this paragraph (b)and generally is includible in income.The term customer connection feeincludes any amount of money or otherproperty transferred to the utility repre-senting the cost of installing a connectionor service line (including the cost ofmeters and piping) from the utility’s mainwater or sewer lines to the line owned bythe customer or potential customer. Acustomer connection fee also includes anyamount paid as a service charge for start-ing or stopping service.

(ii) Exceptions—(A) Multiple cus-tomers. Money or other property con-tributed for a connection or service linefrom the utility’s main line to the cus-tome’s or the potential customer’s line isnot a customer connection fee if the con-nection or service line serves, or isdesigned to serve, more than one cus-tomer. For example, a contribution for asplit service line that is designed to servetwo customers is not a customer connec-tion fee. On the other hand, if a water orsewerage disposal utility treats an apart-ment or office building as one utility cus-tomer, then the cost of installing a con-nection or service line from the utility’smain water or sewer lines serving that sin-gle customer is a customer connection fee.

(B) Fire protection services. Money orother property contributed for public andprivate fire protection services is not acustomer connection fee.

(4) Reimbursement for a facility previ-ously placed in service—(i) In general.If a water or sewerage disposal facility isplaced in service by the utility before anamount is contributed to the utility, thecontribution is not a contribution in aid ofconstruction under this paragraph (b) with

respect to the cost of the facility unless, nolater than 82 months after the close of thetaxable year in which the facility wasplaced in service, there is an agreement,binding under local law, that the utility isto receive the amount as reimbursementfor the cost of acquiring or constructingthe facility. An order or tariff, bindingunder local law, that is issued or approvedby the applicable public utility commis-sion requiring current or prospective utili-ty customers to reimburse the utility forthe cost of acquiring or constructing thefacility, is a binding agreement for pur-poses of the preceding sentence. If anagreement exists, the basis of the facilitymust be reduced by the amount of theexpected contributions. Appropriateadjustments must be made if actual con-tributions differ from expected contribu-tions.

(ii) Example. The application of para-graph (b)(4)(i) of this section is illustratedby the following example:

Example. M, a calendar year regulated publicutility that provides water services, spent $1,000,000for the construction of a water facility that can serve200 customers. M placed the facility in service in2000. In June 2001, the public utility commissionthat regulates M approves a tariff requiring new cus-tomers to reimburse M for the cost of constructingthe facility by paying a service availability charge of$5,000 per lot. Pursuant to the tariff, M expects toreceive reimbursements for the cost of the facility of$100,000 per year for the years 2001 through 2010.The reimbursements are contributions in aid of con-struction under paragraph (b) of this section becauseno later than 82 months after the close of the taxableyear in which the facility was placed in service therewas a tariff, binding under local law, approved by thepublic utility commission requiring new customersto reimburse the utility for the cost of constructingthe facility. The basis of the $1,000,000 facility iszero because the expected contributions equal thecost of the facility.

(5) Classification by ratemakingauthority. The fact that the applicableratemaking authority classifies any moneyor other property received by a utility as acontribution in aid of construction is notconclusive as to its treatment under thisparagraph (b).

(c) Expenditure rule—(1) In general.An amount satisfies the expenditure ruleof section 118(c)(2) if the amount isexpended for the acquisition or construc-tion of property described in section118(c)(2)(A), the amount is paid orincurred before the end of the second tax-able year after the taxable year in whichthe amount was received as required by

section 118(c)(2)(B), and accurate recordsare kept of contributions and expendituresas provided in section 118(c)(2)(C).

(2) Excess amount—(i) Includible inthe utility’s income. An amount receivedby a utility as a contribution in aid of con-struction that is not expended for theacquisition or construction of water orsewerage disposal facilities as required byparagraph (c)(1) of this section (theexcess amount) is not a contribution to thecapital of the taxpayer under paragraph(a) of this section. Except as provided inparagraph (c)(2)(ii) of this section, suchexcess amount is includible in the utility’sincome in the taxable year in which theamount was received.

(ii) Repayment of excess amount. Ifthe excess amount described in paragraph(c)(2)(i) of this section is repaid, in wholeor in part, either—

(A) Before the end of the time perioddescribed in paragraph (c)(1) of this sec-tion, the repayment amount is not includi-ble in the utility’s income; or

(B) After the end of the time perioddescribed in paragraph (c)(1) of this sec-tion, the repayment amount may bededucted by the utility in the taxable yearin which it is paid or incurred to the extentsuch amount was included in income.

(3) Example. The application of thisparagraph (c) is illustrated by the follow-ing example:

Example. M, a calendar year regulated publicutility that provides water services, received a$1,000,000 contribution in aid of construction in2000 for the purpose of constructing a water facility.To the extent that the $1,000,000 exceeded the actu-al cost of the facility, the contribution was subject tobeing returned. In 2001, M built the facility at a costof $700,000 and returned $200,000 to the contribu-tor. As of the end of 2002, M had not returned theremaining $100,000. Assuming accurate records arekept, the requirement under section 118(c)(2) is sat-isfied for $700,000 of the contribution. Because$200,000 of the contribution was returned within thetime period during which qualifying expenditurescould be made, this amount is not includible in M’sincome. However, the remaining $100,000 isincludible in M’s income for its 2000 taxable year(the taxable year in which the amount was received)because the amount was neither spent nor repaidduring the prescribed time period. To the extent Mrepays the remaining $100,000 after year 2002, Mwould be entitled to a deduction in the year suchrepayment is paid or incurred.

(d) Adjusted basis—(1) Exclusionfrom basis. Except for a repaymentdescribed in paragraph (d)(2) of this sec-tion, to the extent that a water or sewerage

February 26, 2001 724 2001–9 I.R.B.

disposal facility is acquired or constructedwith an amount received as a contributionto the capital of the taxpayer under para-graph (a) of this section, the basis of thefacility is reduced by the amount of thecontribution. To the extent the water orsewerage disposal facility is acquired as acontribution to the capital of the taxpayerunder paragraph (a) of this section, thebasis of the contributed facility is zero.

(2) Repayment of contribution. If a con-tribution to the capital of the taxpayer underparagraph (a) of this section is repaid to thecontributor, either in whole or in part, thenthe repayment amount is a capital expendi-ture in the taxable year in which it is paid orincurred, resulting in an increase in theproperty’s adjusted basis in such year.Capital expenditures allocated to deprecia-ble property under paragraph (d)(3) of thissection may be depreciated over theremaining recovery period for that property.

(3) Allocation of contributions. Anamount treated as a capital expenditureunder this paragraph (d) is to be allocatedproportionately to the adjusted basis ofeach property acquired or constructedwith the contribution based on the relativecost of such property.

(4) Example. The application of thisparagraph (d) is illustrated by the follow-ing example:

Example. A, a calendar year regulated publicutility that provides water services, received a$1,000,000 contribution in aid of construction in2000 as an advance from B, a developer, for the pur-pose of constructing a water facility. To the extentthat the $1,000,000 exceeds the actual cost of thefacility, the contribution is subject to being returned.Under the terms of the advance, A agrees to pay to Ba percentage of the receipts from the facility over afixed period, but limited to the cost of the facility. In

2001, A builds the facility at a cost of $700,000 andreturns $300,000 to B. In 2002, A pays $20,000 to Bout of the receipts from the facility. Assuming accu-rate records are kept, the $700,000 advance is a con-tribution to the capital of A under paragraph (a) ofthis section and is excludable from A’s income. Thebasis of the $700,000 facility constructed with thiscontribution to capital is zero. The $300,000 excessamount is not a contribution to the capital of A underparagraph (a) of this section because it does not meetthe expenditure rule described in paragraph (c)(1) ofthis section. However, this excess amount is notincludible in A’s income pursuant to paragraph(c)(2)(ii) of this section since the amount is repaid toB within the required time period. The repayment ofthe $300,000 excess amount to B in 2001 is not treat-ed as a capital expenditure by A. The $20,000 pay-ment to B in 2002 is treated as a capital expenditureby A in 2002 resulting in an increase in the adjustedbasis of the water facility from zero to $20,000.

(e) Statute of limitations—(1) Exten-sion of statute of limitations. Under sec-tion 118(d)(1), the statutory period forassessment of any deficiency attributableto a contribution to capital under para-graph (a) of this section does not expirebefore the expiration of 3 years after thedate the taxpayer notifies the Secretary inthe time and manner prescribed in para-graph (e)(2) of this section.

(2) Time and manner of notification.Notification is made by attaching a state-ment to the taxpayer’s federal income taxreturn for the taxable year in which any ofthe reportable items in paragraphs(e)(2)(i) through (iii) of this section occur.The statement must contain the taxpayer’sname, address, employer identificationnumber, taxable year, and the followinginformation with respect to contributionsof property other than water or seweragedisposal facilities that are subject to theexpenditure rule described in paragraph(c) of this section—

(i) The amount of contributions in aidof construction expended during the tax-able year for property described in section118(c)(2)(A) (qualified property) asrequired under paragraph (c)(1) of thissection, identified by taxable year inwhich the contributions were received;

(ii) The amount of contributions in aidof construction that the taxpayer does notintend to expend for qualified property asrequired under paragraph (c)(1) of thissection, identified by taxable year inwhich the contributions were received;and

(iii) The amount of contributions in aidof construction that the taxpayer failed toexpend for qualified property as requiredunder paragraph (c)(1) of this section,identified by taxable year in which thecontributions were received.

(f) Effective date. This section isapplicable for any money or other proper-ty received by a regulated public utilitythat provides water or sewerage disposalservices on or after January 11, 2001.

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 3. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 4. In §602.101, paragraph (b) is

amended by adding an entry to the table innumerical order to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

2001–9 I.R.B. 725 February 26, 2001

CFR part or section where Current OMBidentified and described control No.

* * * * *1.118–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1639

* * * * *

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved December 20, 2000.

Jonathan Talisman,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on Janu-ary 10, 2001, 8:45 a.m., and published in the issue ofthe Federal Register for January 11, 2001, 66 F.R.2252)

Section 280F.—Limitation onDepreciation for LuxuryAutomobiles; Limitation Where

Certain Property Used forPersonal Purposes

26 CFR 1.280F–7: Property leased after December31, 1986.

This procedure provides owners and lessees ofpassenger automobiles (including electric automo-

biles) with tables detailing the limitations on depre-ciation deductions for automobiles first placed inservice during calendar year 2001 and the amountsto be included in income for automobiles first leasedduring calendar year 2001. See Rev. Proc. 2001–19,page 732.

Section 312.—Effect onEarnings and Profits

26 CFR 1.312–6: Earnings and profits.(Also §§ 56, 83; § 1.83–6.)

E & P adjustments on exercise of option.This revenue ruling announces that the earn-ings and profits of a corporate employer arereduced to reflect the deduction the corpora-tion takes when an employee receives stockupon exercise of a nonstatutory stock option.

Rev. Rul. 2001–1

If a corporation transfers stock uponexercise of an option that was granted inconnection with the performance of ser-vices and to which § 421 of the InternalRevenue Code does not apply (a nonstatu-tory stock option), and the option did nothave a readily ascertainable fair marketvalue at the time of grant, the earnings andprofits of the service recipient are reducedby the amount of the deduction allowed tothe service recipient under §§ 83(h) and162 by reason of such exercise. Becausethis item reduces earnings and profits, § 56(g)(4)(C)(i) does not disallow thededuction of the item in computingadjusted current earnings for purposes ofalternative minimum tax.

The principal author of this revenueruling is Russell P. Subin of the Office ofAssociate Chief Counsel (Corporate). Forfurther information regarding this revenueruling, contact Mr. Subin at (202) 622-7790 (not a toll-free call).

Section 446.—General Rule forMethods of Accounting

26 CFR 1.446–1: General rule for methods ofaccounting.

What are the procedures for a taxpayer subject tothe jurisdiction of the Large and Mid-Size BusinessDivision (LMSB) of the Service to request the ex-amination of specific issues relating to a tax returnbefore the return is timely filed and to obtain anLMSB Pre-Filing Agreement with respect to thatissue. See Rev. Proc. 2001–22, page 745.

Section 471.—General Rule forInventories

26 CFR 1.471–3: Inventories at cost. (Also §§ 61, 111, 472; 1.472–2.)

Rev. Rul. 2001–8

ISSUE

What is the proper method of account-ing for payments made or received withrespect to “floor stocks”?

BACKGROUND

A floor stocks provision, which appliesto a designated type of goods held in inven-tory (floor stocks) on a particular date (the“floor stocks date”), is sometimes enactedin conjunction with a tax, change in taxrate, or subsidy that is imposed upon simi-lar goods purchased or produced on or afterthat date. The purpose of a floor stocks pro-vision is to ensure that all goods sold on orafter the floor stocks date are subjected tothe same total amount of tax or subsidy,regardless of whether the items sold weregoods held as floor stocks on the floorstocks date or goods purchased or pro-duced after that date. This equal treatmentis achieved by imposing with respect togoods held on the floor stocks date anamount, to be either paid or received, thatwill serve to eliminate any differential intotal tax or subsidy that would otherwiseexist relative to goods subsequently pur-chased or produced.

The Internal Revenue Service, in twoprevious revenue rulings, has addressedthe proper tax treatment of paymentsreceived with respect to floor stocks. Rev.Rul. 88–95, 1988–2 C.B. 28, and Rev.Rul. 85–30, 1985–1 C.B. 20, generallyprovide that payments received withrespect to floor stocks should be treated aseither an item of gross income or a reduc-tion in inventory, depending on whetherthe cost of the goods to which the pay-ments relate remains in ending inventoryunder the taxpayer’s cost flow assump-tion. However, questions continue toarise about how the “goods to which thepayments relate” should be determined,particularly when the last-in, first-out(LIFO) inventory method is used.

The purpose of this revenue ruling is toclarify that payments made or receivedwith respect to floor stocks must beaccounted for as adjustments to the invoice

price or production cost of the goods phys-ically held on the floor stocks date to whichthe payments relate, rather than as anadjustment to the tax basis (carrying value)of those goods. This revenue ruling alsoprovides, for costing purposes, an optionalsimplifying assumption for LIFO taxpay-ers regarding identification of the goodsphysically held on the floor stocks date towhich the floor stocks payments relate.

LAW

Section 471(a) of the Internal RevenueCode provides that inventories must be takenon such basis as the Secretary may prescribeas conforming as nearly as may be to the bestaccounting practice in the trade or businessand as most clearly reflecting income.

Section 1.471–3 of the Income TaxRegulations provides rules for determin-ing the cost of merchandise on hand at thebeginning of the taxable year and the costof merchandise purchased or producedsince the beginning of the taxable year.

Section 472(a) provides that taxpayersmay use the LIFO method of inventoryinggoods in accordance with such regulationsas the Secretary may prescribe as neces-sary in order that the use of such methodmay clearly reflect income.

Section 472(b) and § 1.472–1 requiretaxpayers using the LIFO inventorymethod to treat goods remaining on handat the close of the taxable year as being:first, those included in the opening inven-tory of the taxable year, in the order ofacquisition and to the extent thereof; andsecond, those acquired during the taxableyear. Section 472(b) and § 1.472–2require taxpayers using the LIFO methodto inventory their goods at cost.

Section 263A(a) provides, in the caseof property that is inventory in the handsof the taxpayer, that the direct costs and anallocable share of the indirect costs(including taxes) of the property must beincluded in inventory costs.

Section 1.263A–1(e)(3)(i) provides thatindirect costs are properly allocable toproperty produced or property acquiredfor resale when the costs directly benefitor are incurred by reason of the perfor-mance of production or resale activities.

Section 1.263A–2(a)(3)(iii) providesthat producers must capitalize all indirectcosts incurred subsequent to completionof production that are properly allocableto the property produced.

February 26, 2001 726 2001–9 I.R.B.

Section 61(a) provides generally thatgross income means all income fromwhatever source derived.

Rev. Rul. 85–30 addresses the incometax treatment of payments received by aretail dealer of highway vehicle tires as areimbursement of federal excise taxespreviously paid with respect to floorstocks of certain tires held on the floorstocks date. Rev. Rul. 85–30 holds thatthe excise tax reimbursement should betreated as a reduction in ending inventoryto the extent that it relates to tires the costof which remains in ending inventory.Rev. Rul. 85–30 further holds that theexcise tax reimbursement should be treat-ed as an item of gross income to the extentthat it relates to tires the cost of whichdoes not remain in ending inventory andhas been included in cost of goods sold.

Rev. Rul. 88–95 addresses the incometax treatment of two types of paymentsreceived by a textile manufacturer thatwere attributable to domestically producedraw cotton that was either held as of a spe-cific date (i.e., floor stocks) or purchasedsubsequent to that date. Rev. Rul. 88–95holds that both types of payments shouldbe treated as a reduction in the inventorycost of the cotton giving rise to the pay-ments to the extent that the cost is deemedto remain in inventory at the date the pay-ments are accrued under the taxpayer’smethod of accounting. Rev. Rul. 88–95further holds that the payments should betreated as an item of gross income to theextent that the cost of the cotton giving riseto the payments is deemed to have beenrelieved from inventory and accounted forthrough cost of goods sold as of the datethe payments are accrued under the taxpay-er’s method of accounting.

Mohawk Liqueur Corp. v. UnitedStates, 324 F.2d 241 (6th Cir. 1963), cert.denied, 377 U.S. 905 (1964), addressedthe specific question of whether the tax-payer, a manufacturer of alcoholic bever-ages, could deduct floor stocks taxes ondistilled spirits instead of including themin inventory in accordance with its previ-ous practice. The court held that consis-tency in inventory practice is required. Asa result, the taxpayer was not allowed todeviate from its prior practice of includingfloor stocks taxes in inventory.

Turtle Wax, Inc. v. Commissioner, 43T.C. 460 (1965), held that refunds of fed-eral excise taxes on watches were taxable

income to the extent that the taxpayer hadderived a tax benefit related to the pay-ment of such taxes from deductions takenin prior years.

ANALYSIS

The inventory accounting rules gener-ally require a taxpayer to first determinethe cost of goods purchased or producedduring a taxable year and then to allocatethat cost between goods sold during thattaxable year and goods that remain in end-ing inventory based on the taxpayer’sinventory cost flow assumption. See§§ 1.471–3 and 1.263A–1(c)(1).

Payments made with respect to floorstocks (e.g., taxes) represent an inventori-able cost of the goods to which the pay-ments relate under §§ 471 and 263A. See§ 263A(a). Similarly, payments receivedwith respect to floor stocks (e.g., taxrefunds or subsidy payments) represent areduction in the purchase price or produc-tion cost of the goods giving rise to thepayments. See Rev. Rul. 85–30; Rev. Rul.88–95.

Thus, consistent with the requirementsof §§ 1.471–3 and 1.263A–1, paymentsmade or received with respect to floorstocks must be accounted for as adjust-ments to the cost of the goods physicallyheld on the floor stocks date to which thepayments relate. “Cost” for this purposemeans invoice price or production cost.The resultant effect on either grossincome or inventory depends on theextent to which the cost of the goodsphysically held on the floor stocks dateremains in ending inventory. Whether thecost of the goods physically held on thefloor stocks date remains in ending inven-tory is determined by applying the tax-payer’s inventory cost flow assumption(e.g., LIFO, first-in, first-out (FIFO), or aspecific-goods method) to identify theparticular costs that are deemed to be con-tained in ending inventory. See Rev. Rul.85–30; Rev. Rul. 88–95.

Therefore, to the extent that the cost ofthe goods associated with the floor stockspayments has been included in cost ofgoods sold under the taxpayer’s inventorycost flow assumption, payments made (orreceived) with respect to floor stocksincrease (or decrease) cost of goods sold.However, payments received that relate togoods the cost of which has been includedin cost of goods sold in a previous year

under the taxpayer’s inventory cost flowassumption increase gross income, con-sistent with operation of the tax benefitrule as illustrated in Turtle Wax, 43 T.C. at466. For taxpayers using a LIFO invento-ry method, this treatment ensures thatpayments made or received with respectto floor stocks do not affect historicalLIFO cost increments that contain the costof unrelated goods.

Similarly, to the extent that the cost ofthe goods associated with the floor stockspayments remains in ending inventoryunder the taxpayer’s inventory cost flowassumption, payments made (or received)with respect to floor stocks increase (ordecrease) ending inventory. For taxpayersusing a LIFO inventory method, pay-ments made or received with respect tofloor stocks affect ending inventory onlywhen one or more LIFO cost incrementsthat remain in ending inventory, as com-puted under § 472(b) and § 1.472–1,include the cost of the goods physicallyheld on the floor stocks date. For taxpay-ers using a FIFO inventory method, pay-ments made or received with respect tofloor stocks generally are included in costof goods sold and not ending inventorybecause the goods physically held on thefloor stocks date to which the paymentsrelate usually do not remain in FIFOinventory at the end of the year.

Mohawk Liqueur was decided on groundsof consistency in inventory practice and didnot address the issue considered in this rev-enue ruling, i.e., the proper method ofaccounting for floor stocks taxes under a par-ticular inventory cost flow assumption.

EXAMPLES

The following four examples illustratethe proper income tax accounting treat-ment of payments made and received withrespect to floor stocks:

Example 1. X files returns on a calendar yearbasis using an accrual method of accounting and thedouble-extension, dollar-value LIFO method ofinventorying goods. X has only one item, Product 1,in its dollar-value LIFO pool. The federal excise taxon Product 1 decreases on January 1, 2000, from 10¢to 8¢ per unit. Simultaneously, a floor stocks provi-sion is implemented that entitles merchants holdingProduct 1 in inventory on January 1, 2000, uponwhich an excise tax of 10¢ per unit had previouslybeen paid, to a refund of 2¢ per unit. X held 10,000units of Product 1 on January 1, 2000, and receivedan associated $200 excise tax refund in 2000. The10,000 units of Product 1 that X physically held onJanuary 1, 2000, were purchased in 1999. X’sDecember 31, 1999, LIFO inventory consists of a

2001–9 I.R.B. 727 February 26, 2001

1995 LIFO cost increment that includes the cost of3,000 units of Product 1 and a 1999 LIFO cost incre-ment that contains the cost associated with an addi-tional 7,000 units. These 1995 and 1999 incrementsremain in X’s 2000 LIFO ending inventory.

X must account for the $200 excise tax refund in2000 as follows: The $200 refund represents areduction in the invoice price of the 10,000 units ofProduct 1 purchased in 1999 and held on January 1,2000. Of these 10,000 units, only the cost of 7,000units remains in X’s 2000 ending inventory under X’sLIFO inventory cost flow assumption as part of a1999 increment; thus, $140 of the $200 refund(7,000/10,000 x $200 = $140) is allocated to theseunits, resulting in a $140 decrease in 2000 endinginventory. ($140 must be subtracted from the cur-rent-year cost of the 1999 LIFO cost increment andthe index (i.e., the ratio of total current-year cost tototal base-year cost) for the 1999 increment wouldbe recalculated). The cost of the remaining 3,000 ofthese 10,000 units was included in cost of goods soldin 1999 under X’s LIFO inventory cost flow assump-tion. Thus, $60 of the refund (3,000/10,000 x $200= $60) must be included in gross income in 2000.

Example 2. Y files returns on a calendar year basisusing an accrual method of accounting and the dou-ble-extension, dollar-value LIFO method of invento-rying goods. A floor stocks provision is implementedon July 1, 2000, that entitles merchants holdingProduct 2 in inventory on that date to receive invento-ry protection (subsidy) payments of $1 per unit. Yheld 50,000 units of Product 2 on July 1, 2000, andreceived an associated $50,000 inventory protectionpayment in 2000. The 50,000 units of Product 2 thatY physically held on July 1, 2000, were purchased in2000. The cost of these units does not remain in Y’s2000 LIFO ending inventory, which consists of 1996,1997, and 1998 LIFO cost increments.

Y must include the entire $50,000 inventory pro-tection payment as a decrease in 2000 cost of goodssold because the cost of the associated goods wasincluded in 2000 cost of goods sold and thus doesnot remain in 2000 ending inventory under Y’s LIFOinventory cost flow assumption.

Example 3. Z files returns on a calendar year basisusing an accrual method of accounting and the double-extension, dollar-value LIFO method of inventoryinggoods. Z has only one item, Product 3, in its dollar-value LIFO pool. The federal excise tax on Product 3increases on January 1, 2000, from 6¢ to 10¢ per unit.Simultaneously, a floor stocks tax provision is imple-mented that requires producers holding Product 3 ininventory on January 1, 2000, upon which an excise taxof 6¢ per unit had previously been paid, to pay an addi-tional excise tax of 4¢ per unit. Z has 100,000 units ofProduct 3 on hand on January 1, 2000, and pays theadditional excise tax of $4,000 in 2000. The 100,000units of Product 3 that Z physically held on January 1,2000, were produced in 1999 and subjected to a 6¢ perunit excise tax in 1999. Z’s December 31, 1999, LIFOinventory consists of LIFO cost increments from 1990,1993, and 1996. The cost of these 100,000 units doesnot remain in Z’s 2000 LIFO ending inventory becauseZ did not add a LIFO cost increment in 1999.

Z must include the entire $4,000 floor stocks taxin cost of goods sold in 2000 because the productioncost of the associated goods was included in cost ofgoods sold in 1999 and thus does not remain in 2000ending inventory under Z’s LIFO inventory costflow assumption.

Example 4. The facts are the same as Example 3,except that the cost of 60,000 of the 100,000 units ofProduct 3 that Z produced in 1999 and physicallyheld on January 1, 2000, is included in a 1999 LIFOcost increment. The cost of these 60,000 unitsremains in Z’s 2000 LIFO ending inventory becauseZ did not have an inventory decrement in 2000.

Z must account for the $4,000 floor stocks tax in2000 as follows: $2,400 must be assigned as anincrease in the production cost of the 60,000 units heldon January 1, 2000, that were produced in 1999 thecost of which remains in 2000 ending inventory underZ’s LIFO inventory cost flow assumption as part of a1999 LIFO cost increment (60,000/100,000 x $4,000 =$2,400). This adjustment results in an increase in 2000ending inventory ($2,400 must be added to the current-year cost of the 1999 LIFO cost increment and theindex (i.e., the ratio of total current-year cost to totalbase-year cost) for the 1999 increment would be recal-culated). The remaining $1,600 of the floor stocks taxmust be included in cost of goods sold in 2000 becausethe production cost of the 40,000 units of Product 3produced in 1999 with which it is associated wasincluded in 1999 cost of goods sold and thus does notremain in 2000 ending inventory under Z’s LIFOinventory cost flow assumption.

HOLDING

Payments made or received with respectto floor stocks must be accounted for asadjustments to the invoice price or produc-tion cost of the goods physically held onthe floor stocks date to which the paymentsrelate. Payments made or received withrespect to floor stocks affect inventory val-uation only to the extent that the invoiceprice or production cost of the goods onhand that gave rise to the payments has notbeen included in cost of goods sold butremains in ending inventory under the tax-payer’s inventory cost flow assumption.Payments made or received with respect tofloor stocks affect gross income to theextent that the invoice price or productioncost of the goods on hand that gave rise tothe payments has been included in cost ofgoods sold and thus is not included in end-ing inventory under the taxpayer’s invento-ry cost flow assumption.

SIMPLIFYING ASSUMPTIONREGARDING GOODS ON HAND

Identification of the goods that werephysically held on the floor stocks datemay be unduly burdensome for some tax-payers, particularly LIFO taxpayers withlarge inventories of fungible goods. As amatter of administrative convenience, theService will permit LIFO taxpayers toassume that the goods physically held onthe floor stocks date are those mostrecently purchased or produced. This

simplifying assumption for paymentsmade or received with respect to floorstocks is a method of accounting that mustbe applied on a consistent basis and usedonly for the purpose of identifying thegoods physically held on the floor stocksdate for costing purposes.

PROSPECTIVE APPLICATION

Pursuant to the authority contained in § 7805(b) of the Code, the conclusions inthis revenue ruling will not be appliedadversely to challenge a consistent treat-ment by taxpayers of payments made orreceived with respect to floor stocks on orbefore February 26, 2001.

CHANGE IN METHOD OFACCOUNTING

A change to comply with this revenueruling is a change in method of account-ing to which the provisions of § 446 andthe regulations thereunder apply. A tax-payer wanting to change its method ofaccounting to conform with the holdingin this revenue ruling or to elect the sim-plifying assumption must follow theautomatic change in accounting methodprovisions of Rev. Proc. 99–49, 1999–2C.B. 725 (or its successor), provided thechange is made for the first taxable yearin which payments are made or receivedwith respect to floor stocks subsequent toFebruary 26, 2001, with the followingmodifications: (1) the scope limitationsin section 4.02 of Rev. Proc. 99–49 donot apply (if the taxpayer is under exam-ination, before an appeals office, orbefore a federal court with respect to anyincome tax issue, the taxpayer must pro-vide a copy of the Form 3115,Application for Change in AccountingMethod, to the examining agent, appealsofficer, or counsel for the government, asappropriate, at the same time that it filesthe copy of the Form 3115 with thenational office); (2) in lieu of the labelrequired by section 6.02(3) of Rev. Proc.99–49, a taxpayer should write “Filedpursuant to Rev. Rul. 2001–8” at the topof its Form 3115; (3) the change inmethod of accounting to comply with theholding in this revenue ruling is to bemade using a cut-off method relative topayments made or received with respectto floor stocks on or before February 26,2001 (see section 2.06 of Rev. Proc.99–49); (4) a taxpayer should clearly

February 26, 2001 728 2001–9 I.R.B.

indicate on its Form 3115 or in an attach-ment thereto if it is electing to use thesimplifying assumption to identify thegoods physically held on the floor stocksdate for costing purposes.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 85–30 is clarified to reflectthat the reimbursement of excise taxes istreated as a reduction in the invoice priceof the tires physically held on the floorstocks date.

Rev. Rul. 88–95 is clarified to reflectthat the inventory protection payments aretreated as a reduction in the invoice priceof the cotton physically held on the floorstocks date.

Rev. Proc. 99–49 is modified andamplified to include this automaticchange in section 9 of the APPENDIX.

DRAFTING INFORMATION

The principal author of this revenueruling is Alan J. Tomsic of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further informationregarding this revenue ruling, contact Mr.Tomsic at (202) 622-4970 (not a toll-freecall).

Section 472.—Last-in, First-outInventories

26 CFR 1.472–2: Requirements incident to adoptionand use of LIFO inventory method.

Must payments made or received with respect tofloor stocks be accounted for as adjustments to the in-voice price or production cost of the goods physicallyheld on the floor stocks date to which the payments re-late, rather than as adjustment to the tax basis (carryingvalue) of those goods. See Rev. Rul. 2001–8, page 726.

Section 482.—Allocation ofIncome and Deductions AmongTaxpayers

What are the procedures for a taxpayer subject tothe jurisdiction of the Large and Mid-Size BusinessDivision (LMSB) of the Service to request the ex-amination of specific issues relating to a tax returnbefore the return is timely filed and to obtain anLMSB Pre-Filing Agreement with respect to thatissue. See Rev. Proc. 2001–22, page 745.

Section 1001.—Determinationof Amount of and Recognition ofGain or Loss

26 CFR 1.1001–3: Modification of debtinstruments.

The revenue procedure, which modifies and su-persedes Rev. Proc. 99–18, provides for an elec-

tion that will allow taxpayers to treat a debt substi-tution, in certain circumstances, as a realizationevent even though it does not result in a significantmodification under section 1.1001–3 of the In-come Tax Regulations. See Rev. Proc. 2001–21,page 742.

Section 1275.—OtherDefinitions and Special Rules

26 CFR 1.1275–2: Special rules relating to debtinstruments.

The revenue procedure, which modifies and su-persedes Rev. Proc. 99–18, provides for an electionthat will allow taxpayers to treat a debt substitution,in certain circumstances, as a realization event eventhough it does not result in a significant modifica-tion under section 1.1001–3 of the Income Tax Reg-ulations. See Rev. Proc. 2001–21, page 742.

Section 7121.—ClosingAgreements

26 CFR 301.7121–1: Closing agreements.

What are the procedures for a taxpayer subjectto the jurisdiction of the Large and Mid-SizeBusiness Division (LMSB) of the Service to re-quest the examination of specific issues relatingto a tax return before the return is timely filedand to obtain an LMSB Pre-Filing Agreementwith respect to that issue. See Rev. Proc.2001–22, page 745.

2001–9 I.R.B. 729 February 26, 2001

February 26, 2001 730 2001–9 I.R.B.

Intermediary Transactions TaxShelter

Notice 2001–16

The Internal Revenue Service and theTreasury Department have become awareof certain types of transactions, describedbelow, that are being marketed to taxpay-ers for the avoidance of federal incometaxes. The Service and Treasury are issu-ing this notice to alert taxpayers and theirrepresentatives of certain responsibilitiesthat may arise from participation in thesetransactions.

These transactions generally involve fourparties: seller (X) who desires to sell stockof a corporation (T), an intermediary corpo-ration (M), and buyer (Y) who desires topurchase the assets (and not the stock) of T.Pursuant to a plan, the parties undertake thefollowing steps. X purports to sell the stockof T to M. T then purports to sell some orall of its assets to Y. Y claims a basis in theT assets equal to Y’s purchase price. Underone version of this transaction, T is includ-ed as a member of the affiliated group thatincludes M, which files a consolidatedreturn, and the group reports losses (orcredits) to offset the gain (or tax) resultingfrom T’s sale of assets. In another form ofthe transaction, M may be an entity that isnot subject to tax, and M liquidates T (in atransaction that is not covered by § 337(b)(2) of the Internal Revenue Code or§ 1.337(d)–4) of the Income TaxRegulations, resulting in no reported gainon M’s sale of T’s assets.

Depending on the facts of the particularcase, the Service may challenge the pur-ported tax results of these transactions onseveral grounds, including but not limitedto one of the following: (1) M is an agentfor X, and consequently for tax purposesT has sold assets while T is still owned byX, (2) M is an agent for Y, and conse-quently for tax purposes Y has purchasedthe stock of T from X, or (3) the transac-tion is otherwise properly recharacterized(e.g., to treat X as having sold assets or totreat T as having sold assets while T is stillowned by X). Alternatively, the Servicemay examine M’s consolidated group todetermine whether it may properly offsetlosses (or credits) against the gain (or tax)from the sale of assets.

The Service may impose penalties onparticipants in these transactions, or, asapplicable, on persons who participate inthe promotion or reporting of these trans-actions, including the accuracy-relatedpenalty under § 6662, the return preparerpenalty under § 6694, the promoter penal-ty under § 6700, and the aiding and abet-ting penalty under § 6701.

Transactions that are the same as orsubstantially similar to those described inthe Notice 2001–16 are identified as “list-ed transactions” for the purposes of § 1.6011–4T(b)(2) of the TemporaryIncome 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), such transactionsmay already be subject to the tax shelterregistration and list maintenance require-ments of §§ 6111 and 6112 under the reg-ulations issued in February 2000 (§§ 301.6111–2T and 301.6112–1T, A–4).Persons required to register these tax shel-ters who have failed to register the shel-ters may be subject to the penalty under § 6707(a) and to the penalty under § 6708(a) if the requirements of § 6112are not satisfied.

For further information regarding thisnotice, contact Theresa Abell, of theOffice of Associate Chief Counsel(Corporate), at (202)622-7700 (not a toll-free call).

Contingent Liability Tax Shelter

Notice 2001–17

The Internal Revenue Service and theTreasury Department have become awareof certain types of transactions, describedbelow, that are being marketed to taxpay-ers for the purpose of accelerating and, insome cases, duplicating tax deductions.This notice is intended to alert taxpayersand their representatives that the lossesgenerated by such transactions are notproperly allowable for federal income taxpurposes. This notice also alerts taxpay-ers and their representatives of certain

responsibilities that may arise from partic-ipation in such transactions.

FACTS

These transactions take several formsbut, in all cases, involve the transfer of ahigh basis asset (i.e., an asset with a basisthat approximates its fair market value) toa corporation purportedly in exchange forstock of the transferee corporation, andthe transferee corporation’s assumption ofa liability (such as a liability for deferredcompensation or other deferred employeebenefits or an obligation for environmen-tal remediation) that the transferor has notyet taken into account for federal incometax purposes. The transferor typicallyremains liable on the underlying obliga-tion. The basis and fair market value ofthe transferred asset, which may be asecurity of another member of the sameaffiliated group of corporations, are gen-erally only marginally greater than thepresent value of the assumed liability.Therefore, the value of the stock of thetransferee received by the transferor isminimal relative to the basis and fair mar-ket value of the asset transferred to thetransferee corporation.

The transaction is purported to qualify asan exchange under § 351 of the InternalRevenue Code, with the intent that the basisof the stock that the transferor receivesfrom the transferee corporation will beequal to the basis of the transferred asset,unreduced by the liability assumed by thetransferee corporation. Under § 358(a), atransferor’s basis in stock received in a § 351 exchange is equal to the transferor’sbasis in property exchanged for such stock,subject to certain adjustments, including areduction for any money or other propertyreceived by the transferor. Under § 358(d)(1), liabilities assumed by thetransferee corporation are treated as moneyreceived by the transferor. Under certaincircumstances, however, liabilities assumedby a transferee corporation in a § 351exchange are not treated as money receivedby the transferor and thus do not reduce thebasis of the stock received in the exchange.See § 358(d)(2); § 357(c)(3).

The transferor typically sells the stockof the transferee corporation for its fairmarket value within a relatively short

Part III. Administrative, Procedural, and Miscellaneous

period of time after the purported § 351exchange and claims a tax loss in anamount approximating the present valueof the liability assumed by the transfereecorporation. In the case of a transactioninvolving members of an affiliated groupthat has elected to file a consolidatedreturn, the transaction is structured withthe intention of avoiding the loss disal-lowance rule of § 1.1502–20 of theIncome Tax Regulations. In addition tothe transferor’s purported loss on the saleof the stock of the transferee corporation,the transferee corporation may claim a § 162 deduction with respect to paymentson the liability.

Taxpayers assert several business pur-poses for these transactions. However,the Service and the Treasury are not awareof any case in which a taxpayer has showna legitimate non-tax business reason tocarry out the combination of stepsdescribed above. Moreover, the Serviceand the Treasury believe that any businesspurposes taxpayers may assert for certainaspects of these transactions are far out-weighed by the purpose to generatedeductible losses for federal income taxpurposes.

ANALYSIS

Depending on the facts of the particularcase, the Service intends to disallow loss-es claimed by the transferor with respectto these transactions. For transfers afterOctober 18, 1999, the Service will assertthat such losses are disallowed becausethe transferor’s basis in the stock receivedis reduced under § 358(h) (reducing stockbasis by the amount of certain liabilities).

For transfers on or before October 18,1999, as well as for transfers after October18, 1999, that are not subject to § 358(h),the Service will disallow such losses forone or more reasons, including but notlimited to the following: (1) that the pur-ported § 351 exchange lacks sufficientbusiness purpose to qualify as a § 351exchange; (2) that the transfer of the assetto the transferee corporation is not, in sub-stance, a transfer of property in exchangefor stock within the meaning of § 351, butinstead is either an agency arrangementfor the transferor or simply a payment tothe transferee for its assumption of a lia-bility; (3) that the purported § 351exchange constitutes an acquisition ofcontrol of the transferee corporation for

the principal purpose of tax avoidancewithin the meaning of § 269(a) and thusthe purported loss should be disallowedunder § 269(a); (4) that the principal pur-pose of the transferee’s assumption of theliability was a purpose to avoid federalincome tax or was not a bona fide busi-ness purpose within the meaning of § 357(b)(1), and thus the assumption ofthe liability should be treated as moneyreceived by the transferor that reduces itsbasis in the transferee stock; (5) that thepurported loss on the sale of the stock ofthe transferee corporation is disallowed orlimited by the loss disallowance rules of§ 1.1502–20, including the anti-avoidancerule in § 1.1502–20(e) and the duplicatedloss rule in § 1.1502–20(c); (6) that thepurported loss on the sale of the stock ofthe transferee corporation is not a bonafide loss actually sustained by the trans-feror, as required by § 1.165–1(b); and(7) that the overall transaction lacks suffi-cient economic substance to be respectedfor federal income tax purposes, see ACMPartnership v. Commissioner, 157 F.3d231 (3d Cir. 1998), cert. denied, 526 U.S.1017 (1999).

In addition, any deduction claimed by atransferee corporation for payments on aliability assumed in a transaction similarto that described above may, dependingon the facts of the particular case, be sub-ject to disallowance on one or more ofseveral possible grounds, including thatthe payments are not for ordinary and nec-essary business expenses of the transfereecorporation. Rev. Rul. 95–74, 1995–2C.B. 36, which addressed the treatment ofcertain environmental liabilities assumedby a transferee of a manufacturing busi-ness, does not apply to the deductibilityby the transferee of liabilities assumed ina transaction of the type described in thisnotice because Rev. Rul. 95–74 dealt withliabilities assumed by a transferee corpo-ration in connection with the transfer ofsubstantially all the assets associated withthe operation of a manufacturing businessto the transferee corporation in a transac-tion that qualified as a § 351 exchange.

The Service may impose penalties onparticipants in these transactions, or, asapplicable, on persons who participate inthe promotion or reporting of these trans-actions, including the accuracy-relatedpenalty under § 6662, the return preparerpenalty under § 6694, the promoter penal-

ty under § 6700, and the aiding and abet-ting penalty under § 6701.

Transactions that are the same as orsubstantially similar to those described inthis Notice 2001–17 (including transac-tions utilizing partnerships) are identifiedas “listed transactions” for the purposes of § 1.6011–4T(b)(2) of the TemporaryIncome 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), such transactionsmay already be subject to the tax shelterregistration and list maintenance require-ments of §§ 6111 and 6112 under the reg-ulations issued in February 2000 (§§ 301.6111–2T and 301.6112–1T, A–4),as well as the regulations issued in 1984and amended in 1986 (§§ 301.6111–1Tand 301.6112–1T, A–3). Persons requiredto register these tax shelters who havefailed to register the shelters may be sub-ject to the penalty under § 6707(a) and tothe penalty under § 6708(a) if the require-ments of § 6112 are not satisfied.

The principal author of this notice isTheresa Abell, of the Office of AssociateChief Counsel (Corporate). For furtherinformation regarding this notice, contactMs. Abell at (202) 622-7700 (not a toll-free call).

Lease Exception to the TaxShelter Regulations

Notice 2001–18

This notice provides an exception fromthe registration requirements under § 6111(d) of the Internal Revenue Codeand the list maintenance requirementsunder § 6112 for certain leasing transac-tions, except as may be provided in subse-quent guidance.

BACKGROUND

Section 301.6111–2T of the temporaryProcedure and Administration Regula-tions provides rules regarding the registra-tion of confidential corporate tax sheltersunder § 6111(d). A confidential corporatetax shelter is any entity, plan, arrange-ment, or transaction that satisfies the fol-

2001–9 I.R.B. 731 February 26, 2001

February 26, 2001 732 2001–9 I.R.B.

lowing three requirements: (1) a signifi-cant purpose of the structure of the trans-action is the avoidance or evasion of fed-eral income tax for a direct or an indirectcorporate participant; (2) the transactionis offered to any potential participantunder conditions of confidentiality; and(3) the tax shelter promoters may receivefees in excess of $100,000 in the aggre-gate. Section 301.6111–2T(b) providesthat the avoidance or evasion of federalincome tax is considered a significant pur-pose of the structure of the transaction ifthe transaction is a listed transactionunder § 301.6111–2T(b)(2), lacks eco-nomic substance under § 301.6111–2T(b)(3), or is otherwise a tax-structuredtransaction under § 301.6111–2 T(b)(4).However, a transaction described in § 301.6111–2T(b)(3) or (4) does not needto be registered if, under § 301.6111–2T(b)(5)(ii), the Internal Revenue Servicemakes a determination by published guid-ance that a transaction is not subject to theregistration requirements under § 6111(d).

Section 301.6112–1T provides rulesregarding the requirement to maintainlists of investors in potentially abusive taxshelters under § 6112. A potentially abu-sive tax shelter under § 6112 includes anyinvestment that is required to be regis-tered with the Internal Revenue Service asa tax shelter under § 6111, and any otherentity, plan, or arrangement, if specified inregulations, that has a potential for taxavoidance or evasion. Section301.6112–1T A–4 provides that for pur-poses of the list requirement, a tax shelterincludes any transaction a significant pur-pose of the structure of which is theavoidance or evasion of federal incometax within the meaning of §§ 6111(d)(1)(A) and 301.6111–2T(b)(whether or not offered to any direct orindirect corporate participant). If a trans-action is exempted from registrationunder § 301.6111–2T(b)(5), the transac-tion is also exempted from the list mainte-nance requirement under § 6112, unlessthe transaction is subject to registrationunder § 6111(c).

DISCUSSION

Since the issuance of §§ 301.6111–2Tand 301.6112–1T, the U.S. TreasuryDepartment and the Internal RevenueService have received comments asking

that certain customary leasing transac-tions involving tangible personal propertybe excepted from the registration require-ment under § 6111(d) and the list mainte-nance requirement under § 6112. Afterconsideration of those comments,Treasury and the Service have determinedthat exemptive relief for certain leasingtransactions is consistent with the objec-tives of the registration requirementsunder § 6111(d) and the list maintenancerequirements under § 6112.

Under § 301.6111–2T(b)(5)(ii), no per-son shall be required to register under § 6111(d) a transaction that satisfies thefollowing requirements: (1) the transac-tion is a lease or sale leaseback betweenan owner-lessor of tangible personal prop-erty and a lessee who is the user of theproperty, (2) the terms of the lease(including any related agreements) areconsistent with customary commercialpractice for the leasing of similar items ofproperty, (3) the transaction qualifies as alease for federal income tax purposesunder Rev. Proc. 75–21, 1975–1 C.B. 715(or its successor), or under generallyaccepted case law principles, (4) thelessor and lessee agree to consistentlyreport the transaction as a lease for feder-al income tax purposes, and (5) the trans-action is not the same as or substantiallysimilar to a listed transaction (or part of alisted transaction) under § 301.6111–2T(b)(2), including a “lease strip” describedin Notice 95–53, 1995–2 C.B. 334, or a“LILO” (lease in / lease out) transactiondescribed in Rev. Rul. 99–14, 1999–1C.B. 835. Furthermore, no list needs to bemaintained under § 6112 for transactionssatisfying this leasing exception that arenot otherwise subject to registration under§ 6111(c).

EFFECTIVE DATE

This notice applies to leasing transac-tions entered into after February 28, 2000.

DRAFTING INFORMATION

The principal author of this notice isCatherine Moore of the Office ofAssociate Chief Counsel (Passthroughsand Special Industries). For further infor-mation regarding this notice, contactCatherine Moore at (202) 622-3080 (not atoll-free call).

26 CFR 601.105: Examination of returns andclaims for refund, credit, or abatement;determination of correct tax liability.(Also Part I, §§ 61, 280F; 1.61–21, 1.280F–7.)

Rev. Proc. 2001–19

SECTION 1. PURPOSE

This revenue procedure provides: (1)limitations on depreciation deductions forowners of passenger automobiles firstplaced in service during calendar year2001, including separate limitations onpassenger automobiles designed to bepropelled primarily by electricity andbuilt by an original equipment manufac-turer (electric automobiles); (2) theamounts to be included in income bylessees of passenger automobiles firstleased during calendar year 2001, includ-ing separate inclusion amounts for electricautomobiles; and (3) the maximumallowable value of employer-providedautomobiles first made available toemployees for personal use in calendaryear 2001 for which the vehicle cents-per-mile valuation rule provided under § 1.61–21(e) of the Income TaxRegulations may be applicable. Thetables detailing these depreciation limita-tions and lessee inclusion amounts reflectthe automobile price inflation adjustmentsrequired by § 280F(d)(7) of the InternalRevenue Code. The maximum allowableautomobile value for applying the vehiclecents-per-mile valuation rule reflects theautomobile price inflation adjustment of § 280F(d)(7) as required by § 1.61–21(e)(1)(iii)(A).

SECTION 2. BACKGROUND

For owners of automobiles, § 280F(a)imposes dollar limitations on the depreci-ation deduction for the year that the auto-mobile is placed in service and each suc-ceeding year. In the case of electricautomobiles placed in service afterAugust 5, 1997, and before January 1,2005, § 280F(a)(1)(C) requires tripling ofthese limitation amounts. Section280F(d)(7) requires the amounts allow-able as depreciation deductions to beincreased by a price inflation adjustmentamount for passenger automobiles placedin service after 1988.

For leased automobiles, § 280F(c)requires a reduction in the deduction

2001–9 I.R.B. 733 February 26, 2001

allowed to the lessee of the automobile.The reduction must be substantiallyequivalent to the limitations on the depre-ciation deductions imposed on owners ofautomobiles. Under § 1.280F–7(a), thisreduction requires the lessees to include ingross income an inclusion amount deter-mined by applying a formula to theamount obtained from a table. There is atable for lessees of electric automobilesand a table for all other passenger auto-mobiles. Each table shows inclusionamounts for a range of fair market valuesfor each tax year after the automobile isfirst leased.

For automobiles first provided byemployers to employees that meet therequirements of § 1.61–21(e)(1), the valueto the employee of the use of the automo-bile may be determined under the vehiclecents-per-mile valuation rule of § 1.61–21(e). Section 1.61–21(e)(1)(iii)(A) provides that for an automobilefirst made available after 1988 to anyemployee of the employer for personaluse, the value of the use of the automobilemay not be determined under the vehiclecents-per-mile valuation rule for a calen-dar year if the fair market value of theautomobile (determined pursuant to § 1.61–21(d)(5)(i) through (iv)) on thefirst date the automobile is made availableto the employee exceeds $12,800 asadjusted by § 280F(d)(7).

SECTION 3. SCOPE AND OBJECTIVE

01. The limitations on depreciationdeductions in section 4.02 of this revenueprocedure apply to automobiles (otherthan leased automobiles) that are placedin service in calendar year 2001 and con-tinue to apply for each tax year that theautomobile remains in service.

02. The tables in section 4.03 of thisrevenue procedure apply to leased auto-mobiles for which the lease term begins incalendar year 2001. Lessees of such auto-mobiles must use these tables to deter-mine the inclusion amount for each taxyear during which the automobile isleased.

03. Rev. Proc. 96–25, 1996–1 C.B.681, for information on determininginclusion amounts for automobiles firstleased before January 1, 1997; Rev. Proc.97–20, 1997–1 C.B. 647, for automobilesfirst leased during calendar year 1997,including electric automobiles first leased

on or after January 1, 1997, and beforeAugust 6, 1997; Rev. Proc. 98–24,1998–1 C.B. 663, for electric automobilesfirst leased after August 5, 1997, andbefore January 1, 1998; Rev. Proc. 98–30,1998–1 C.B. 930, for all automobiles firstleased in calendar year 1998; Rev. Proc.99–14, 1999–1 C.B. 413, for all automo-biles first leased in calendar year 1999;and Rev. Proc. 2000–18, 2000–9 I.R.B.722, for all automobiles first leased in cal-endar year 2000.

04. The maximum fair market valuefigure in section 4.04(2) of this revenueprocedure applies to employer-providedautomobiles first made available to anyemployee for personal use in calendaryear 2001. See Rev. Proc. 97–20, for themaximum fair market value figure forautomobiles first made available in calen-dar year 1997; Rev. Proc. 98–30, for themaximum fair market value figure forautomobiles first made available in calen-dar year 1998; Rev. Proc. 99–14, for themaximum fair market value figure forautomobiles first made available in calen-dar year 1999; and Rev. Proc. 2000–18,for the maximum fair market value figurefor automobiles first made available incalendar year 2000.

SECTION 4. APPLICATION

01. A taxpayer placing an automobile inservice for the first time during calendaryear 2001 is limited to the depreciationdeduction shown in Table 1 of section4.02(2) of this revenue procedure or, in thecase of an electric automobile, Table 2 ofthis revenue procedure. A taxpayer firstleasing an automobile in calendar year2001 must determine the inclusion amountthat is added to gross income using Table 3of section 4.03 of this revenue procedure or,in the case of an electric automobile, Table4 of this revenue procedure. In addition, theprocedures of § 1.280F–7(a) must be fol-lowed. An employer providing an automo-bile for the first time in calendar year 2001for the personal use of any employee maydetermine the value of the use of the auto-mobile by using the cents-per-mile valua-tion rule in § 1.61–21(e) if the fair marketvalue of the automobile does not exceed theamount specified in section 4.04(2) of thisrevenue procedure. If the fair market valueof the automobile exceeds the amount spec-ified in section 4.04(2) of this revenue pro-cedure, the employer may determine the

value of the use of the automobile under thegeneral valuation rules of § 1.61–21(b) orunder the special valuation rules of § 1.61–21(d) (Automobile lease valuation)or § 1.61–21(f) (Commuting valuation) ifthe applicable requirements are met.

02. Limitations on DepreciationDeductions for Certain Automobiles.

(1) Amount of the Inflation Adjust-ment. Under § 280F(d)(7)(B)(i), the auto-mobile price inflation adjustment for anycalendar year is the percentage (if any) bywhich the CPI automobile component forOctober of the preceding calendar yearexceeds the CPI automobile componentfor October 1987. The term “CPI auto-mobile component” is defined in §280F(d)(7)(B)(ii) as the “automobilecomponent” of the Consumer Price Indexfor all Urban Consumers published by theDepartment of Labor (the CPI). The newcar component of the CPI was 115.2 forOctober 1987 and 138.6 for October2000. The October 2000 index exceededthe October 1987 index by 23.4. TheInternal Revenue Service has, therefore,determined that the automobile priceinflation adjustment for 2001 is 20.31 per-cent (23.4/115.2 x 100%). This adjust-ment is applicable to all automobiles thatare first placed in service in calendar year2001. The dollar limitations in § 280F(a)must therefore be multiplied by a factor of0.2031, and the resulting increases, afterrounding to the nearest $100, are added tothe 1988 limitations to give the deprecia-tion limitations applicable to passengerautomobiles (other than electric automo-biles) for calendar year 2001. To deter-mine the dollar limitations applicable toan electric automobile first placed in ser-vice during calendar year 2001, the dollarlimitations in § 280F(a) are tripled inaccordance with § 280F(a)(1)(C) and arethen multiplied by a factor of 0.2031; theresulting increases, after rounding to thenearest $100, are added to the tripled 1988limitations to give the depreciation limita-tions for calendar year 2001.

(2) Amount of the Limitation. Forautomobiles (other than electric automo-biles) placed in service in calendar year2001, Table 1 of this revenue procedurecontains the dollar amount of the depreci-ation limitations for each tax year. Forelectric automobiles placed in service incalendar year 2001, Table 2 of this rev-enue procedure contains these amounts.

February 26, 2001 734 2001–9 I.R.B.

03. Inclusions in Income of Lessees ofAutomobiles.

The inclusion amounts for automobilesfirst leased in calendar year 2001 are cal-

culated under the procedures described in§ 1.280F–7(a). Lessees of automobilesother than electric automobiles should useTable 3 of this revenue procedure in

applying these procedures, while lesseesof electric automobiles should use Table 4of this revenue procedure.

REV. PROC. 2001–19 TABLE 1

DEPRECIATION LIMITATIONS FOR AUTOMOBILES(OTHER THAN ELECTRIC AUTOMOBILES)

FIRST PLACED IN SERVICE IN CALENDAR YEAR 2001

Tax Year Amount

1st Tax Year $3,0602nd Tax Year $4,9003rd Tax Year $2,950Each Succeeding Year $1,775

REV. PROC. 2001–19 TABLE 2

DEPRECIATION LIMITATIONS FOR ELECTRIC AUTOMOBILESFIRST PLACED IN SERVICE IN CALENDAR YEAR 2001

Tax Year Amount

1st Tax Year $9,2802nd Tax Year $14,8003rd Tax Year $8,850Each Succeeding Year $5,325

REV. PROC. 2001–19 TABLE 3

DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2001

Fair Market Value Tax Year During Leaseof Automobile

Over Not Over 1st 2nd 3rd 4th 5th and Later

15,500 15,800 3 6 9 10 1115,800 16,100 5 12 16 20 2216,100 16,400 8 17 24 30 3316,400 16,700 10 22 33 39 4416,700 17,000 13 27 41 48 5617,000 17,500 16 35 51 61 7017,500 18,000 20 44 64 77 8918,000 18,500 24 53 78 92 10718,500 19,000 28 62 91 109 12519,000 19,500 32 71 104 125 14319,500 20,000 36 80 117 141 16220,000 20,500 40 89 131 156 18120,500 21,000 45 97 144 173 19921,000 21,500 49 106 158 188 21721,500 22,000 53 115 171 204 23622,000 23,000 59 129 190 229 26323,000 24,000 67 147 217 260 30024,000 25,000 75 165 243 292 33725,000 26,000 83 183 270 324 373

2001–9 I.R.B. 735 February 26, 2001

REV. PROC. 2001–19 TABLE 3—Continued

DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2001

Fair Market Value Tax Year During Leaseof Automobile

Over Not Over 1st 2nd 3rd 4th 5th and Later

26,000 27,000 91 201 296 356 41027,000 28,000 100 218 324 387 44728,000 29,000 108 236 350 419 48429,000 30,000 116 254 377 451 52030,000 31,000 124 272 403 483 55731,000 32,000 132 290 430 515 59432,000 33,000 140 308 456 547 63133,000 34,000 149 326 482 579 66734,000 35,000 157 343 510 610 70535,000 36,000 165 361 536 643 74136,000 37,000 173 379 563 674 77837,000 38,000 181 397 590 705 81538,000 39,000 189 415 616 738 85139,000 40,000 198 433 642 770 88840,000 41,000 206 451 669 801 92541,000 42,000 214 469 695 833 96242,000 43,000 222 487 722 865 99843,000 44,000 230 505 748 897 1,03644,000 45,000 238 523 775 929 1,07245,000 46,000 247 540 802 961 1,10846,000 47,000 255 558 828 993 1,14547,000 48,000 263 576 855 1,024 1,18348,000 49,000 271 594 881 1,057 1,21949,000 50,000 279 612 908 1,088 1,25650,000 51,000 287 630 935 1,119 1,29351,000 52,000 296 648 961 1,151 1,33052,000 53,000 304 666 987 1,184 1,36653,000 54,000 312 684 1,014 1,215 1,40354,000 55,000 320 702 1,040 1,248 1,43955,000 56,000 328 720 1,067 1,279 1,47656,000 57,000 336 738 1,093 1,311 1,51457,000 58,000 345 755 1,120 1,343 1,55058,000 59,000 353 773 1,147 1,375 1,58659,000 60,000 361 791 1,173 1,407 1,62460,000 62,000 373 818 1,213 1,455 1,67862,000 64,000 390 854 1,266 1,518 1,75264,000 66,000 406 890 1,319 1,582 1,82566,000 68,000 422 926 1,372 1,645 1,90068,000 70,000 439 961 1,426 1,709 1,97270,000 72,000 455 997 1,479 1,772 2,04772,000 74,000 471 1,033 1,532 1,836 2,12074,000 76,000 488 1,068 1,585 1,901 2,19376,000 78,000 504 1,104 1,638 1,964 2,26778,000 80,000 520 1,140 1,692 2,027 2,34180,000 85,000 549 1,203 1,784 2,139 2,46985,000 90,000 590 1,292 1,917 2,298 2,65390,000 95,000 631 1,382 2,049 2,458 2,83795,000 100,000 671 1,472 2,182 2,617 3,020

100,000 110,000 733 1,605 2,382 2,856 3,296

110,000 120,000 814 1785 2,647 3,174 3,664120,000 130,000 896 1,964 2,913 3,492 4,032130,000 140,000 978 2,142 3,179 3,811 4,399140,000 150,000 1,059 2,322 3,444 4,129 4,767150,000 160,000 1,141 2,501 3,709 4,448 5,135160,000 170,000 1,223 2,680 3,975 4,766 5,502170,000 180,000 1,304 2,859 4,241 5,084 5,871180,000 190,000 1,386 3,038 4,506 5,403 6,238190,000 200,000 1,468 3,217 4,772 5,721 6,606200,000 210,000 1,549 3,396 5,038 6,040 6,973210,000 220,000 1,631 3,575 5,303 6,358 7,341220,000 230,000 1,713 3,754 5,568 6,677 7,709230,000 240,000 1,794 3,933 5,834 6,996 8,076240,000 250,000 1,876 4,112 6,100 7,314 8,443

February 26, 2001 736 2001–9 I.R.B.

REV. PROC. 2001–19 TABLE 3—Continued

DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2001

Fair Market Value Tax Year During Leaseof Automobile

Over Not Over 1st 2nd 3rd 4th 5th and Later

REV. PROC. 2001–19 TABLE 4

DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILESWITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2001

Fair Market Value Tax Year During Leaseof Automobile

Over Not Over 1st 2nd 3rd 4th 5th and Later

$ 47,000 48,000 9 21 33 40 4648,000 49,000 17 39 60 71 8349,000 50,000 25 57 86 104 11950,000 51,000 33 75 113 135 15751,000 52,000 42 93 139 167 19352,000 53,000 50 111 165 199 23053,000 54,000 58 129 192 231 26654,000 55,000 66 147 218 263 30455,000 56,000 74 165 245 295 34056,000 57,000 82 183 272 326 37757,000 58,000 91 200 299 358 41458,000 59,000 99 218 325 390 45159,000 60,000 107 236 352 422 48760,000 62,000 119 263 391 470 54362,000 64,000 136 298 445 533 61664,000 66,000 152 334 498 597 69066,000 68,000 168 370 551 661 76368,000 70,000 185 406 604 724 83770,000 72,000 201 442 657 788 91072,000 74,000 217 478 710 852 98474,000 76,000 234 513 764 915 105776,000 78,000 250 549 817 979 113178,000 80,000 266 585 870 1,043 1,204

2001–9 I.R.B. 737 February 26, 2001

04. Maximum Automobile Value forUsing the Cents-per-mile Valuation Rule.

(1) Amount of Adjustment. Under § 1.61–21(e)(1)(iii)(A), the limitation onthe fair market value of an employer-pro-vided automobile first made available toany employee for personal use after 1988 isto be adjusted in accordance with § 280F(d)(7). Accordingly, the adjustmentfor any calendar year is the percentage (ifany) by which the CPI automobile compo-nent for October of the preceding calendaryear exceeds the CPI automobile compo-nent for October 1987. See, section 4.02(1)of this revenue procedure. The new carcomponent of the CPI was 115.2 forOctober 1987 and 138.6 for October 2000.The October 2000 index exceeded theOctober 1987 index by 23.4. The InternalRevenue Service has, therefore, determinedthat the adjustment for 2001 is 20.31 per-cent (23.4/115.2 x 100%). This adjustmentis applicable to all employer-provided auto-

mobiles first made available to any employ-ee for personal use in calendar year 2001.The maximum fair market value specifiedin § 1.61–21(e)(1)(iii)(A) must therefore bemultiplied by a factor of 0.2031, and theresulting increase, after rounding to thenearest $100, is added to $12,800 to givethe maximum value for calendar year 2001.

(2) The Maximum Automobile Value.For automobiles first made available incalendar year 2001 to any employee of theemployer for personal use, the vehiclecents-per-mile valuation rule may beapplicable if the fair market value of theautomobile on the date it is first madeavailable does not exceed $15,400.

SECTION 5. EFFECTIVE DATE

This revenue procedure applies to auto-mobiles (other than leased automobiles)that are first placed in service during cal-endar year 2001, to leased automobiles

that are first leased during calendar year2001, and to employer-provided automo-biles first made available to employees forpersonal use in calendar year 2001.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Bernard P. Harvey of theOffice of the Associate Chief Counsel(Passthroughs and Special Industries).For further information regarding thedepreciation limitations and lessee inclu-sion amounts in this revenue procedure,contact Mr. Harvey at (202) 622-3110; forfurther information regarding the maxi-mum automobile value for applying thevehicle cents-per-mile valuation rule, con-tact Ms. Lynne Camillo of the Office ofthe Associate Chief Counsel (Tax Exemptand Government Entities) at (202) 622-6040 (not toll-free calls).

REV. PROC. 2001–19 TABLE 4—Continued

DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILESWITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2001

Fair Market Value Tax Year During Leaseof Automobile

Over Not Over 1st 2nd 3rd 4th 5th and Later

80,000 85,000 295 648 962 1,155 1,33285,000 90,000 336 737 1,095 1,314 1,51790,000 95,000 377 826 1,229 1,472 1,70195,000 100,000 417 916 1,361 1,632 1,885

100,000 110,000 479 1,050 1,560 1,871 2,161110,000 120,000 560 1,230 1,825 2,190 2,528120,000 130,000 642 1,408 2,092 2,508 2,895130,000 140,000 724 1,587 2,357 2,826 3,264140,000 150,000 805 1,767 2,622 3,145 3,631150,000 160,000 887 1,946 2,888 3,463 3,998160,000 170,000 969 2,124 3,154 3,782 4,366170,000 180,000 1,050 2,304 3,419 4,100 4,374180,000 190,000 1,132 2,483 3,684 4,419 5,102190,000 200,000 1,214 2,661 3,951 4,737 5,469200,000 210,000 1,295 2,841 4,216 5,055 5,837210,000 220,000 1,377 3,020 4,481 5,374 6,205220,000 230,000 1,459 3,199 4,747 5,692 6,572230,000 240,000 1,540 3,378 5,013 6,010 6,940240,000 250,000 1,622 3,557 5,278 6,329 7,308

February 26, 2001 738 2001–9 I.R.B.

Voluntary Compliance on Alien Withholding Program

Rev. Proc. 2001–20

Offer to resolve issues arising from certain tax, withholding, and reporting obligations of public and other not-for-profit collegesand universities with respect to payments to alien individuals.

TABLE OF CONTENTS

SECTION 1. GENERAL

.01 Background.

.02 Applicable law.

.03 Definitions.

.04 Summary of VCAP.

.05 No waiver of excise tax, FICA, or other tax obligations.

.06 Request for comments.

SEC. 2. ELIGIBLE ORGANIZATIONS

.01 Eligible Organizations.

.02 Organizations currently under examination.

SEC. 3. TAX AND WITHHOLDING OBLIGATIONS SUBJECT TO VCAP

SEC. 4. SUBMISSION PROCEDURES

.01 In general.

.02 Required information.

.03 Required documents.

.04 Signatures.

.05 Power of Attorney requirements.

.06 Penalty of perjury statement.

.07 Marked letter.

.08 Mailing address.

SEC. 5. PROCESSING OF VCAP REQUESTS

.01 Inadequate or incomplete submission or request for additional information.

.02 Determining tax liability.

.03 Review of Eligible Organization’s compliance procedures.

.04 Other tax liabilities or issues.

.05 Verification.

.06 Acknowledgment letter.

.07 Failure to reach resolution.

.08 Applicability of §§ 6103 and 6110.

.09 Conferences.

SEC. 6. EFFECTIVE DATE AND SUNSET DATE

SEC. 7. PAPERWORK REDUCTION ACT

SEC. 8. DRAFTING INFORMATION

SECTION 1. GENERAL

.01 Background. This revenue proce-dure describes the Voluntary Complianceon Alien Withholding Program(“VCAP”), which is available to certainpublic and other not-for-profit colleges

and universities, and their charitable affil-iates, with respect to the payment, with-holding, and reporting of certain taxes dueon payments made to alien individuals.

The Internal Revenue Service(“Service”) will begin VCAP as a tempo-rary and experimental program. See sec-

tion 6 of this revenue procedure for theeffective date and sunset date of VCAP.See section 2 of this revenue procedurefor the organizations that are eligible toparticipate in VCAP (eligible organiza-tions). See section 3 of this revenue pro-cedure for the taxes, including excise

taxes, and the withholding and reportingobligations covered by VCAP.

.02 Applicable law. The objective ofVCAP is to enhance voluntary compli-ance among public and other not-for-prof-it colleges and universities, and their affil-iated charitable organizations, makingpayments of wages, grants, scholarships,and other income to alien individuals.Generally, income received by a nonresi-dent alien individual from sources withinthe United States is subject to tax under § 871(a) of the Internal Revenue Code(“Code”) unless an exception applies.The tax is imposed, generally on the grossamount of income, at a 30-percent rate ifthe income is not effectively connectedwith the conduct of a trade or business inthe United States or at a 14-percent rate inthe case of income from certain scholar-ships, fellowships and grants. Section1441 of the Code requires any person whopays income subject to tax under § 871(a)of the Code to a nonresident alien individ-ual to deduct and withhold the 30% (or14%) tax from the gross amount paid.The rate of tax, and therefore withholding,may be reduced or eliminated under anincome tax treaty. A withholding agentmay rely on a claim of treaty benefit if thenonresident alien individual has furnishedappropriate documentation. See § 1.1441–6 of the Income Tax Regulations. Seealso IRS Publication 515, Withholding ofTax on Nonresident Aliens and ForeignCorporations, and IRS Publication 901,U.S. Tax Treaties.

Section 871(b) of the Code imposes agraduated rate of tax on a nonresidentalien individual’s income that is effective-ly connected with the individual’s conductof a trade or business in the United States.This provision is relevant to incomeearned for personal services because,under § 864(b) of the Code, the perfor-mance of personal services in the UnitedStates is considered to be the conduct of atrade or business within the United States.Further, under § 871(c) of the Code, anonresident alien individual with a speci-fied nonimmigrant status who is a partici-pant in certain exchange or training pro-grams is treated as being engaged in atrade or business within the United States(regardless of whether he is actually soengaged) with regard to income derived inconnection with that exchange or trainingprogram. A nonresident alien individual’s

effectively connected services incomemay also be subject to withholding under§ 1441 of the Code (or § 3402 of the Codefor most income constituting wages).With respect to reporting obligations, anonresident alien individual’s effectivelyconnected personal services income con-stituting wages under § 3402 of the Codeis subject to wage reporting under chapter61 of the Code (i.e., on Form 941 andForm W-2), and such individual’s non-wage income is subject to reporting under § 1.1461–1(c)(2) of the Income TaxRegulations (i.e., on Form 1042 and Form1042–S). Additionally, taxes may beimposed on wages paid to alien individu-als under §§ 3101 and 3111 of the Code(social security and Medicare taxes).

.03 Definitions. For purposes of thisrevenue procedure, the following defini-tions apply:

(1) The term “alien individual” means anindividual who is not a citizen or a nationalof the United States. See § 1.1–1(c) of theIncome Tax Regulations.

(2) The term “resident alien” means analien individual described in § 7701(b)(1)(A)of the Code.

(3) The term “nonresident alien”means an alien individual described in § 7701(b)(1)(B) of the Code.

.04 Summary of VCAP. Organizationsthat request consideration under VCAPagree to (1) identify those areas in whichthey are not in compliance with tax, with-holding, and reporting obligations on pay-ments to alien individuals; (2) computeand pay any tax due; and (3) institute pro-cedures and policies which will assurecompliance in the future with the organi-zation’s tax, withholding, and reportingobligations. Organizations will receiveassurance that their proposed proceduresand policies relating to tax, withholding,and reporting obligations applicable toalien individuals are acceptable to theService, and the Service generally will notimpose penalties for identified underpay-ments or deficiencies, if the liability is dueto reasonable cause. See sections 5.02(3)and 5.06 of this revenue procedure.

.05 No waiver of excise tax, FICA, orother tax obligations. VCAP does notwaive or reduce any applicable tax anddoes not alter an employer’s obligationsto satisfy any applicable FederalInsurance Contributions Act (FICA) orFederal income tax withholding require-

ments with regard to any employee.(However, see §§ 3121(b)(10) and3121(b)(19) of the Code for certain tax-exempt wages.) In addition, VCAP doesnot affect any other obligations of the tax-payer or the Service that are not within thescope of this revenue procedure or theacknowledgment described in section5.06 of this revenue procedure.

.06 Request for comments. Becauseof the experimental nature of VCAP,the Service welcomes comments on theformat and operation of this program,including suggestions regardingwhether the program should be expand-ed to cover other organizations, such asproprietary colleges and universitiesand other educational organizations,not listed in section 2 of this revenueprocedure, or other types of defects notlisted in section 3 of this revenue pro-cedure. The Service also welcomessuggestions regarding possible stan-dardized correction methods for speci-fied defects that could be appropriatelyaddressed under VCAP. Any modifica-tions will be made only by announce-ments, revenue procedures, notices orother guidance published in the InternalRevenue Bulletin. Comments onVCAP should be mailed to:

Internal Revenue ServiceAttention: T:EO:RA:T:G (VCAP)1111 Constitution Avenue, N.W.Washington, D.C. 20224

Comments may also be sent electroni-cally via the Internet to *TE/GE-EO-3@irs.gov.

SEC. 2. ELIGIBLE ORGANIZATIONS

.01 Eligible Organizations. Except asprovided in section 2.02, an organizationis eligible for VCAP (an “eligible organi-zation”) if it is:

(1) A college or university described in§ 170(b)(1)(A)(ii) of the Code that is:

(a) Exempt from tax under § 501(a) ofthe Code as an organization described in § 501(c)(3); or

(b) An agency or instrumentality of anygovernment or any political subdivisionthereof, or that is owned or operated by agovernment or any political subdivisionthereof, or by an agency or instrumentali-ty of one or more governments or politicalsubdivisions (a “State college or universi-ty”); or

2001–9 I.R.B. 739 February 26, 2001

(2) An organization described in § 501(c)(3) of the Code and exempt fromincome tax under § 501(a) that is affiliat-ed with such a college or university.

An eligible organization may apply forVCAP with respect to any payments madeto alien individuals.

.02 Organizations currently underexamination. An organization is not eli-gible for VCAP if the organization isunder examination on the date of the pub-lication of this revenue procedure, orcomes under examination prior to submit-ting the information required by section 4of this revenue procedure. For this pur-pose, an examination is treated as com-mencing on the date the organizationreceived notification from the Service ofan impending examination or of animpending referral for examination. Thisprogram is also not available to any orga-nization that has a case pending inAppeals or in litigation on issues involv-ing taxes or withholding obligationsdescribed in section 3 of this revenue pro-cedure.

SEC. 3. TAX, WITHHOLDING, ANDREPORTING OBLIGATIONSSUBJECT TO VCAP

The defects for which an eligible orga-nization may make a submission underVCAP are:

(1) Failure to pay the correct amount ofsocial security and Medicare excise taxesimposed on employers with respect towages paid to alien individuals (§ 3111(a)and § 3111(b) of the Code);

(2) Failure to withhold or pay the cor-rect amount of social security andMedicare taxes imposed on employeeswith respect to wages paid to alien indi-viduals (§ 3101(a) and § 3101(b) of theCode);

(3) Failure to withhold or pay the cor-rect amount of income taxes on wagespaid to alien individuals (§ 3402 of theCode);

(4) Failure to withhold or pay the cor-rect amount of income taxes on scholar-ships, fellowships and grants paid to non-resident alien individuals (§§ 1441—1464of the Code);

(5) Failure to withhold or pay the cor-rect amount of taxes on compensation forindependent personal services paid tononresident alien individuals (§§ 1441—1464 of the Code);

(6) Failure to withhold or pay the cor-rect amount of taxes on royalties or othertypes of taxable income paid to nonresi-dent alien individuals (§§ 1441–1464 ofthe Code); and

(7) Failure to report the correct amountof any or all of the taxes listed above (§§ 1441–1464 and 6011 of the Code).

SEC. 4. SUBMISSION PROCEDURES

.01 In general. In general, an eligibleorganization submits a request underVCAP through a letter to the TaxExempt/Government Entities (TE/GE)office at the address in section 4.08 of thisrevenue procedure. The submission mustcontain the information and documenta-tion described in sections 4.02 and 4.03 ofthis revenue procedure. The Service willnot accept anonymous submissions underVCAP.

.02 Required information. The requestfor consideration under VCAP must con-tain the following information:

(1) The name, address, and taxpayeridentification number of the eligible orga-nization.

(2) A description of the current admin-istrative procedures that the eligible orga-nization uses to determine tax, withhold-ing, and reporting obligations regardingpayments to alien individuals.

(3) A description of the defects in theeligible organization’s tax, withholding,and reporting procedures for payments toalien individuals, how and why thedefects occurred, and the years affectedby such defects.

(4) The number of alien individualsaffected and how the number was deter-mined.

(5) The number of any affiliated chari-table organizations affected by thedefects, their names, addresses, and tax-payer identification numbers.

(6) A calculation of the total amount oftaxes the eligible organization failed towithhold, pay and/or report, not includinginterest and penalties, for tax periods openfor assessment or collection under theprovisions of § 6501 of the Code. Thiscalculation should take into account prop-erly substantiated adjustments under §§ 1463 and 3402(d) of the Code. Theeligible organization must agree to payand remit all of its additional tax due andowing plus interest at the completion ofthe Service’s review or examination. See

section 5 of this revenue procedure.(However, regarding the non-assertion ofinterest, see section 5.02(2) of this rev-enue procedure.) In certain cases involv-ing large liabilities or underpayments, theService will consider the organization’sproposal for payment of the liability orunderpayment in more than one install-ment, or will consider the organization’sposting of a cash bond under the proce-dures outlined in Rev. Proc. 84–58,1984–2 C.B. 501. See section 5.02(4) ofthis revenue procedure.

(7) A detailed description of the meth-ods for correcting the defects that theorganization has implemented or proposesto implement. Those methods mustensure that the correct amount of taxesand withholding of taxes on payments toalien individuals will be withheld, paidover, and reported to the Service on theproper forms and in a timely manner.

(8) A statement signed by the eligibleorganization’s officer or authorized repre-sentative acknowledging and agreeing thatthe eligible organization’s participation inVCAP will not constitute an employmenttax audit of the eligible organization andwill not provide a reasonable basis for nottreating an individual as an employeeunder § 530 of the Revenue Act of 1978.

.03 Required documents. The submis-sion must be accompanied by the follow-ing documentation:

(1) In the case of a college or universi-ty, a copy of the organization’s determina-tion letter indicating that it is an organiza-tion described in §§ 170(b)(1)(A)(ii) and501(c)(3) of the Code, or sufficient docu-mentation indicating that the organizationis a State college or university. In the caseof an affiliated charitable organization,the organization must provide both a copyof its determination letter indicating that itis an organization described in § 501(c)(3)of the Code and sufficient documentationindicating its relationship to a college oruniversity that is itself an eligible organi-zation.

(2) Copies of workpapers or schedulesthat clearly explain the eligible organiza-tion’s calculation of its correct tax liabili-ty regarding payments to alien individuals(see section 4.02(6) of this revenue proce-dure). The workpapers or schedulesshould also show to which specific taxreturns and tax periods the liabilityrelates.

February 26, 2001 740 2001–9 I.R.B.

(3) Copies of the original Forms 941,945, 1042, if any, as filed that relate to theabove calculations.

(4) Copies of Forms 8233, 1001, W-8BEN, W-9, or sufficient informationto support tax treaty claims.

(5) In cases involving the failure to paythe correct amount of social security andMedicare excise taxes imposed onemployers with to respect wages paid toalien individuals (§ 3111(a) and § 3111(b)of the Code), and the failure to withholdor pay the correct amount of social securi-ty and Medicare taxes imposed onemployees with respect to wages paid toalien individuals (§ 3101(a) and § 3101(b)of the Code), a description of how FormsW-2C will be prepared and provided toaffected employees and the SocialSecurity Administration.

.04 Signatures. The submission mustbe signed by an officer of the eligibleorganization who is authorized to sign orthe eligible organization’s authorized rep-resentative.

.05 Power of Attorney requirements.To sign the submission or to appear beforethe Service in connection with the sub-mission, a representative must complywith the requirements of section 9 of Rev.Proc. 2001–4, 2000–1 I.R.B. 135.

.06 Penalty of perjury statement. Thefollowing declaration must accompany aVCAP submission and any factual infor-mation submitted after the original sub-mission or any change in the submissionat a later time: “Under penalties of per-jury, I declare that I have examined thissubmission, including accompanyingdocuments, and to the best of myknowledge and belief, the facts present-ed in support of the VCAP request aretrue, correct, and complete.” The decla-ration must be signed by the eligible orga-nization’s officer, not the organization’srepresentative.

.07 Marked letter and marked enve-lope. The letter which transmits the sub-mission to the Service must be marked“VCAP” in the upper right-hand corner ofthe letter, and the envelope containing thesubmission must be marked “VCAP” inthe lower left-hand corner of the enve-lope.

.08 Mailing address. The submissionmust be mailed to the address shownbelow. The Service may issue anannouncement later which contains other

addresses for the mailing of VCAP sub-missions.

Internal Revenue ServiceRoger GreeningManager EPP1100 Commerce StreetMC: 4910DALDallas, TX 75242

SEC. 5. PROCESSING OF VCAPREQUESTS

.01 Inadequate or incomplete submis-sion or request for additional information.If the submission fails to comply with theprovisions of this revenue procedure orthe Service requires additional informa-tion, the Service representative assignedto the case will contact the eligible orga-nization or its representative and explainwhat is needed to complete the submis-sion. The organization will have 90 busi-ness days from the date of this contact toprovide the requested information. Anyrequest for an extension of the 90-daytime period must be made prior to expira-tion of the period, and must be approvedby the TE/GE Area Manager of the appro-priate TE/GE Area Office, or his or herdesignated representative. If the request-ed information is not received within 90business days, or an agreement cannot bereached on correction or administrativeprocedures, the matter will be closed, andthe Service may consider the case forexamination.

.02 Determining tax liability. Once theService accepts the submission underVCAP, the Service will analyze the eligi-ble organization’s calculation of its taxliability regarding payments to alien indi-viduals, and will analyze the accompany-ing workpapers, schedules, and returnswhich support such calculation. TheService will generally apply the followingapproach to determine the tax liability ofan eligible organization:

(1) The Service will normally allow taxtreaty benefits in the computation of anyadjustments to taxes and withholding oftaxes on payments to nonresident alienindividuals, even in the absence of Forms8233, 1001, W-9, or W-8BEN if the eligi-ble organization has acted in good faithand provides sufficient information tosupport the treaty claims.

(2) Interest on the eligible organiza-tion’s underpayments will be due from the

last date prescribed for payment of thetaxes (determined without regard toVCAP or any extension of time for pay-ment) to the date on which payment isreceived; provided, however, that interest-free adjustments of underpayments of cer-tain employment taxes may be made inaccordance with § 6205(a)(1) of the Code,Proposed Treas. Reg. § 31.6205–1(b) and(c), and Rev. Rul. 75–464, 1975–2 C.B.474.

(3) The Service will not assert anypenalties on the eligible organization’sliability, if the organization’s failure towithhold, pay, and report taxes asdescribed in section 1 of this revenue pro-cedure, is due to reasonable cause.

(4) In certain cases involving large lia-bilities, the Service will consider the eligi-ble organization’s proposal for paymentof the liability in more than one install-ment. See Internal Revenue Manual(IRM) Handbook 4.3.2, ExaminationCollectibility Handbook, Chapter 4,Installment Agreements (05–25–2000).Applicants may also wish to avail them-selves of the procedures for making adeposit in the nature of a cash bond ascontained in Rev. Proc. 84–58, 1984–2C.B. 501.

.03 Review of Eligible Organization’scompliance procedures. The eligibleorganization must demonstrate to the sat-isfaction of the Service that it has imple-mented (or it has plans for implementing)policies and procedures that ensure thatthe correct amount of taxes and withhold-ing of taxes on payments to alien individ-uals are reported and paid over to theService on the proper forms and in a time-ly manner. The Service will review theeligible organization’s policies and proce-dures to assure itself that the policies andprocedures are reasonably likely to bringthe organization into compliance on aprospective basis. The Service reservesthe right to prescribe appropriate adminis-trative procedures, but will first discussthe appropriateness of existing procedureswith the organization. Where the currentprocedures, or proposed future proce-dures, are inadequate for complying withthe relevant tax, withholding, and report-ing requirements, the Service alsoreserves the right to deny relief underVCAP.

.04 Other tax liabilities or issues. Ifthe Service discovers an unrelated tax lia-

2001–9 I.R.B. 741 February 26, 2001

bility or exemption issue while consider-ing the request, that issue will remain out-side the scope of the VCAP submissionbecause it was not voluntarily broughtforward by the organization.

.05 Verification. As part of the pro-cessing of the VCAP submission, theService reserves the right to verify thatcorrections have been made to the eligibleorganization’s tax, withholding, andreporting procedures on payments to alienindividuals. Verification of such correc-tions does not constitute an examinationof the books and records of the organiza-tion. If the Service determines that theeligible organization has not implementedor does not plan to implement the propercorrections and procedures, the case maybe considered for examination. TheService does not contemplate openingexaminations on VCAP submissions butreserves the right to do so. If the Servicedecides to examine the eligible organiza-tion, the examination will be commencedand completed as soon as possible, withthe intention in most cases that the scopeof the examination will be limited to taxand withholding obligations on paymentsto alien individuals and related issues.

.06 Acknowledgment letter. If theService is satisfied at the conclusion of itsreview that the organization has institutedpolicies and procedures which ensure thatthe correct amounts of taxes on paymentsto alien individuals are withheld, paid,and reported to the Service on the properforms and in a timely manner, then theService will issue to the eligible organiza-tion an acknowledgment letter indicatingthat based upon its review, the eligibleorganization is at that time in substantialcompliance with the tax, withholding, andreporting obligations governing paymentsto alien individuals. Once the organiza-tion has received an acknowledgment let-ter at the completion of the VCAPprocess, and provided that the organiza-tion in fact complies with the agreed uponwithholding, payment and reporting pro-cedures, the information submitted by theorganization to the Service under VCAPwill not be used as the basis to initiate anexamination of the organization.

.07 Failure to reach resolution. If res-olution cannot be reached because suffi-cient information is not timely provided tothe Service or because agreement cannotbe reached on correction or administrative

procedures, the Service may consider thecase for examination.

.08 Applicability of §§ 6103 and 6110.The information received or generated bythe Service under VCAP is subject to theconfidentiality requirements of § 6103 ofthe Code. The acknowledgment letter isnot a written determination letter withinthe meaning of § 6110 of the Code.

.09 Conferences. If the Service initial-ly determines that it cannot issue anacknowledgment letter because the partiescannot agree upon some correction oradministrative issue, the organization orthe organization’s representative may begranted a conference with the Service, atthe Service’s discretion and upon requestby the organization or the organization’srepresentative. The conference can beheld either in person or by telephone. If aconference is offered, the organization orits representative will be contacted by theService representative.

SEC. 6. EFFECTIVE DATE ANDSUNSET DATE

VCAP is effective on February 26,2001. It will be available for submissionsmade on or before February 28, 2002.

SEC. 7. PAPERWORK REDUCTIONACT

The collections of information containedin this revenue procedure have beenreviewed and approved by the Office ofManagement and Budget in accordance withthe Paperwork Reduction Act (44 U.S.C. §3507) under control number 1545–1735.

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 validcontrol number.

The collections of information con-tained in this revenue procedure are insection 4.02 and section 4.03(2). Thisinformation will enable the Service todetermine whether an organization quali-fies for VCAP. The likely respondents arepublic and other not-for-profit collegesand universities and certain other charita-ble organizations.

The estimated total annual reportingburden is 346,500 hours.

The estimated average annual burdenper respondent is 700 hours. The estimat-ed number of respondents is 495.

The estimated annual frequency ofresponses is on occasion.

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.

SEC. 8. DRAFTING INFORMATION

The principal authors of this revenueprocedure are Lowell G. Hancock of theOffice of Pre-Filing Services, andVirginia Richardson of the TaxExempt/Government Entities Division.For more information concerning VCAP,contact Mr. Hancock at (202) 874-1800 or(330) 375-5421 (not toll-free numbers),Ms. Richardson at (202) 283-8938 (not atoll-free number), or Neil Shepherd of theOffice of the Associate Chief Counsel(Tax Exempt and Government Entities) at(202) 622-6040 (not a toll-free number).

26 CFR 601.601: Rules and regulations.(Also Part I, §§ 1001; 1.1001–3, 1.1275–2.)

Rev. Proc. 2001–21

SECTION 1. PURPOSE

This revenue procedure provides anelection that will facilitate the substitu-tion of newly issued debt instrumentsfor outstanding debt instruments.Under the election, taxpayers can treata substitution of debt instruments, incertain circumstances, as a realizationevent for federal income tax purposeseven though it does not result in a sig-nificant modification under § 1.1001–3of the Income Tax Regulations (and,therefore, is not otherwise an exchangefor purposes of § 1.1001–1(a)). Undersection 4 of this revenue procedure,taxpayers do not recognize any realizedgain or loss on the date of the substitu-tion. Instead, the gain or loss generallyis taken into account as income ordeductions over the term of the newdebt instruments.

This revenue procedure modifies andsupersedes Rev. Proc. 99–18, 1999–1C.B. 736, which, as modified by Rev.Proc. 2000–29, 2000–28 I.R.B. 113,applies to substitutions that occur on or

February 26, 2001 742 2001–9 I.R.B.

after March 1, 1999. The significantchanges to Rev. Proc. 99–18 are as fol-lows:

.01 The newly issued debt may be debtissued in a qualified reopening;

.02 The outstanding debt may havebeen issued with premium; and

.03 The determination of whether asubstitution does or does not result in asignificant modification may be made onthe substitution date or, in most cases, onthe date that is two business days beforethe date on which the substitution offercommences.

SECTION 2. BACKGROUND

.01 Under § 1.1001–1(a), if gain or lossis realized from the exchange of propertyfor other property differing materiallyeither in kind or in extent, it is treated asincome or as loss sustained.

.02 Section 1.1001–3 provides rules todetermine whether a modification of theterms of a debt instrument results in anexchange of the original debt instrumentfor a modified instrument that differsmaterially either in kind or in extent.Under § 1.1001–3(b), a modification of adebt instrument results in an exchange forpurposes of § 1.1001–1(a) if, and only if,the modification is significant.

.03 Section 1.1001–3 applies to anymodification of a debt instrument, regard-less of the form of the modification(including an exchange of a new instru-ment for an existing instrument). Under § 1.1001–3(c), a modification means anyalteration, including any deletion or addi-tion, in whole or in part, of a legal right orobligation of the issuer or a holder of adebt instrument, whether the alteration isevidenced by an express agreement (oralor written), conduct of the parties, or oth-erwise.

.04 In general, a modification of a debtinstrument is a significant modificationunder § 1.1001–3 only if, based on all thefacts and circumstances, the legal rights orobligations that are altered and the degreeto which they are altered are economical-ly significant. Section 1.1001–3(e) pro-vides rules to determine whether certainmodifications, such as a change in theyield or in the timing of payments, consti-tute significant modifications.

.05 If the terms of a debt instrument aremodified to defer one or more paymentsand the modification does not result in an

exchange under § 1.1001–3, § 1.1275–2(j)provides rules to account for the modifieddebt instrument. Under § 1.1275–2(j),solely for purposes of §§ 1272 and 1273 ofthe Internal Revenue Code, the debt instru-ment is treated as retired and then reissuedon the date of the modification for anamount equal to the instrument’s adjustedissue price on that date. As a result, the debtinstrument is retested for original issue dis-count based on the instrument’s adjustedissue price and the remaining payments, asmodified, to be made on the instrument. Ifthe debt instrument has original issue dis-count as a result of the modification, boththe issuer and the holder account for theoriginal issue discount over the remainingterm of the instrument. See §§ 163(e) and1272.

.06 An issuer may want to refinance andconsolidate outstanding debt instrumentsin a way that increases the liquidity of theissuer’s debt by concentrating more of theissuer’s outstanding debt in a smaller num-ber of issues. In general, if the terms of thenewly issued debt are not materially dif-ferent from the terms of the outstandingdebt, substituting the newly issued debt forthe outstanding debt does not result in asignificant modification of the outstandingdebt under § 1.1001–3. Therefore, thesubstitution of the newly issued debt forthe outstanding debt in the refinancing andconsolidation is not a realization event forfederal income tax purposes. Under § 1.1275–2(j), however, some or all of thenewly issued debt may have original issuediscount in varying amounts, dependingupon the terms of the outstanding debt forwhich the newly issued debt was substitut-ed. As a result, the newly issued debt maynot be fungible.

SECTION 3. SCOPE

This revenue procedure applies to thesubstitution of new debt for old debt if allof the following conditions are satisfied:

.01 Either—(1) Debt instruments from a single

new issue (“new debt”) are substituted fordebt instruments from two or more out-standing issues of debt (“old debt”) (It isnot necessary, however, for any singleholder of the old debt to have held debtinstruments from more than one of theoutstanding issues.); or

(2) Debt instruments issued in aqualified reopening (as defined in

§ 1.1275–2) (“new debt”) are substitutedfor debt instruments from one or moreoutstanding issues of debt (“old debt”).

.02 The substitution does not result in asignificant modification of the old debtunder § 1.1001–3 and, therefore, is not arealization event under § 1.1001–1. Thisdetermination may be made either on–

(1) the substitution date, or(2) the date that is two business days

before the date on which the substitutionoffer commences, provided that date is nomore than 30 business days before thedate on which the substitution offer ends.

.03 The new debt and the old debt arepublicly traded (within the meaning of § 1.1273–2(f)). If the new debt is issuedin a qualified reopening of an outstandingissue of debt, that outstanding issue wasalso publicly traded.

.04 The old debt was issued at par, at apremium, or with less than a de minimisamount of original issue discount (withinthe meaning of § 1.1273–1(d)).

.05 The new debt is issued at par orwith less than a de minimis amount oforiginal issue discount or premium. Forpurposes of this condition, the issue priceof the new debt is determined under § 1.1273–2 (rather than under § 1.1275–2(j)), and the de minimis amount for premi-um is determined using the principles of §1.1273–1(d).

.06 Neither the new debt nor the olddebt is—

(1) a contingent payment debt instru-ment (within the meaning of § 1.1275–4),

(2) a tax-exempt obligation (asdefined in § 1275(a)(3)), or

(3) a convertible debt instrument(within the meaning of § 1.1272–1(e)).

.07 All payments on the old debt andthe new debt are denominated in, or deter-mined solely by reference to, U.S. dollars,and the functional currency of the busi-ness unit issuing the new debt is the U.S.dollar.

.08 The issuer and one or more holdersof the old debt make the election providedin section 4.01 of this revenue procedure.

SECTION 4. APPLICATION

.01 Election.(1) Manner of making the election.

The issuer and the holders make the elec-tion under this revenue procedure byagreeing in writing to treat the substitu-tion for federal income tax purposes in the

2001–9 I.R.B. 743 February 26, 2001

manner described in section 4.02 throughsection 4.04 of this revenue procedure andto comply with all other provisions of thisrevenue procedure. The written agree-ment must be entered into no later thanthe last day of the month in which the sub-stitution occurs.

For example, the written agreement tomake the election may be evidenced by astatement in the offering documents forthe substitution that—

(a) The issuer, by distributing thedocuments, elects under this revenue pro-cedure to treat the substitution as a real-ization event for federal income tax pur-poses;

(b) Any holder of old debt that ten-ders its old debt for new debt as part of thesubstitution thereby makes the electionunder this revenue procedure; and

(c) The issuer and the holders whohave tendered their old debt for the newdebt (“electing holders”) will comply withthe provisions of this revenue procedure.

(2) Statement attached to return. Ifan election is made under section 4.01(1)of this revenue procedure, and if the issuermust file a federal income tax return forthe taxable year in which the substitutionoccurs, the issuer must attach a signedstatement to its timely filed (includingextensions) federal income tax return forthe taxable year in which the substitutionoccurs. On the statement, the issuermust—

(a) identify the old debt for whichnew debt was substituted,

(b) identify the new debt that wassubstituted for the old debt,

(c) indicate the issue price of thenew debt (or, if the new debt is issued in aqualified reopening, the adjusted issueprice of the new debt immediately afterthe substitution), and

(d) indicate that the election wasmade under this revenue procedure.

.02 Treatment of substitution. If anelection is made under this revenue proce-dure, the issuer and the electing holdersmust report the substitution for federalincome tax purposes as a repurchase ofthe old debt in exchange for the new debtin the taxable year in which the substitu-tion occurs. The issuer, however, mustaccount for this deemed exchange underthe rules described in section 4.03 of thisrevenue procedure, and each electing

holder must account for this deemedexchange under the rules described in sec-tion 4.04 of this revenue procedure.

.03 Issuer’s treatment.(1) In general. Except as provided in

section 4.03(2) of this revenue procedure,the issuer must take into account over theterm of the new debt any differencebetween the adjusted issue prices of theold debt at the time of the substitution andthe issue price of the new debt (as deter-mined under § 1.1273–2). If the aggre-gate issue price of the new debt that istransferred to electing holders as a substi-tute for the old debt is greater than theaggregate adjusted issue prices of the olddebt for which it is substituted, the issuertreats the difference as a reduction in theaggregate issue price of the new debt. Asa result, the difference is taken intoaccount by the issuer over the term of thenew debt as increased original issue dis-count or as reduced bond issuance premi-um (within the meaning of § 1.163–13).If the aggregate issue price of the newdebt that is transferred to electing holdersas a substitute for the old debt is less thanthe aggregate adjusted issue prices of theold debt for which it is substituted, theissuer treats the difference as an increasein the aggregate issue price of the newdebt. As a result, the difference is takeninto account by the issuer over the term ofthe new debt as reduced original issue dis-count or increased bond issuance premi-um.

(2) Qualified reopening. If the newdebt is issued in a qualified reopening, theissuer applies the rules in section 4.03(1)of this revenue procedure by using theremaining term of the new debt instead ofthe term of the new debt and by using theadjusted issue price of the new debtimmediately after the substitution insteadof the issue price of the new debt.

.04 Electing holder’s treatment. (1) In general. Notwithstanding any

provision of subtitle A of the InternalRevenue Code (including §§ 356(a) and1276(a)), an electing holder does not rec-ognize any gain or loss as a result of thedeemed exchange. Instead, the holder’sbasis (immediately after the substitution)in the new debt is the same as the holder’sadjusted basis (determined as of the dateof the substitution) in the debt instrumentsfor which the new debt was substituted.

In addition, the holder’s holding periodfor the new debt includes the holder’sholding period for the old debt.

(2) Market discount.(a) In general. If the stated

redemption price at maturity of the newdebt (as determined under § 1.1273–1(b))is greater than the holder’s basis (immedi-ately after the substitution) in the newdebt, the holder treats the difference asmarket discount on the new debt and thenew debt as a market discount bond(unless the amount of the discount is deminimis within the meaning of § 1278(a)(2)(C)). See §§ 1276 and 1278for the treatment of market discount. (Theissue date of the old debt rather than theissue date of the new debt is used to deter-mine whether the new debt is a short-termobligation for purposes of § 1278(a)(1)(B)(i).) See section 4.04(2)(b) below forthe treatment of any accrued market dis-count on the old debt.

(b) Accrued market discount. Therules in this section 4.04(2)(b) apply if, asof the date of the substitution, there is anyaccrued market discount on the old debtthat has not been taken into account by theholder as ordinary income. If, under sec-tion 4.04(2)(a) above, there is no marketdiscount on the new debt or the amount ofany market discount on the new debt is deminimis, the amount of accrued marketdiscount on the new debt is zero, and theaccrued market discount on the old debt isignored. If, under section 4.04(2)(a)above, the amount of market discount onthe new debt is more than de minimis, thelesser of this market discount and theaccrued market discount on the old debt istreated by the holder, as of the date of thesubstitution, as accrued market discounton the new debt. (Solely for purposes ofdetermining the accruals of any additionalmarket discount on the new debt, theholder’s basis is increased by the amountof the accrued market discount on the olddebt that is treated as accrued market dis-count on the new debt.)

(3) Bond premium. If the holder’sbasis in the new debt (immediately afterthe substitution) is greater than the statedredemption price at maturity of the newdebt (as determined under § 1.1273–1(b)),the holder treats the difference as bondpremium on the new debt. See §§ 1.171–1 through 1.171–5 for the treatment

February 26, 2001 744 2001–9 I.R.B.

of bond premium.

SECTION 5. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 99–18, as modified by Rev.Proc. 2000–28, is modified and super-seded.

SECTION 6. EFFECTIVE DATE

This revenue procedure applies to sub-stitutions that occur on or after March 13,2001. For substitutions that occur beforeMarch 13, 2001, Rev. Proc. 99–18, as cur-rently in effect, continues to apply.

SECTION 7. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by the Officeof Management and Budget (OMB) in

accordance with the Paperwork ReductionAct (44 U.S.C. 3507) under control num-ber 1545–1647.

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.

The collections of information in thisrevenue procedure are in section 4.01.This information is required to determinewhether an election has been made underthis revenue procedure. The collectionsof information are required to obtain abenefit. The likely respondents are busi-ness or other for-profit institutions.

The estimated total annual reportingand/or recordkeeping burden is 75 hours.

The estimated annual burden perrespondent/recordkeeper varies from 1/2hour to 1 hour, depending on individualcircumstances, with an estimated average

of 3/4 hour. The estimated number ofrespondents is 100.

The estimated annual frequency ofresponses is on occasion.

Books or records relating to a collec-tion of information must be retained aslong as their contents may becomematerial in the administration of anyinternal revenue law. Generally taxreturns and tax return information areconfidential, as required by 26 U.S.C.6103.

CONTACT PERSON

For further information regarding thisrevenue procedure, contact William E.Blanchard of the Office of the AssociateChief Counsel (Financial Institutions andProducts) at (202) 622–3950 (not a toll-free call).

2001–9 I.R.B. 745 February 26, 2001

26 CFR 601.202: Closing agreements. (Also Part I, sections 446, 482, 7121; 1.446-1, 301.7121-1)

Rev. Proc. 2001–22

SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746

SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746

SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747.01 Eligible taxpayers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747.02 Eligible taxable years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747.03 Eligible issues generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747

(1) Factual issues and well established law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747(2) Eligible taxable year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747

.04 Nonexclusive list of eligible domestic issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747

.05 Exclusive list of international issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747

.06 Excluded issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747

.07 Methods of accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748

.08 Definition of taxpayer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748

SECTION 4. REQUESTING AN LMSB PRE-FILING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.01 General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.02 Specific descriptions of issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.03 Perjury statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.04 Agreement regarding examination or inspection of records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.05 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.06 Where to submit request. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

SECTION 5. SELECTING TAXPAYERS FOR LMSB PFA PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.01 Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.02 Criteria for selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.03 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.04 Requests not accepted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

SECTION 6. PROCESSING A REQUEST FOR AN LMSB PFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.01 Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.02 Drafting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

SECTION 1. PURPOSE

.01 This revenue procedure permits ataxpayer subject to the jurisdiction of theLarge and Mid-Size Business Division(LMSB) of the Internal Revenue Service(Service) to request the examination ofspecific issues relating to a tax returnbefore the return is timely filed. This rev-enue procedure also establishes a frame-work within which the taxpayer and theService can work together in a coopera-tive environment to resolve the examinedissues. Finally, if the taxpayer and theService are able to resolve the examinedissues prior to the filing of the return, thisrevenue procedure authorizes the taxpay-er and the Service to finalize their resolu-tion by executing an LMSB Pre-FilingAgreement (LMSB PFA).

.02 The purpose of this revenue proce-dure is to facilitate and encourage the use ofpre-filing examinations to resolve issuesinvolving factual questions under well set-tled principles of law. A pre-filing examina-tion can often resolve such issues moreeffectively and efficiently than a post-filingexamination because the taxpayer and theService have more timely access to therecords and personnel relevant to the issue.

A pre-filing examination also provides thetaxpayer with a greater level of certaintyregarding the examined issue at an earlierpoint in time than a post-filing examination.Thus, the use of pre-filing examinations willbenefit both taxpayers and the Service byimproving the quality of tax compliancewhile reducing its costs, burdens and delays.

.03 This revenue procedure appliesonly to issues involving the application ofwell settled principles of law. This rev-enue procedure is not intended to resolveissues involving questions of law that arenot well settled with respect to the mater-ial facts of the issue. Such issues are moreappropriately resolved through the privateletter ruling process. See Rev. Proc.2001–1, 2001–1 I.R.B. 1 (or successor).

.04 This revenue procedure is not intend-ed to resolve disputes between the taxpayerand the Service regarding the correct inter-pretation of the law, except as authorized byDelegation Order Nos. 236 (Application ofAppeals Settlement to CoordinatedExamination Program Taxpayers) or 247(Authority of Examination Case Managersto Accept Settlement Offers and ExecuteClosing Agreements on Industry Speciali-zation Program and International FieldAssistance Program Issues).

SECTION 2. BACKGROUND

.01 In Notice 2000–12, 2000–9 I.R.B.727, the Service announced a pilot pro-gram for LMSB PFAs, under whichLMSB taxpayers could request examina-tion and resolution of specific issues relat-ing to returns they expected to filebetween September and December, 2000.The purpose of the pilot program was todetermine if taxpayers and Service per-sonnel could resolve, prior to the time forfiling the taxpayers’ returns, issues thatwere likely to be disputed in post-filingaudits. The Service anticipated that ifsuch issues could be resolved throughcooperation of the parties, the resultswould benefit both taxpayers and theService.

.02 In evaluating the pilot program, theService, with considerable input from theparticipating taxpayers, has concludedthat LMSB PFAs allowed taxpayers to filemore compliant returns within prescribedtime frames, were cost efficient,decreased taxpayer compliance burdens,and conserved Service resources.Accordingly, the Service will offer theLMSB PFA program on a permanentbasis.

February 26, 2001 746 2001–9 I.R.B.

.03 Return filing requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

.04 TEFRA taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

.05 Execution prior to filing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

.06 Execution after filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

SECTION 7. NATURE AND EFFECT OF AN LMSB PFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.01 Criteria for issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749.02 Form and content generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.03 Methods of accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 8. WITHDRAWAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 9. NO LMSB PFA EXECUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.01 Accelerated issue resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.02 Administrative appeals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 10. USER FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.01 Taxpayers subject to fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.02 Amount of fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.03 Time and method of payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750.04 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 11. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 12. RECORD KEEPING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 13. PAPERWORK REDUCTION ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750

SECTION 14. DRAFTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751

SECTION 3. SCOPE

.01 Eligible taxpayers. This revenueprocedure applies to all taxpayers underthe jurisdiction of the LMSB that desire toadvance through an LMSB PFA the pre-filing resolution of issues that may other-wise be the subject of a post-filing exam-ination.

.02 Eligible taxable years. An eligibletaxpayer may request an LMSB PFA withrespect to the current taxable year or anyprior taxable year for which the return isnot yet due (including extensions) and isnot yet filed. However, taxpayers arereminded that the selection criteria for theLMSB PFA program include both theamount of time remaining until the datefor filing the return to which the desiredLMSB PFA would relate and the overalllikelihood that the LMSB PFA processcan be completed prior to such date. Seesection 5.02 of this revenue procedure.Taxpayers are therefore urged to submittheir LMSB PFA requests at the earliestpossible time in order to maximize thelikelihood that they will be selected forthe LMSB PFA program and that anLMSB PFA agreement can be finalizedprior to the filing of the return(s).

.03 Eligible issues generally.(1) Factual issues and well estab-

lished law. The Service generally willconsider entering into an LMSB PFA onany issue that represents either (i) a factu-al determination or (ii) an application oflegal principles to agreed upon facts inwhich the legal principles are well estab-lished in their application to such facts.However, the Service will not considerentering into an LMSB PFA with respectto (i) any international issue that is notlisted in section 3.05 of this revenue pro-cedure, or (ii) any excluded issue listed insection 3.06 of this revenue procedure.

(2) Eligible taxable year(s). An eli-gible issue must relate to an eligible yearfor which the LMSB PFA is sought; anissue is not an eligible issue if it relates toany prior or subsequent taxable year.Thus, the valuation of a specific asset dur-ing an eligible year is generally an eligibleissue for the LMSB PFA program, where-as the valuation of an asset during a prioror subsequent taxable year is not.

.04 Nonexclusive list of eligible domes-tic issues. The following is a list ofdomestic issues that are likely to be suit-able for resolution through the LMSB

PFA program. This list is nonexclusiveand is not intended to prevent submissionof other domestic issues that fall withinthe scope of the LMSB PFA program.

(1) the current valuation of specificassets (except in the context of transferpricing), but not the appropriateness of avaluation methodology;

(2) the allocation of the purchase orsale price of a business among the assetsacquired or sold;

(3) the identification and documenta-tion of hedging transactions;

(4) issues relating to in-houseresearch expenses under § 41;

(5) the allocation of costs among dif-ferent categories of deductible and capitalitems, in contexts where there is a pub-lished revenue ruling, e.g. repairs (Rev.Rul. 94–12, 1994–1 C.B. 36), advertising(Rev. Rul. 92–80, 1992–2 C.B. 57), andY2K costs (Rev. Proc. 97–50, 1997–2C.B. 525);

(6) identification of investigatorycosts incurred to determine whether toenter a new business and, if so, whichbusiness to enter, for purposes of qualify-ing such costs as start-up costs under § 195 (see Rev. Rul. 99–23, 1999–1 C.B.998);

(7) whether a taxpayer’s financialstatement presentation of its last-in, first-out (LIFO) inventory is consistent withthe LIFO conformity requirement under § 1.472–2(e);

(8) whether a taxpayer’s inventorycontains “sub-normal” goods within themeaning of § 1.471–2(c), and the valua-tion of such goods;

(9) whether a taxpayer is consideredto be the tax owner of the property beingproduced under § 1.263A–2(a)(1)(ii)(A);

(10) whether a manufacturing con-tract newly entered into by the taxpayer isrequired to be accounted for as a long-term contract under § 460;

(11) the determination of appropriateclassification under § 168(e) for depre-ciable property placed in service duringthe eligible taxable year; and

(12) whether a security becameworthless during the eligible taxable year,for purposes of § 165(g).

.05 Exclusive list of internationalissues. The following is a list of interna-tional issues that are likely to be suitablefor resolution through the LMSB PFAprogram. This list is exclusive; theService will not consider entering into an

LMSB PFA with respect to an internation-al issue that is absent from this list.

(1) the valuation of specified assets,but not a retrospective change in themethod of valuation or a determination ofappropriate valuation methodology;

(2) the proper SIC or NAIC classifi-cation code(s) for the taxpayer’s line(s) ofbusiness;

(3) whether the taxpayer’s apportion-ment of deductions, including general andadministrative expenses, that are relatedto all gross income properly reflects thefactual relationship between deductionsand gross income as required by § 1.861–8(f)(5);

(4) whether, as a factual matter, anexpense relates to fewer than all membersof an affiliated group for purposes of § 1.861–14T(c)(2);

(5) the verification of amounts offoreign taxes paid and the applicableexchange rates, but not whether suchtaxes are creditable; and

(6) whether the taxpayer must recap-ture a dual consolidated loss following atriggering event under § 1503(d).

.06 Excluded issues. The Service gener-ally will not enter into an LMSB PFA onthe following types of issues:

(1) Transfer pricing issues that areaddressed under the Advance PricingAgreement program (Rev. Proc. 96–53,1996–2 C.B. 375);

(2) Issues for which the taxpayer hasfiled a request for Competent Authorityassistance;

(3) Issues that can be resolved byrequesting a change in method of account-ing on Form 3115, Application forChange in Accounting Method;

(4) Issues of reasonable cause, duediligence, good faith, clear and convinc-ing evidence, or any other similar stan-dard under Subtitle F (Procedure andAdministration) of the Internal RevenueCode;

(5) Issues involving the applicabilityof any penalty or criminal sanction;

(6) Issues that are, or will be, thesubject of a pending or contemplatedrequest for a private letter ruling, account-ing method change request, determinationletter or technical advice memorandum;

(7) Issues for which the taxpayerproposes a resolution that is contrary to aprivate letter ruling, accounting methodchange request, determination letter, tech-nical advice memorandum, or closing

2001–9 I.R.B. 747 February 26, 2001

agreement previously issued to or regard-ing the taxpayer;

(8) Issues for which the taxpayerproposes a resolution that is contrary to aposition proposed by the Service inresponse to a private letter ruling, deter-mination letter or accounting methodchange request that was withdrawn by thetaxpayer;

(9) Issues that are the subject of liti-gation between the Service and the tax-payer with respect to an earlier taxableperiod;

(10) Issues that have been designatedfor litigation by the Office of ChiefCounsel;

(11) Issues involving a tax shelterdescribed in § 6662(d)(2)(C)(iii); and

(12) Issues that require a determina-tion of whether the taxpayer, rather thananother entity, is the common lawemployer.

.07 Methods of accounting. The LMSBPFA’s application of the law to the tax-payer’s facts may result in treating an itemdifferently from earlier treatments of sim-ilar items in prior taxable years (e.g.,deducting items that previously were cap-italized, such as certain ISO 9000 costs).If so, the differing treatment may consti-tute a change in the method of accountingfor that item. The LMSB PFA will resolveonly the factual characterization of theitems at issue for the taxable year(s) towhich the LMSB PFA relates, but will notconstitute the Commissioner’s consent tomake any accounting method change thatmay be required to conform the agreedupon factual characterization of the itemwith identical items in earlier years.Permission to make any accountingmethod changes required by the LMSBPFA’s resolution of the factual and legalissues must be obtained using the applica-ble administrative procedures. See Rev.Proc. 99–49, 1999–2 C.B. 725 (automaticconsent to change certain accountingmethods); Rev. Proc. 97–27, 1997–1 C.B.680.

.08 Definition of taxpayer. For purpos-es of section 3 of this revenue procedure,any reference to the taxpayer alsoincludes a related taxpayer and any prede-cessor of the taxpayer or a related taxpay-er. A related taxpayer is one related with-in the meaning of § 267 or a member of anaffiliated group within the meaning of § 1504 that includes the taxpayer. A pre-

decessor is an entity for whose tax liabili-ty the taxpayer or a related taxpayer is orwas primarily or secondarily liable.

SECTION 4. REQUESTING AN LMSBPRE-FILING AGREEMENT

.01 General information. A request foran LMSB PFA must contain the followinggeneral information about the taxpayerand its request for an LMSB PFA:

(1) Names, addresses, telephonenumbers, and taxpayer identificationnumbers of all interested parties;

(2) The name, title, address and tele-phone number of a person to contact (Ifthe person to contact is an authorized rep-resentative of the taxpayer, a properlyexecuted Form 2848, Power of Attorneyand Declaration of Representative, mustaccompany the request);

(3) The annual accounting periodand the overall method of accounting(e.g., cash receipts and disbursements oraccrual) for maintaining the accountingbooks and filing the federal income taxreturn of all interested parties;

(4) The location of the taxpayer’s taxstaff and records;

(5) A brief description of the taxpay-er’s business operations, including theNAICS (North American Industry CodeSystem) classification used by the taxpay-er on its last filed return; and

(6) The taxable period for which theLMSB PFA is sought, the last date onwhich the taxpayer may file (with exten-sions) a timely return for that period, and(if earlier) the date on which the taxpayerintends to file that return;

.02 Specific descriptions of issues. Arequest for an LMSB PFA should alsocontain a separate written statement foreach proposed issue that concisely:

(1) Describes the issue;(2) Summarizes all the facts that are

relevant and material to the issue;(3) States whether the issue involves

an item or transaction in which two ormore persons may take contrary positionswith respect to the item or transaction (a“whipsaw” issue);

(4) Summarizes all relevant legalauthorities, including citations to specificsections of the Internal Revenue Code,Income Tax Regulations, case law andother authorities, and discusses why theissue is an eligible issue as defined in sec-tion 3 of this revenue procedure;

(5) Summarizes and discusses theimplications of any known authorities thatmay be potentially contrary to the positionadvanced, such as legislation (or pendinglegislation), tax treaties, court decisions,regulations, revenue rulings, revenue pro-cedures, notices, or announcements;

(6) Discusses the suitability of theissue for the LMSB PFA program in lightof the purpose and criteria set forth in sec-tions 1, 2, and 3 of this revenue proce-dure;

(7) Discusses whether the LMSBPFA will have any effect in taxable peri-ods either before or after the taxable peri-od for which the LMSB PFA is sought;

(8) States whether the taxpayer hasapplied for competent authority assistancewith respect to the issue for the year inquestion or any prior year;

(9) States whether the issue, or anypart of the issue, has ever been the subjectof a request for private letter ruling,determination letter, consent to change amethod of accounting, or technical advicewith respect to the year in question or anyprior year;

(10) Discusses whether the issue canbe resolved by the date on which the tax-payer intends to file its return for the tax-able period in question; and

(11) Describes the availability, orga-nization and location of the records andother evidence that substantiate the tax-payer’s proposed position on the issue.

.03 Perjury statement. A request for anLMSB PFA, and any supplemental sub-missions (including additional docu-ments), must include a declaration, signedby a person currently authorized to signthe taxpayer’s federal income tax return,in the following form:

Under penalties of perjury, I declarethat I have examined this request,including accompanying documents,and to the best of my knowledge andbelief, the facts presented in support ofthe request for the Pre-FilingAgreement are true, correct and com-plete..04 Agreement regarding examination

or inspection of records. The request for aLMSB PFA must contain a statement bythe taxpayer that the taxpayer agrees thatthe inspection of records and testimonyunder the LMSB PFA procedures will notpreclude or impede (under § 7605(b) orany administrative provisions adopted by

February 26, 2001 748 2001–9 I.R.B.

the Service) a later examination of areturn or inspection of records withrespect to any taxable year needed toresolve the issue in the request for anLMSB PFA, and that the Service need notcomply with any applicable proceduralrestrictions (such as providing noticeunder § 7605(b) before beginning suchexamination or inspection).

.05 Signature. The request for anLMSB PFA must be signed by the taxpay-er or the representative properly autho-rized by the taxpayer in the accompanyingForm 2848, Power of Attorney andDeclaration of Representative.

.06 Where to submit request. A requestfor an LMSB PFA:

(1) In the case of a taxpayer whosereturn is currently under examination bythe LMSB, should be submitted to theLMSB Team Manager in charge of theexamination; or

(2) In the case of a taxpayer whosereturn is not currently under examination,should be sent to the following address:

Internal Revenue ServiceAttn: LMSBManager, Pre-Filing Services, Mint Building1111 Constitution Avenue, NWWashington, DC 20224

(3) Facsimile transmissions may bemade to (202) 283-8427 (not a toll freecall).

SECTION 5. SELECTING TAXPAYERSFOR LMSB PFA PROGRAM

.01 Jurisdiction. The LMSB IndustryDirector with jurisdiction over the taxpay-er will make the final decision whether toproceed with the taxpayer’s request for anLMSB PFA. (For purposes of this rev-enue procedure, the term “LMSB IndustryDirector” includes a duly authorizeddesignee of an LMSB Industry Director.)

.02 Criteria for selection. The criteriafor selecting taxpayers to participate inthe LMSB PFA program include:

(1) The suitability of the issue pre-sented for the LMSB PFA program;

(2) The direct or indirect impact ofan LMSB PFA upon other years, issues,taxpayers, or related cases;

(3) The availability of Serviceresources;

(4) The ability and willingness of thetaxpayer to dedicate sufficient resourcesto the LMSB PFA process;

(5) The likelihood that the LMSBPFA may result in two or more personstaking contrary positions with respect toan item or transaction (“whipsaw”);

(6) The time remaining until the duedate of the return to which the LMSB PFArelates; and

(7) The overall probability of com-pleting the process and entering into anLMSB PFA by the proposed date for filingthe taxpayer’s return.

.03 Notification. A representative ofLMSB will contact the taxpayer within 14business days of receipt of the taxpayer’srequest for an LMSB PFA to discuss thepotential suitability of the issue(s) forinclusion in the LMSB PFA program.Thereafter, a representative of LMSB willinform the taxpayer in writing whether ithas been selected for participation in theLMSB PFA program.

.04 Requests not accepted. A taxpayeris not entitled to a conference to appeal adecision not to go forward with the LMSBPFA process. A taxpayer not selected forthe PFA program remains eligible forother procedures for early issue resolu-tion, including the Accelerated IssueResolution (AIR) program (see Rev. Proc.94–67, 1994–2 C.B. 800).

SECTION 6. PROCESSING AREQUEST FOR AN LMSB PFA

.01 Planning. If the Service accepts thetaxpayer’s request for an LMSB PFA, arepresentative of LMSB will contact thetaxpayer to schedule an orientation meet-ing with the taxpayer and examination per-sonnel to discuss the LMSB PFA processand explain the roles and responsibilitiesof each participant. Immediately followingthe orientation meeting, the taxpayer andthe Service should meet to formulate aplan and timeline that will result in a thor-ough development of the facts and a suc-cessful resolution of the issue prior to thetime for filing the taxpayer’s return.

.02 Drafting. After the development ofthe facts and issues, the Team Managerwill informally meet with the taxpayer todetermine whether the parties can reachagreement on a proposed LMSB PFA. Ifthe parties reach agreement, the taxpayerwill work with the Service to prepare theinitial draft of the LMSB PFA closingagreement. The LMSB PFA will be pre-pared by the taxpayer and the audit teamwith assistance, as necessary, from the

LMSB PFA Program Manager, the Officeof Chief Counsel, or other Service person-nel.

.03 Return filing requirements. TheService’s acceptance of a taxpayer’srequest for a LMSB PFA does not suspendor waive the normal filing requirements forany tax returns that may be affected by theproposed LMSB PFA. If an LMSB PFA isreached prior to the filing of the return, thetaxpayer will report the transaction(s)addressed in the LMSB PFA in accordancewith the terms of the LMSB PFA.

.04 TEFRA taxpayers. If the taxpayerrequesting the LMSB PFA is subject to theprocedures set forth in §§ 6221 through6233 and the issue(s) in the LMSB PFAwill become a partnership item or items asdefined in § 6231 when the return is filed,the LMSB PFA process will be terminatedwith respect to such issue(s) if no agree-ment on such issues is reached with allpartners within 30 business days prior tothe extended due date of the return.

.05 Execution prior to filing. If anLMSB PFA is executed prior to the filingof the return to which the LMSB PFArelates, the taxpayer must file such returnaccording to the terms and conditions setforth in the LMSB PFA. A copy of theLMSB PFA must be attached to the return.

.06 Execution after filing. If theService and the taxpayer cannot reachagreement prior to the filing of the return,the Service and the taxpayer may contin-ue to attempt to resolve the issue and enterinto an LMSB PFA. If the Service and thetaxpayer desire to execute an LMSB PFAafter the filing of a return to which theLMSB PFA relates and the return is notconsistent with the terms and conditionsof the contemplated LMSB PFA, the tax-payer is expected to file an amendedreturn consistent with the terms and con-ditions of the LMSB PFA. The LMSBPFA should contain a statement wherebythe taxpayer acknowledges the expecta-tion that an amended return will be filedand that if such return is not filed that theService will assess any additional tax due.A copy of the LMSB PFA must beattached to the amended return.

SECTION 7. NATURE AND EFFECTOF AN LMSB PFA

.01 Criteria for issuance. The Director,Field Operations (or other authorized offi-cial) may execute an LMSB PFA if:

2001–9 I.R.B. 749 February 26, 2001

(1) Entering into the LMSB PFA isconsistent with the goals of the LMSBPFA program;

(2) The resolution(s) of issue(s) inthe LMSB PFA reflect well settled legalprinciples and correctly apply those prin-ciples (or positions authorized underDelegation Order No. 236 or 247) to thefacts established by the audit team; and

(3) There is an advantage in having theissue(s) permanently and conclusivelyclosed for the taxable period covered by theLMSB PFA, or that the taxpayer showsgood and sufficient reasons for desiring aclosing agreement and that the UnitedStates will sustain no disadvantage throughconsummation of such an agreement (see § 301.7121–1 (a) of the Regulations onProcedure and Administration).

.02 Form and content generally. AnLMSB PFA between the Service and thetaxpayer is a closing agreement under § 7121, and, accordingly, must complywith the requirements of Rev. Proc.68–16, 1968–1 C.B. 770, regarding theform and content of closing agreements.

.03 Methods of accounting. An LMSBPFA shall not constitute a final determina-tion under § 7121 with respect to themethods of accounting of the taxpayer forany taxable year. Further, an LMSB PFAdoes not constitute the consent of theCommissioner under § 446(e) to anychange in method of accounting by thetaxpayer.

SECTION 8. WITHDRAWAL

.01 At any time prior to the execution ofthe LMSB PFA, either the taxpayer or theService may withdraw from considerationall or part of the request for an LMSBPFA. The withdrawal must be in writingand signed by the party initiating the with-drawal action, i.e., the taxpayer or hisauthorized representative or the IndustryDirector.

.02 Notwithstanding the withdrawal byeither the taxpayer or the Service of anyor all the issues in the request for anLMSB PFA, the taxpayer’s agreementunder section 4.04 of this revenue proce-dure will remain effective.

SECTION 9. NO LMSB PFAEXECUTED

.01 Accelerated issue resolution. If theService and the taxpayer cannot agreeupon and execute an LMSB PFA with

respect to an issue, either before or afterthe filing of the return to which the LMSBPFA relates, and the Service subsequentlydisagrees with the taxpayer’s treatment ofthe issue on such return, the taxpayer andthe Service may continue their efforts toreach an agreement using post filing pro-cedures, such as the Accelerated IssueResolution (AIR) procedures under Rev.Proc. 94–67, 1994–2 C.B. 800. This con-tinuation of the resolution process doesnot require a new application.

.02 Administrative appeals. If theService and the taxpayer are unable toresolve an issue by an LMSB PFA or anAIR agreement, the taxpayer may pursuean administrative appeal either byrequesting an Early Referral to Appealsunder procedures set forth in Rev. Proc.99–28, 1999–2 C.B. 109, or by protestingany proposed deficiency related to theissue.

SECTION 10. USER FEE

.01 Taxpayers subject to fees.Taxpayers are subject to a user fee only ifthey are selected to participate in theLMSB PFA program. Taxpayers notselected to participate in the LMSB PFAprogram are not subject to user fees.

.02 Amount of fee. The user fees fortaxpayers selected to participate in theLMSB PFA program are:

(1) $10,000 for taxpayers having$250,000,000 or more in assets;

(2) $5,000 for taxpayers having atleast $50,000,000, but less than$250,000,000 in assets; and

(3) $1,000 for taxpayers having atleast $5,000,000, but less than$50,000,000 in assets.For purposes of determining the appropri-ate user fee, the amount of assets held bythe taxpayer will be determined by itsmost recently filed return.

.03 Time and method of payment.Taxpayers subject to user fees must sub-mit payment within 30 business days ofreceiving notification that they have beenselected to participate in the LMSB PFAprogram. Payment must be made by acheck or money order payable to theInternal Revenue Service.

.04 Withdrawal. Notwithstanding thewithdrawal by either the taxpayer or theService of any or all of the issues in therequest for an LMSB PFA, the user feepaid by the taxpayer generally will not be

refundable.

SECTION 11. DISCLOSURE

.01 LMSB PFAs are closing agree-ments entered into pursuant to § 7121. Assuch, both an LMSB PFA and the infor-mation generated or received by theService during the LMSB PFA processconstitute confidential return informationas defined by § 6103 (b)(2)(D). As pre-scribed by Congress, the Service will pub-lish annual reports summarizing the oper-ation of the LMSB PFA program,consistent with the restrictions of § 6103.LMSB PFAs are not written determina-tions under § 6110, and accordingly, areexempt from disclosure to the publicunder the Freedom of Information Act(FOIA).

SECTION 12. RECORD KEEPINGREQUIREMENTS

.01 No aspect of the LMSB PFAprocess will affect the record keepingrequirements imposed by any section ofthe Internal Revenue Code.

.02 The taxpayer must maintain a copyof the LMSB PFA supporting documentsand books of account and records toenable the Service to insure the taxpayer’scompliance with the LMSB PFA. Theserecords may be specified in the LMSBPFA itself or in separate agreements.

SECTION 13. PAPERWORKREDUCTION ACT

The collection of information containedin this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507) under the controlnumber 1545–1684.

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 OMB control number. Thecollections of information in this revenueprocedure are in sections 4, 6 and 12. Theinformation collected under section 4 isrequired to provide the Service with theinformation necessary to determine whichtaxpayers should be included in theLMSB PFA program. The informationcollected under section 6 will be used toresolve the taxpayer’s issue and to supportany PFA entered into between the taxpay-er and the Service. The record keeping

February 26, 2001 750 2001–9 I.R.B.

requirements under section 12 will beused for tax administration. The collec-tions of information under sections 4 and6 are voluntary. Once an LMSB PFA isentered into, the record keeping require-ments under section 12 are mandatory.The likely respondents are businesses orother for-profit institutions.

The estimated total annual reportingand/or record keeping burden is 10,200hours.

The estimated annual burden perrespondent/recordkeeper varies from 5hours to 126 hours, depending on whethera taxpayer applying to the LMSB PFAprogram is accepted into the program. Theestimated annual burden for taxpayerswho apply to the LMSB PFA program and

are accepted is 126 hours. The estimatedannual burden for taxpayers who apply tothe LMSB PFA program and are notaccepted is 5 hours. The estimated num-ber of taxpayers who apply to the LMSBPFA program and are accepted is 75. Theestimated number of taxpayers who applyto the LMSB PFA program and are notaccepted is 150. The estimated total num-ber of respondents and/or recordkeepers is225.

The estimated annual frequency ofresponses is on occasion.

Books or records relating to a collec-tion of information must be retained solong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns and

tax return information are confidential, asrequired by 26 U.S.C. 6103.

SECTION 14. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Grant Anderson of the Officeof the Associate Chief Counsel (IncomeTax and Accounting). For further infor-mation about this revenue procedure, con-tact Mike Mann, Senior Program Analyst,LMSB Office of Pre-filing and TechnicalGuidance, at (202) 283-8424 (voice)(not atoll free call), (202) 283-8427 (fax) (not atoll-free call), or pfa.info@irs.gov (e-mail).

2001–9 I.R.B. 751 February 26, 2001

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

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, being

employed 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 enrolled ac-tuaries to identify practitioners under con-sent suspension from practice before theInternal Revenue Service, the Director of

New Schedule N (Form 1120),Foreign Operations of U.S.Corporations for the 2000 TaxYear

Announcement 2001–13

New Schedule N (Form 1120) is nowavailable. A corporation that, at any timeduring the 2000 tax year, had assets in oroperated a business in a foreign countryor a U.S. possession, may have to fileSchedule N (Form 1120) with the corpo-ration’s income tax return.

You can obtain Schedule N (Form1120) by telephone or by using IRS elec-tronic information services.

Request by Number or address

Telephone 1-800-TAX-FORM(1-800-829-3676)

Personal computer:

IRS Web Site www.irs.gov

File transfer protocol ftp.irs.gov

Revision of Form 8851,Summary of Archer MSAs

Announcement 2001–21

Purpose

This announcement advises trusteesand custodians of medical savingsaccounts of the requirement to file Form8851, Summary of Archer MSAs, andchanges for magnetic and electronic fil-ing.

Background

Sections 201 and 202 of Public Law106–554, enacted December 21, 2000,change the name of medical savingsaccounts to Archer MSAs, extend theArcher MSA program through 2002, andreinstate the reporting requirement fortrustees and custodians of Archer MSAs.

Reporting Requirements

Filers are required to report on Form8851 by August 1, 2001, the total numberof Archer MSAs they established fromJanuary 1, 2001, through June 30, 2001,the total number of previously uninsuredaccount holders, the total number ofexcludable account holders, and thenames and social security numbers ofaccount holders. We expect to make therevised Form 8851 available by May2001. There are no major changes to theNovember 1997 version of Form 8851.

Filing Requirements

The minimum reporting requirement tofile magnetically or electronically remainsat 250 Archer MSAs. However, filersreporting fewer than 250 Archer MSAs arealso encouraged to file magnetically or elec-tronically. We will issue a revenue proce-dure with the magnetic media and electron-ic filing requirements for Form 8851 nolater than May 2001 to update Rev. Proc.97–25, which will include the followingchanges.

• The mailing address for theMartinsburg Computing Center haschanged. All correspondence andmedia relating to Forms 8851 should

be sent to: IRS-MartinsburgComputing Center, InformationReporting Program, 240 MurallDrive, Kearneysville, WV 25430

• The only acceptable media andmethod of filing Forms 8851 are asfollows:

Magnetic TapeTape Cartridge8mm, 4mm, and Quarter

Inch Cartridges (QIC)3.5-Inch Diskette*Electronic Filing – FIRE

System*** The IRS no longer has the

capability to process non-MS-DOS compatible diskettes.The 3.5-inch diskettes createdon a System 36 or AS400 arenot acceptable.

** The telephone number forthe FIRE System is 304-262-2400. If filers haveany questions about theFIRE System, they shouldcall the technical staff at304-263-8700. Filersshould use Publication3609 for electronic filinginformation until therevised revenue procedureis published.

• The only format change is in theTrustee “A” Record. In the Trustee“A” Record, Field Position 136,Report Period, enter the last digit ofthe year for which the Form 8851 isbeing filed (i.e., enter a “1” for taxyear 2001).

February 26, 2001 752 2001–9 I.R.B.

Part IV. Items of General Interest

2001–9 I.R.B. 753 February 26, 2001

Date of Name Address Designation Suspension

Sinclair, Gerald A. Hammond, IN Enrolled August 16, 2000Agent to

August 15, 2001

Barrett, Norman Dover, DE CPA September 1, 2000to

November 30, 2001

Janus, Stephen E. Michigan City, IN CPA September 20, 2000to

September 19, 2003

McCormack, Frank J. Castlebury, FL CPA September 20, 2000to

September 19, 2003

Serio, Vinson J. Metairie, LA Enrolled October 1, 2000 Agent to

September 30, 2003

Baker, Linda L. West Orange, NJ CPA October 20, 2000 to

April 19, 2004

Duncanson, Thomas D. Mankato, MN CPA November 7, 2000 to

May 6, 2003

West, Keith Pasadena, CA Enrolled November 15, 2000 Agent to

May 14, 2001

Overbeck, Marietta Evansville, IN CPA November 15, 2000to

November 14, 2002

Garrison, John L. Guymon, OK CPA November 20, 2000to

November 19, 2002

Aiken, Kim Allen Olympia, WA CPA December 10, 2000 to

June 9, 2002

D’Arata, David J. Buffalo, NY CPA January 1, 2001 to

June 30, 2003

Gambrel, Thomas R. Corbin, KY CPA January 1, 2001 to

December 31, 2004

Practice will announce in the InternalRevenue Bulletin the names and addressesof practitioners who have been suspendedfrom such practice, their designation as at-torney, certified public accountant, en-rolled agent or enrolled actuary, and dateor period of suspension. This announce-

ment will appear in the weekly Bulletin atthe earliest practicable date after such ac-tion and will continue to appear in theweekly Bulletins for five successiveweeks or for as many weeks as is practica-ble for each attorney, certified public ac-countant, enrolled agent or enrolled actu-

ary so suspended and will be consolidatedand published in the Cumulative Bulletin.

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

February 26, 2001 754 2001–9 I.R.B.

EffectiveName Address Designation Date

Joyner, Joseph Gary, IN CPA November 24, 2000

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the InternalRevenue Service any practitioner who,within five years, from the date the expe-dited proceeding is instituted, (1) has hada license to practice as an attorney, certi-fied public accountant, or actuary sus-pended or revoked for cause; or (2) hasbeen convicted of any crime under title 26of the United States Code or, of a felonyunder title 18 of the United States Codeinvolving dishonesty or breach of trust.

Attorneys, certified public accountants,enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Servicematter from directly or indirectly employ-ing, accepting assistance from, being em-ployed by, or sharing fees with, any practi-tioner disbarred or suspended from practicebefore the Internal Revenue Service.

To enable attorneys, certified pubic ac-countants, enrolled agents, and enrolled ac-tuaries to identify practitioners under expe-dited suspension from practice before theInternal Revenue Service, the Director ofPractice will announce in the Internal Rev-enue Bulletin the names and addresses ofpractitioners who have been suspendedfrom such practice, their designation as at-torney, certified public accountant, enrolled

agent, or enrolled actuary, and date or pe-riod of suspension. This announcement willappear in the weekly Bulletin at the earliestpracticable date after such action and willcontinue to appear in the weekly Bulletinsfor five successive weeks or for as manyweeks as is practicable for each attorney,certified public accountant, enrolled agent,or enrolled actuary so suspended and willbe consolidated and published in the Cu-mulative Bulletin.

The following individuals have beenplaced under suspension from practice be-fore the Internal Revenue Service byvirtue of the expedited proceeding provi-sions of the applicable regulations:

Date of Name Address Designation Suspension

Barger, Robert E. Garden Ridge, TX Attorney Indefinite from

October 10, 2000

Roberts, Thomas W. Cincinnati OH CPA Indefinite from

October 24, 2000

Announcement of the Expedited Suspension of Attorneys, CertifiedPublic Accountants, Enrolled Agents, and Enrolled Actuaries FromPractice Before the Internal Revenue Service

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

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 Service

matter from directly or indirectly employing,accepting assistance from, being employedby, or sharing fees with any practitioner dis-barred or under suspension from practice be-fore the Internal Revenue Service.

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, enrolled

agent or enrolled actuary, and the date ofdisbarment 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 individual has beendisbarred from futher practice before theInternal Revenue Service:

February 26, 2001 i 2001–9 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

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 Contributions Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—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.

Definition of Terms

2001–9 I.R.B. ii February 26, 2001

Numerical Finding List1

Bulletins 2001–1 through 2001–8

Announcements:

2001–1, 2001–2 I.R.B. 2772001–2, 2001–2 I.R.B. 2772001–3, 2001–2 I.R.B. 2782001–4, 2001–2 I.R.B. 2862001–5, 2001–2 I.R.B. 2862001–6, 2001–3 I.R.B. 3572001–7, 2001–3 I.R.B. 3572001–8, 2001–3 I.R.B. 3572001–9, 2001–3 I.R.B. 3572001–10, 2001–4 I.R.B. 4312001–11, 2001–4 I.R.B. 4322001–12, 2001–6 I.R.B. 5262001–14, 2001–7 I.R.B. 6482001–15, 2001–8 I.R.B. 7152001–16, 2001–8 I.R.B. 7152001–17, 2001–8 I.R.B. 7162001–20, 2001–8 I.R.B. 716

Notices:

2001–1, 2001–2 I.R.B. 2612001–2, 2001–2 I.R.B. 2652001–3, 2001–2 I.R.B. 2672001–4, 2001–2 I.R.B. 2672001–5, 2001–3 I.R.B. 3272001–6, 2001–3 I.R.B. 3272001–7, 2001–4 I.R.B. 3742001–8, 2001–4 I.R.B. 3742001–9, 2001–4 I.R.B. 3752001–10, 2001–5 I.R.B. 4592001–11, 2001–5 I.R.B. 4642001–12, 2001–3 I.R.B. 3282001–13, 2001–6 I.R.B. 5142001–14, 2001–6 I.R.B. 5162001–15, 2001–7 I.R.B. 589

Proposed Regulations:

REG–209461–79, 2001–8, I.R.B. 712REG–246256–96, 2001–8, I.R.B. 713REG–251701–96, 2001–4, I.R.B. 396REG–106542–98, 2001–5, I.R.B. 473REG–121928–98, 2001–6, I.R.B. 520REG–103320–00, 2001–8, I.R.B. 714REG–104683–00, 2001–4, I.R.B. 407REG–106702–00, 2001–4, I.R.B. 424REG–106791–00, 2001–6, I.R.B. 521REG–107176–00, 2001–4, I.R.B. 428REG–107566–00, 2001–3, I.R.B. 346REG–114082–00, 2001–7, I.R.B. 629REG–114083–00, 2001–7, I.R.B. 630REG–114084–00, 2001–7, I.R.B. 633REG–116468–00, 2001–6, I.R.B. 522REG–119352–00, 2001–6, I.R.B. 525

Railroad Retirement Quarterly Rates:

2001–2, I.R.B. 258

Revenue Procedures:

2001–1, 2001–1 I.R.B. 12001–2, 2001–1 I.R.B. 792001–3, 2001–1 I.R.B. 1112001–4, 2001–1 I.R.B. 121

Revenue Procedures:—continued:

2001–5, 2001–1 I.R.B. 1642001–6, 2001–1 I.R.B. 1942001–7, 2001–1 I.R.B. 2362001–8, 2001–1 I.R.B. 2392001–9, 2001–3 I.R.B. 3282001–10, 2001–2 I.R.B. 2722001–11, 2001–2 I.R.B. 2752001–12, 2001–3 I.R.B. 3352001–13, 2001–3 I.R.B. 3372001–14, 2001–3 I.R.B. 3432001–15, 2001–5 I.R.B. 4652001–16, 2001–4 I.R.B. 3762001–17, 2001–7 I.R.B. 5892001–18, 2001–8 I.R.B. 708

Revenue Rulings:

2001–2, 2001–2 I.R.B. 2552001–3, 2001–3 I.R.B. 3192001–4, 2001–3 I.R.B. 2952001–5, 2001–5 I.R.B. 4512001–6, 2001–6 I.R.B. 4912001–7, 2001–7 I.R.B. 5412001–9, 2001–8 I.R.B. 652

Treasury Decisions:

8910, 2001–2 I.R.B. 2588911, 2001–3 I.R.B. 3218912, 2001–5 I.R.B. 4528913, 2001–3 I.R.B. 3008914, 2001–8 I.R.B. 6538915, 2001–4 I.R.B. 3598916, 2001–4 I.R.B. 3608917, 2001–7 I.R.B. 5388918, 2001–4 I.R.B. 3728919, 2001–6 I.R.B. 5058920, 2001–8 I.R.B. 6548921, 2001–7 I.R.B. 5328922, 2001–6 I.R.B. 5088923, 2001–6 I.R.B. 4858924, 2001–6 I.R.B. 4898925, 2001–6 I.R.B. 4968926, 2001–6 I.R.B. 4928928, 2001–8 I.R.B. 6858930, 2001–5 I.R.B. 4338931, 2001–7 I.R.B. 5428935, 2001–8 I.R.B. 702

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2000–27 through2000–52 is in Internal Revenue Bulletin 2001–1,dated January 2, 2001.

February 26, 2001 iii 2001–9 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2001–1 through 2001–8

Announcement:

98–99Modified byAnn. 2001–9, 2001–3 I.R.B. 357

99–79Superseded byAnn. 2001–3, 2001–2 I.R.B. 278

2000–97Corrected byAnn. 2001–7, 2001–3 I.R.B. 357

Cumulative Bulletin:

1998–2Corrected byAnn. 2001–5, 2001–2 I.R.B. 286

Notices:

98–39Modified byNotice 2001–9, 2001–4 I.R.B. 375

98–40Modified byNotice 2001–9, 2001–4 I.R.B. 375

99–53Modified and superseded byNotice 2001–7, 2001–4 I.R.B. 374

2000–21Superseded byNotice 2001–1, 2001–2 I.R.B. 261

2000–22Modified and superseded byNotice 2001–8, 2001–4 I.R.B. 374

2000–43Extended byNotice 2001–13, 2001–6 I.R.B. 514

Proposed Regulations:

EE–130–86Partially withdrawn byREG–209461–79, 2001–8 I.R.B. 712

REG–116733–98Withdrawn byAnn. 2001–11, 2001–4 I.R.B. 432

Revenue Procedures:

83–87Superseded byRev. Proc. 2001–15, 2001–5 I.R.B. 465

90–18Amplified and superseded byRev. Proc. 2001–18, 2001–8 I.R.B. 708

92–19Superseded byRev. Proc. 2001–15, 2001–5 I.R.B. 465

96–17Modified byRev. Proc. 2001–9, 2001–3 I.R.B. 328

Revenue Procedures–continued:

99–47Superseded byRev. Proc. 2001–16, 2001–4 I.R.B. 376

99–49Modified and amplified byRev. Proc. 2001–10, 2001–2 I.R.B. 272

2000–1Superseded byRev. Proc. 2001–1, 2001–1 I.R.B. 1

2000–2Superseded byRev. Proc. 2001–2, 2001–1 I.R.B. 79

2000–3Superseded byRev. Proc. 2001–3, 2001–1 I.R.B. 111

2000–4Superseded byRev. Proc. 2001–4, 2001–1 I.R.B. 121

2000–5Superseded byRev. Proc. 2001–5, 2001–1 I.R.B. 164

2000–6Superseded byRev. Proc. 2001–6, 2001–1 I.R.B. 194

2000–7Superseded byRev. Proc. 2001–7, 2001–1 I.R.B. 236

2000–8Superseded byRev. Proc. 2001–8, 2001–1 I.R.B. 239

2000–16Modified and superseded byRev. Proc. 2001–17, 2001–7 I.R.B. 589

2000–22Modified and superseded byRev. Proc. 2001–10, 2001–2 I.R.B. 272

2001–13Clarified byNotice 2001–12, 2001–3 I.R.B. 328

Revenue Rulings:

64–328Modified byNotice 2001–10, 2001–5 I.R.B. 459

66–110Modified byNotice 2001–10, 2001–5 I.R.B. 459

Treasury Decisions:

8889Corrected byAnn. 2001–14, 2001–2 I.R.B. 286

1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2000–27 through 2000–52 is in Internal RevenueBulletin 2001–1, dated January 2, 2001.

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.

ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNETYou may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Tax Info for Business at the bottom of the

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purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

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